Economics of WiFi-based Metropolitan Internet Service Providers

In the United States, nearly all of the city-scale, mainly WiFi-based wireless ISPs of the past several years are dead. Some, like Philadelphia, lumber on as zombie ventures. A few small town systems will continue to operate as long as the social and political consensus supports the subsidy required. And there are one or two big city projects that haven’t burned through their initial operating capital yet.

But the rest are dead. The disease that killed American wireless ISPs (WISPs) was cash flow hemorrhage, brought on by virulent churn. It’s a cautionary case study for WISPs in emerging markets and elsewhere around the world. Prospective investors should work out in advance whether local market conditions favor WISP economics.

Churn measures the percentage of total subscribers who cancel service, and have to be replaced, in a given period of time. It is also used to calculate subscriber lifetime. In the US mobile phone industry, a typical 2.5% monthly churn rate results in an average subscriber lifetime of about 40 months.

Operating cash flow comparison cellular versus wifi operators

Take an ARPU (monthly revenue per subscriber) of, say, $53, subtract $30 for the monthly cost of providing service to one customer, and there’s sufficient cash flow over that period to pay off a subscriber acquisition cost (SAC) of perhaps $400 and still have something left over to improve the balance sheet, or grow the business, or even pay dividends. The business model works, although different companies implement it in a variety of ways with a wide range of results.

The same equation applies to a municipal (or municipally bound) WISP. First of all, monthly subscriber revenue is limited by competition from DSL (digital subscriber line) service offered by telephone companies. DSL is invariably the low-cost wired broadband option in any given market, and it delivers better service than WiFi-based alternatives

DSL’s superior performance is constantly debated, mostly by wireless equipment manufacturers and other vendors, but the hard fact is that it’s almost always faster, usually has significantly greater effective market coverage and, most importantly, delivers a consistent subscriber experience. DSL customers know what to expect and almost always get it when they surf the Internet. WiFi-based subscribers, on the other hand, might have a blazing fast connection in the morning, a mere trickle later that afternoon and intermittent outages in the evening.

At a typical monthly cost of $20 (forgetting for the moment promotional rates that are a few dollars less initially), and with performance metrics far superior to WiFi, DSL keeps WISP rates in the $15 range.

From that $15, subtract $12 for a small system (5,000 subs, say) and $8 for a large system (more like 50,000 subs) to pay for the cost of providing service to one subscriber every month.

Muni WiFi ISP operating costs

These cost figures are highly optimistic; it’s very possible to see a monthly operating cost of twice that range. But for the sake of discussion, start with a rosy operating cost scenario. In the best case, you have $7 per month left over to pay down SAC, put towards growing your subscriber base and improving your network.

Start with SAC. Take just the cost of providing and supporting the installation of CPE (customer premise equipment). For a WiFi-based system, this equipment is a wireless bridge that every subscriber needs to access the service reliably from homes and businesses. Then add in the direct cost of selling and activating a new customer, and a little indirect marketing cost, and SAC is well over $200. But let’s say $200 for the sake of discussion.

With $7 of operating cash flow, you’ll need 26 months just to break even on the average subscriber. If you can hang on to that subscriber for as long as a mobile phone company does, you have a makable business case.

Unfortunately, WISPs don’t, and can’t, manage that essential trick. U.S. WISP churn rates are 2, 3, 4 times and more that of mobile phone companies. At a 7.5% monthly churn rate, which is not particularly high for a WISP, a subscriber lifetime is only 13 months, half what you need to pay the cost of getting and serving a sub. Even a 5% churn rate won’t get you there, and that’s a wildly optimistic figure.

Results over subscriber lifetime

It is easy to build a spreadsheet and plug in numbers that make it work: lower churn, lower operating cost, lower SAC, higher ARPU. And dozens of would-be municipal wireless ISP operators did just that. But the real world doesn’t pay attention to spreadsheet models and powerpoint presentations.

An $8 operating cost, $15 monthly rate and a $200 SAC are difficult to achieve, but possible. What’s not possible in the US is a monthly churn rate much under 7% or so. And that kills the business model. The annual loss (or subsidy) is in the hundreds of thousands of dollars for a small system and in the millions for a large one.

The high churn rate is a direct and inevitable consequence of the competitive position of a WISP versus DSL and other wired technologies. If significantly superior service is available for $20 a month (and it is), then people who rely on Internet access (nearly everyone, these days) will pay the extra $5 if they can afford it. Or unless they don’t want to sign up for a minimum term of a year or can’t pass the phone company’s credit check standards.

So as a competitive tactic (and often as a matter of public policy), WISPs either adopt easier credit standards and shorter terms or, more usually, all but eliminate those requirements. As a result, the core subscriber profile leans heavily towards households with lower disposable income and credit scores, and people who don’t plan to be in town very long. With this subscriber profile, even a well designed and operated WISP is going to have a high churn rate, and remain well out of reach of achieving a sustainable enterprise.

Mobile workers are touted as the sweet spot for municipal broadband, but for a couple of reasons they tend to churn out too. First, WiFi-based WISPs are not optimized for truly mobile service. When you are driving around in a car, for example, handoffs from one access point to another are problematic.

Second, service ends at the city limits, and it is a rare private sector or government worker whose job is limited to a single city, except for city employees themselves. Mobile data service from cellular providers is a far better solution to both problems, and people with job-related needs quickly migrate to those platforms.

The business case for wireless Internet service internationally, and particularly in emerging markets, is significantly different of course. But the underlying economic equation is the same. Success is achieved through skillful management of a few critical financial metrics:

Operating cost: the key items are mounting rights, maintenance, network operations and general overhead, which are fixed costs, plus the variable costs of customer service and support, billing and, of course, the wholesale cost of Internet bandwidth. Hard, realistic planning will help keep fixed costs down; many an enterprise has died as a result of too much optimism.

Price: the trick to managing variable costs is to set prices carefully. If covering costs results in a price that’s too high for the market, then that’s a red flag that your business case can’t be supported. Competition is a limiting factor when it comes to setting prices. Connection speed is important, but it is less important to users than reliability and consistency. If your wired competition is more reliable or more consistent, you will have to charge less.

Subscriber acquisition cost: SAC has two elements, hardware (including installation) and marketing costs. It’s easy to underestimate both. Make sure you account for the entire cost of storefronts, sales personnel, advertising and other marketing expenses. Perhaps you can cover hardware related costs by upfront charges for equipment and installation, but take a hard look at the installation process. For example, if an installer typically has to return to a customer’s location for adjustments, the cost of a standard installation could double.

Churn: customers who receive reliable and consistent service at a fair and affordable price will tend to remain customers. Careful network design and skillful, polite customer service and technical support go a long way toward keeping churn down, particularly if wired competitors eventually respond with network upgrades and price promotions. It is also necessary to properly target and qualify your new subscribers. Otherwise, you will be paying out of your pocket for customers who can’t afford the ongoing service fee or only keep service for a short time.

If you can accurately estimate these figures in advance, you can calculate your monthly operating cash flow, which in turn determines the amount of capital investment that the enterprise can support. Get it wrong, and your investment will disappear just as with those ill-fated American ventures. Get it right, and you will have a sustainable business that will continue to grow and prosper over time.

The grand municipal WISP ventures died when the cash transfusions stopped. In some cases, they simply ran out of capital. In others, they had unworkable business models, often resulting from unrealistic expectations of free service and various other perks. When the subsidies stopped, the systems went dark. RIP.

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The author, Stephen A. Blum is president of Tellus Venture Associates, a management and business development consultancy for municipal and community broadband enterprises.  He is a 30-year industry veteran and an expert in business case development, market assessment, funding and management of new broadband systems, including wireless, fiber optic and satellite broadcasting facilities. He may be reached at +1-831-582-0700, or via email at More information is available at


  1. I think there are several fatal flaws in this analysis.

    First, most of the early WiFi networks were just incompetently deployed – delivering inferior service – delivering the churn. It is entirely possible to do it right and minimize the churn by deploying a competent product.

    Secondly, the CAPEX and SAC costs reflect legacy technology. Modern networks can be deployed in a way that delivers a cable modem competitive service at a CAPEX and SAC that are much lower than the antiquated assumptions in this analysis.

    This analysis is a wonderful recapitulation of how to do it wrong – but gives little insight on how to do it right.

  2. There are many successful US WiSPs who giggle at this analysis.

  3. I agree with Ken. This is a seriously flawed argument especially in the light of emerging markets of which we are a major player in the WISP business. The first major difference is that most emerging markets (and about 45% of the US) represent a large “underserved” potential subscriber base. This means that the wonderful DSL service that Mr Blum gushes about is not available at all. The incumbent Telcos are happy deploying in high density urban areas. In fact, in some of the places we deploy, we seem to be the only operator. The total number of broadband subscribers in India stands at a dismal 7Mn subs only compared to over 500Mn mobile phone users.
    I totally agree with Ken when he says that the earlier muniwireless networks were not designed well and ran more on marketing hype than reliable service. Also, I dont agree with the $200 SAC. A DSL provider in India spends around $500 as his SAC whereas we as a WISP spend around $50 out of which we recover the CPE cost ($30) upfront.
    Unfortunately for all of us, a lot of potential will look at analyses like these and make their decisions. They may even conclude that its better to invest in WiMax!!!

  4. @Ken Biba – my early draft of the article had the word “post-mortem” in the title, and I should have kept it. Yes, this particular article looks backward. Going forward, my point is that there are financial metrics that have to be properly managed to make any WISP a success, and anyone assessing a prospective WISP business plan needs those numbers in advance. As someone who was deeply involved in the early muni WiFi deployments, I’d say the original sin was ignorance brought on by a reliance on handwaving rather than hard facts, but perhaps we’re saying the same thing. Show me the numbers.

    @Shivkumar – you’re absolutely correct. The data used in the analysis is strictly from the U.S. Elsewhere, the data is different. The basic equations are the same, but different data will produce different results. The genesis of this article was an analysis I did for a WISP in a developing market. The business case worked there. You’re running your business on the numbers rather than the marketing hype, which is why you’re successful.

  5. It would be nice if reports on municipal WiFi projects used some type of template for consistency in the content and the presentation of the information. Pieces I would like to see would be:

    Cost per square mile of the installation.

    Type of community, including population density, typical building construction, presence of trees, and so on.

    Architecture of installation, including models of routers and backhaul equipment, density of nodes, power supply, use of repeaters at the residence of subscribers, and so on.

    Operating costs, including Internet backbone connection, personnel, and so on.

    Performance including real world coverage both indoors and outside, latency, upload, and download speeds.

    The vendors might not be so interested in having a side-by-side comparison of their products like this, but it would sure be a big help to people who are wanting to build municipal/community WiFi networks.