The popularity of cellular data and bundled service offers from competitors have hurt.
The wireless future of Minneapolis has not turned out quite as expected.
The city's Wi-Fi network is falling far short of its initial revenue projections. And that, in turn, has ended hopes that the network would spin off $1 million a year for the city's Digital Inclusion Fund, a program aimed at those who can't afford or need help with technology.
Instead, the network is expected to provide only about $25,000 for the fund this year, said Joe Caldwell, CEO of Minnetonka-based USI Wireless, in an interview Tuesday. USI owns and manages the network under contract to the city of Minneapolis. The contract specifies that USI give the fund 5 percent of its net profit, which is projected to be $500,000 this year on revenue of about $6 million, he said.
The Digital Inclusion Fund has received a total of $568,000 from USI Wireless in the past four years, but after making a series of charitable grants the fund has only about $52,000 remaining, said Nick Scheibel, the fund's philanthropic services adviser. With so little money left to distribute, the fund's board of directors meets less often and its membership has declined from 12 to nine, he said.
When the city signed the contract, Mayor R.T. Rybak said it was projected, but not required, that USI Wireless would contribute $10 million to the fund over the 10-year life of the contract, which expires in 2018, based on the 5 percent annual contribution and other milestones.
But increased competition from traditional Internet service providers has limited USI Wireless to about 23,000 customers for its wireless Internet service -- about half as many as the company expected to attract by now, Caldwell said.
"No one is more upset than me that we're not paying $10 million to the Digital Inclusion Fund," Caldwell said. "But those projections were made before there were any Wi-Fi radios hanging from poles and before we had any customers."
He said that USI and the city could not foresee that USI would face competition from high-speed cellular services that didn't exist in 2006, or from bundled offers from Comcast and CenturyLink that provide faster Internet service to customers who also buy other services, such as telephone or TV.
"We didn't see that cellular would get that much faster or become that much cheaper," Caldwell said. "We expected that we'd get a couple of million dollars a year from people visiting the city and using the Wi-Fi network with their laptops. But now they don't use Wi-Fi, they use their smartphones."
Some wonder if USI's real problem is not competition, but the changes in the way people use technology.
"People want to consume data in multiple locations," said Bil MacLeslie, president of ipHouse, a Minneapolis Internet service firm battered by changing federal rules about Internet competition. "You could use Wi-Fi with your iPad in Minneapolis, but you probably want your iPad to have a cellular modem so that you can use it at home, at work or in Wisconsin Dells."
USI Wireless also found it more difficult than expected to get potential customers to switch from the phone or cable company, Caldwell said.
"We thought a big chunk of people would switch. But many people thought switching to save $25 a month wasn't worth the hassle," he said.
The expenses of running the network also turned out to be higher than anticipated, largely because no one had built a citywide Wi-Fi network before, Caldwell said. "That means it takes longer to make a profit."
USI Wireless also had hoped to sell additional Wi-Fi service to the city, but that also never happened, Caldwell said.
Last year Minneapolis government used only 11 percent of the annual $1.25 million a year worth of capacity it already buys from USI Wireless under the contract. City Wi-Fi use is expected to increase to about 80 percent of the city's $1.25 million payment this year, but it's unclear when or if the city will use all the capacity it pays for, said Otto Doll, the city's chief information officer.
But the city is not upset with USI Wireless, Doll said.
"More than 22,000 families get low-cost, broadband service anywhere in the city, and there are 117 free Wi-Fi hotspots in the city that can be used by anybody," Doll said. "There is value there."
Steve Alexander 612-673-4553