Chicago’s plans for an $18.5m municipal WiFi network fell through because its business stakeholders could not see a financial upside, according to the city’s Department of Business and Information Services. It had spent the past several months working with AT&T and Earthlink on getting the project up and running.

When neither organization could justify a business case for the type of partnership outlined in our proposal, we realized – after much consideration – that we need to reevaluate our approach to provide universal and affordable access to high speed Internet as part of the City’s broader digital inclusion efforts, said Hardik Bhatt, Chicago’s chief information officer.

In San Francisco, politics between the city’s mayoral office and the governing Board of Supervisors prevented Earthlink and Google from completing a four-year agreement to create the citywide network. But that’s not why Earthlink, which expected to spend as much as $17m on building and maintaining the network, pulled out.

In short, Earthlink’s ambitions were larger than its coffers. The company had lost $46m so far this year and recently said it would cut about 900 jobs, or roughly half of its workers, and close down four offices to help curb its costs. Earthlink chief executive Rolla Huff last week said, on a conference call, the company would spend no new capital on the old municipal WiFi model that has us taking all the risks.

Earthlink had initially hoped to recoup its investment in the proposed San Francisco network by charging users $21.95 a month for a premium WiFi service that would potentially be several times faster than the free version. Those hopes have clearly been dashed. Still, San Francisco’s mayor last week said the city’s plans to build the network will go ahead. No word yet on which company will take Earthlink’s place.

Earthlink is also building municipal WiFi networks in New Orleans and Philadelphia. And it had inked a deal to spend about $50m on building a network in Houston, Texas but the city last week said it would fine Earthlink $5m for missing contract deadlines. Given Huff’s recent comments, that project also seems destined to be scrapped by Earthlink.

This is not just an Earthlink or big-city problem. Midwest Fiber Networks, for instance, is building a $20m municipal WiFi network in Milwaukee, Wisconsin. While the project is still in the early trial phase, the company already has said it is not sure it will be able to recoup its investment.

Some industry pundits say anchor tenant deals are required to sustain the muni WiFi market. Under these deals, cities help bear some of the cost of building the networks and underwrite a minimum amount of paid-subscriber revenue for the network. AT&T, for example, has anchor tenancies with two Californian cities and in St Louis, Missouri.

Our View

Earthlink’s backing off from the muni WiFi market may affect mesh networking vendors, which may have begun refocusing on enterprises to stay in business.

Also, many major cities originally expressed interest in deploying muni WiFi in order to promote themselves as venues for businesses to locate. San Francisco seems intent on still building its muni WiFi network, but it likely will need to strike an anchor tenant deal in order to do so.