Monday, April 17, 2006

And now, a word from our muni WiFi sponsor

A little-noticed item that came from the S.F. muni wireless bid process was a plan by a team comprised of SeaKay, IBM and Cisco. Cities, take note of this before you auto-lock into the concept that every private-ownership model for the network has to be driven by ad sales. It’s early enough in the game to consider other potentially better business models.

IBM and Cisco teamed with Seakay, a consulting firm that helps non-profits bring technology to underserved communities. Their business model proposed to cover the deployment and on-going operations cost of the network with corporate and philanthropic contributions (alla NPR), and direct sponsorship. Other cities are considering this option.

You can make a strong case for sponsorships. Sponsorships are not the same as ads. When Ford Motors runs a TV ad, various people see it among many other ads at various times. Impressions are fleeting, brand building is slow and there’s not much prospect interaction with the advertiser. You often have to run a lot of ads to get good results.

But if Ford sponsors the annual Lowly County stock car championship races, they “own” the event. Every ad promoting the races is an ad for Ford. Every attendee sees the Ford name all day, and they might get a Ford-branded bag of goodies to take home. When the races are broadcast on TV or radio, every 5 minutes your subconscious is pinged with “here at the Ford stock car championship.”

With muni WiFi networks, sponsorship is ownership of customer relationships without the hassles of owning the network. For the city or service provider, finding several sponsors is a guarantee of huge blocks of capital. Would you rather ask 1000 businesses for 100 each, or ask one business for $100,000? Vendors build better networks because once you lock in a few sponsors, vendors aren’t worrying so much about getting enough ad sales or subscriptions to recover their investment.

Let’s list the reasons why this makes sense – and potentially many dollars. (E-mail me if you want some scenarios for how muni wireless sponsorships can work –

Sponsorships are more attractive for some companies. Though companies obviously buy ads because they work, muni WiFi ads compete with local newspaper, radio, etc for their ad dollars. Does being rotated in with 100 other WiFi advertisers offset taking money from other media? But if you own the identity of the network the same way Staples owns the identity of the Staples Center in L.A. that’s home to the Lakers, Kings, Clippers, Sparks, Avengers and hundreds of events a year, you reap *huge* amounts of 24/7 publicity, promotion and ad impact.

Interactive ties that bind. There is no (and I mean zero) end to the ability of a sponsor to create content and interactive online features that 1) draw repeated use of the network, and 2) wrap users in a cocoon of daily relationships with the sponsor that users actively pursue.

If I’m Nokia and I own a network, I have a whole city of present and future gamers for whom I can create mini-games, special content, group chat areas, etc. If I’m the city sports franchise, the network’s an awesome channel for delivering content to create and maintain rabid fans. The local health care conglomerate? It’s all about cradle-to-grave health and wellness content plus personal reminder alerts for medical check ups.

Perfect complement to other funding. Secure block grants from federal or state sources (i.e. Homeland Security) to build out your network for public safety applications. Then bring in a sponsor to provide funds to enhance the network for public access and other general public uses. You get a very solid core network developed then enhanced and maintained without a lot of financial risk.

Mix & match your sponsorship sources. Bring in the philanthropic sponsors to fund part of the network, plus the content, community and business portals, applications and other elements necessary for digital inclusion or economic development programs. Look to a company such as Chevron Energy Solutions (a unit of Chevron Oil) to sponsor part of the network for public works applications, as is the case in Burleson, TX

Chevron Energy Solutions markets consulting services to cities that help them make better use of water, energy and other utility resources. They decided to underwrite some of the expense of Burleson’s network that will facilitate automated meter reading. Chevron get exposure that helps them sell services here and to other cities.

The bottom line

There are a bunch of cities that don’t have, or don’t want, to spend the money for municipal broadband, yet they all want broadband. You have the vendors, many of them relatively small businesses, upon which cities are putting all or most of the financial responsibility for the network. Building a useful network requires money. Maintaining and upgrading it requires yet more money (see my following post on the economics of ad sales).

Sponsorships offer a practical path to get the money that cities don’t have, and that vendors need if you want them to build and maintain a network without going out of business. The challenge is that this requires creativity, sweat equity and going against the current popularity of the ad-driven business model. So much easier, it seems, to bring someone in and let them deal with everything. The smart cities, however, should at the very least seriously explore the sponsorship option.

How to be the Hero (a.k.a. It sucks to be the goat)

In six months to a year, those driving these initiatives are going to be the hero or the goat in their respective cities. In government IT, you only need to be the goat once and stock in your career gets greatly devalued if not de-listed. Here’s some help to land you in the Hero camp.

I believe totally in the importance of asking the right questions. Most managers who do so, and have the will to act forcefully on the answers they get, end up with technology investments that deliver positive payback. Those who avoid the tough questions or fail to accept answers they don’t want to hear get bad technology results.

Is your vision ok?

In my report on the true price of free muni networks, a city CIO who is negotiating a contract with a company that plans to use the ad-driven model also says about it “To be honest, I have my doubts about this… is it enough to keep a network operating and also defray the capital cost?” In the Wall St. Journal EarthLink CEO Garry Betty, whose company is partnering with Google states "We still don't believe in the free model much."

Given what people who ought to know what they’re talking about are saying, are you and others driving this initiative looking at vendors who offer ad-driven networks with eyes wide open, or through rose-tinted classes?

Have you done the math?

I’ll use Framingham, MA as an example. With bigger cities, the numbers change but the math process is the same.

Framingham is 25 square miles and has 69,000 people living in a little over 26,000 households. A recent article estimates that it will cost $4 million to build a citywide network here. Industry folks estimate that each year it costs about 10% - 20% of buildout costs to run and upgrade the network.

Are there enough businesses in a town this size to generate $4 million and sustain $400,000 - $800,000 per year in operating costs? If there aren’t enough local businesses, is your city hip enough, rich enough and connected enough that national advertisers want to spend several hundred grand in advertising to make up the difference?

You say you can sell service subscriptions instead of ads? At $20/customer per month, the vendor makes their capital investment back in a year by signing up 16,600 citizens. If they maintain these numbers, the vendor makes a profit in year two. But what if you can only sell one account per household because families don’t want one for one for every person? Hmm, now you’re talking about 55% market penetration.

Hint: You may not want to offer the service for free initially if you want to sell boatloads of subscriptions. It’s usually much harder to sell stuff after you’ve given it away for free. Yet it doesn’t help that a recent Jupiter Research survey shows that 58% of consumers will only access public WiFi if it’s free.

What’s does the vendor’s marketing plan and financial plan tell you?

Better get proof the vendor has the skill and budget to generate enough ad sales or paid subscriptions. If the vendor shows the marketing plan to 5 veteran marketing pros, what’s the general consensus? Competitive Companies Inc. is one vendor that developed a full-on marketing plan with revenue and profit margin projections in its successful bid to provide wireless for Vine Grove, in Hardin County, Kentucky.

Have you taken a hard look at the financial impact on the vendor of fronting $4 million for your city while putting up similar amounts in other cities, while also mounting a serious marketing campaign for ads or subscriptions? Is the business sustaining itself on revenues to a venture capitalist sugar daddy? The dot bomb fiasco was the direct result of companies running out of VC funding before they could generate enough ad revenues, click throughs or whatever, to pay the bills. That, and the fact no one could be bothered with the reality that perpetual excess of expense over income equals bankruptcy.

Has everyone looked at the impact of churn?

Subscribers and advertisers both are always leaving the service and have to be replaced to maintain revenue levels. Have you looked at how much the city’s going to pay for public safety, public works or general mobile workforce to access the network? It’s possible this will offset the churn. Unless you negotiated to get that service for free.

Maybe the most important question is, has someone asked a bunch of potential advertisers if they’re willing to buy ads, for how much and how often? Have you surveyed constituents to determine what services, content or other factor will convince them to signup in the droves necessary to achieve the financial numbers needed to break even? Pay a little now to find out, or risk paying a whole lot after the network’s built.

Spend much time with colleagues in other cities?

Some cities have done the math. Have you talked to Burleson, TX? They took out a loan based on a guarantee from the service provider and assurances from Chevron that each month the city will see enough money to make the loan payment. Someone here must have done the math.

Did you talk to Addison, TX or Cupertino, CA? They both have networks supported by ad or subscription sales. Spend a little time to figure out how they’re making it work. Will their numbers scale for your city?

Bottom line

The ad-driven muni network model is one of many. It could be good for you, it could be bad. It’s not the model but the process you use to select the model that delivers results. Are enough cities – and the vendors to whom they’re giving the keys to the digital kingdom - asking the right questions? 2007 could be a good year for goat herders.

Take a look at my other post today on sponsorship of muni networks as another option for funding these initiatives.