The two tech giants are among the four organizations behind Silicon Valley Metro Connect, along with a municipal Wi-Fi firm, Azulstar Networks, and a nonprofit organization called SeaKay that aims to bridge the digital divide by offering Internet access to low-income housing communities.

Silicon Valley Metro Connect won the bid Tuesday to provide the Wi-Fi service from the San Mateo County Telecommunications Authority (SAMCAT) and its Wireless Silicon Valley initiative. The project will encompass 42 municipalities and nearly 1,500 square miles.

A number of California towns and cities in San Mateo, Santa Clara, Alameda, and Santa Cruz counties have already signed on to participate in the project, including Belmont (home of Red Herring), Burlingame, Half Moon Bay, Redwood City, South San Francisco, Fremont, Los Altos, San Jose, and Sunnyvale.

“It will be up to the individual municipalities to enter into negotiations with us about the types of services we would be able to provide,” said IBM spokesperson Clay Helm. “We will provide free universal Internet broadband service and will begin negotiating a model agreement that the cities and communities can choose to adopt.”

The base speed will operate at up to 1 megabit per second for free, but the consortium will also offer premium services like VoIP and video streaming for a fee, she added. They will also offer tiers of service for public agencies like police and fire departments, and there will be additional services offered as well.

Shares of IBM fell $0.61 to $80.24 in recent trading, while Cisco shares dropped $0.37 to $21.72.

Muni Wi-Fi Spreads Nationwide

The trend toward municipal Wi-Fi has been spreading over the past year, with companies like Google, EarthLink, and Tropos Networks jumping on board, signing deals with Philadelphia, New Orleans; and San Francisco, Mountain View, and Culver City, California; and other towns (see How Free Is Free Wi-Fi?).

Last week, AT&T got into the business by offering free Wi-Fi service in Springfield, Illinois (see AT&T Gets into Muni Wi-Fi). Nokia has also begun sponsoring free Wi-Fi in some of New York City’s parks (see Nokia Hooks Up NYC Wi-Fi).

Brian Moura, chairman of SAMCAT and co-chairman of the Wireless Silicon Valley Initiative, said his group was impressed with Silicon Valley Metro Connect’s vision for the project and the results its participants had achieved in the municipalities where they had set up Wi-Fi networks.

“Metro Connect also delivered a convincing message on how their partner companies could address key aspects of the Wireless Silicon Valley RFP,” he said in a statement.

Those elements included technology, systems integration, customer service, service delivery, economic development, local portals and web sites, city applications, and digital inclusion.

Building Clout in the Valley

Besides providing Wi-Fi access across Silicon Valley, the project is also bound to increase the clout of Cisco and IBM among the businesses and residents of the Valley.

“This could prove to be a great moment for both companies that legitimizes them as major players in the muni wireless space,” said Craig Settles, author of the book Fighting the Good Fight for Municipal Wireless. “Silicon Valley is the center of the technology universe, so the publicity, credibility, and industry influence that will come to them is huge.”

He believes the project will also help drive an increase in the number of county- and region-wide initiatives in the muni wireless space.

However, Mr. Settles anticipates there will likely be a struggle to unify the different technology standards, community needs, and business operation goals of the networks. He is also skeptical about any claims that the service will be entirely free.

“While there may be a low-speed service for free, I think that part of the business is going to be minuscule if Cisco and IBM want any ROI for their $200-million investment,” he said.

Monetizing Free Wi-Fi

IBM, like Cisco and Azulstar, is indeed looking for ways to make money from the network.

“We’re looking at a number of creative ways to diversify the revenue streams, either through philanthropic contributions, premium services, or having municipal agencies utilize the services to run traffic across it, such as automated traffic metering and automated wireless utility services,” said Diana Hage, IBM’s director of wireless and RFID services.

She added that IBM was also open to advertising, but hasn’t focused on that revenue stream. The consortium plans to begin negotiating a model contract starting next week, complete the contract by early October, and begin building the network by early in the fourth quarter.

The consortium will phase in different municipalities with the service, and has targeted between 30 to 40 days for each. It hopes to get the first cities up and running by early 2007.

Ms. Hage sees the service as being complementary to the broadband residential services provided by the phone and cable TV companies, appealing more to “nomadic” users, especially when they need Net access outdoors.

“The goal is to enhance the Internet access experience for folks, not to compete head to head with existing providers,” she said.

IBM, Cisco, Azulstar, and SeaKay are still working out the details of how they will share revenue during the five-year contract. They will also need to share the costs, which are estimated to range from $75 million to $270 million, depending on the services offered and how quickly the consortium can secure outside funding.

The process of securing the contract went quickly. When the request for proposals went out, the consortium needed to respond by June 30. The Wireless Silicon Valley Initiative spent a little over two months evaluating and reacting to the responses it received, according to Ms. Hage.

The competition came down to MetroFi and VeriLAN, but IBM, Cisco, Azulstar, and SeaKay ultimately won the deal.

Copyright © 2006. Red Herring.