EarthLink Inc. (Nasdaq: ELNK)'s long-anticipated pullout from the San Francisco municipal WiFi mesh network project this week is just a signal more tough times to come for this market. Some industry commentators and vendors are now suggesting that a major rethink of the free citywide WiFi dream will have to be undertaken if muni networks are to survive into the future.

EarthLink dropped out of the San Francisco muni deal Wednesday. The Atlanta-based Internet service provider already said Tuesday that it plans to eliminate 900 jobs, around half its work force, in a bid to cut its spending. (See SF Muni Project on the Ropes.)

EarthLink's troubles, however, are by no means the first indication that all was not well in muni paradise. Regular Unstrung readers will know that we have been tracking the issues that dog muni mesh for a while now. (See We Fade to Grey, Mesh: Interference in the City?, and What's Next for Tropos?)

There have always been questions about the business model of free municipal WiFi services and issues about the capability of WiFi mesh technology to deliver all that some of its promoters promised. (See WiFi Outlook Cloudy in Mountain View and What's Muni Wireless Good For?)It is just that these questions have more sharply come into focus recently as it became obvious that a shakeout is underway in the mesh market. Startups SkyPilot Networks Inc. and Strix Systems Inc. are both rumored to have had lay-offs recently and industry chatter suggests that they may not be the only ones. (See What a Mesh!)

Craig Settles, Oakland-based consultant and wireless strategist, suggests that operators and vendors need to get away from over-promising what the technology can do -- VOIP services, for instance -- and everybody needs to stop thinking of muni services as free.

"We distorted reality for 12 months or so and now we're paying a pretty heavy price for it," Settles says. "I don't think this is the end -- there's a value in municipal networks -- but you have to think the process through very careful."

He suggests that the industry should look to the Philadelphia municipal network as a more viable model than San Fran, which has always been plagued by local politics.

Settles says the network has been built to "attack economic development" and supply the more disadvantaged in Philly with cheap -- but not free -- Internet service. The network is now half-completed, Settles says, and subscriptions are already being sold for services.

"They got it built for free but it was never meant to be free," he comments.

Settles suggests that the San Francisco project could be revitalized if the city drops the free-for-all plans and instead looks at combining fiber and wireless -- not just WiFi -- "in an integrated fashion."

"WiFi mesh equipment vendors need to start developing revenue opportunities outside of the muni market," notes analyst firm In-Stat .

In-Stat’s recent report on this market forecasts a strong rate of growth for WiFi mesh equipment through 2008. Much of this growth comes from muni-deployments already under development. After 2008, In-Stat sees a significant slowdown in growth as new muni-deployments slow down. In-Stat suggests that international and enterprise sales could help ease the pain.

Mesh vendors are also examining their options in the light of the San Fran meltdown. Tropos Networks Inc. , the startup that is a major supplier to EarthLink, put out a statement saying that the Bay Area problems are "not the beginning of the end but it is, perhaps, the end of the beginning."

"Tropos continues to add many new municipal and service provider customers, and our installed networks continue to attract new subscribers and exciting applications," notes CEO Ron Sege in the statement.

Ben Gibson, director of mobility solutions for Cisco, says that vendor is looking at "municipal applications," rather than plain ol' connectivity, as one possible way to go forward with WiFi mesh. Settles also notes that Cisco is trying to push more mesh into the enterprise market.

Meanwhile, EarthLink's mostly silent partner in the SF network, Google (Nasdaq: GOOG), is still hoping that mesh helps to deliver free WiFi in the city.

"We hope that the city will be able to reach an agreement that will enable all San Franciscans to enjoy a free WiFi network," a company spokesperson tells Unstrung. "Google is committed to promoting alternative platforms for people to access the Web no matter where they are, and we encourage others to think creatively about how to address access issues in their own communities."

— Dan Jones, Site Editor, Unstrung