Google (Nasdaq: GOOG) may take another large step into the telecommunications business if it wins a deal to supply free wireless Internet access in San Francisco, but the move isn't about transforming the company from a search engine to a service provider. It's all about selling ads. (See SF Muni WiFi in Low Gear.)

Google has a history of serving targeted ads based on the destinations of consumers in cyberspace. And with a free WiFi offering in San Francisco, Google could sell and serve ads based on consumers' locations in the physical world, analysts say.

So a consumer surfing or checking email in San Francisco's Union Square might be enticed by Neiman Marcus or some other nearby retailer to come over and spend a few bucks.

Google spokesman Nate Tyler spoke in broad terms of Google's ad targeting plans in an email to Light Reading on Monday: "It is an opportunity to make San Francisco a test-ground for new location-based applications and services that enable people to find relevant information exactly when and where they need it."

But not everyone is convinced that Google's WiFi ad targeting idea will pay for itself, given the $10 million to $20 million it would cost Google to install the 49-square-mile, city-wide network. (See Light Readers Embrace Muni Nets .)

"If that's their rationale, they are supposing a lot about the real value of being able to do that," says San Francisco-based American Technology Research analyst David Edwards. "It will be a costly experiment for them."

Edwards explains that Google could detect consumers' physical locations based on which of the hundreds of WiFi hotspots they could connect to. That location information could then be cross-referenced with the locations of the Google advertisers in the area, then an ad would be sent to the user.

Analysts say that almost all of Google's $3.2 billion in revenue last year derived from sales of its search-based ad sales -- the little ads that appear at the right of the screen with your search results.

Then there is the issue of bandwidth. (See Dutch, Swedes Rule Muni BB.) The Google system will deliver only 300 kbit/s, far short of the 1-Mbit/s threshold many believe defines true broadband service. The FCC, by the way, defines "broadband" as anything above 200 kbit/s.

Google says it will lease its WiFi network on a wholesale basis to other providers wishing to sell higher-throughput broadband service to San Franciscans.

What's Google up against? Two things: reliability and incumbency. {dirlink 5|166} (NYSE: SBC), the local incumbent, recently began offering a $15 DSL broadband service in San Francisco. The service provides 1.5 Mbit/s of bandwidth for data downloads and 384 kbit/s for uploads.And, as broadband applications such as gaming and video become more prevalent, San Franciscans may choose a reliable wireline connection for most uses, only opting to use Google when they're out of the house or office.

San Francisco's network is still at the RFI (request for information) stage now, but the process could move quickly to vendor selections. In the RFI, the city reserves the right to skip the RFP phase altogether, sources say.

"I remember back in the broadcast TV days when all the channels were free and all you had to do was watch the advertisement," says Ron Sege, CEO of Tropos Networks. "So the model Google is proposing is something like that."

Tropos makes the hotspot devices that blanket WiFi coverage areas. It was listed as a hardware partner on several of the RFI responses received by San Francisco. Tropos was also listed with San Diego-based integrator WFI, which Google has chosen as its technology partner to build the San Francisco network.

A WFI spokesman said his company could not comment on the issue. But its investors did -- WFI's shares rose $0.30 (5.17%) to $6.10 in trading on Monday.

Tyler says Google's WiFi proposal is limited to San Francisco and the company has no plans of expanding its WiFi service beyond the Bay Area. He did not provide any comment on Google's technology partners.

— Mark Sullivan, Reporter, Light Reading