Wireless Connectivity

City may revisit Freenet subsidies

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Editor’s note: The Lawrence Journal-World is owned by The World Company, which also owns Sunflower Broadband. Sunflower Broadband and Lawrence Freenet are competitors in the Lawrence Internet service provider market.

Plans are in the works for the for-profit partner of Lawrence Freenet to provide cable television service in Lawrence, sparking new questions about a city subsidy that Freenet receives.

City commissioners at their meeting tonight are scheduled to vote on a new agreement with Community Wireless Communications that would allow the company to begin offering video television services over a planned network of fiber optic cables buried in city rights-of-way.

The Kansas Corporation Commission recently approved Community Wireless’ application to provide video services in Lawrence. City commissioners are expected to also approve the agreement, but Mayor Rob Chestnut said he wants the city to launch a review of whether the city is improperly aiding Community Wireless’ related nonprofit entity, Lawrence Freenet.

“We need to make sure that we’re not indirectly subsidizing a for-profit entity that is in direct competition with other private, for-profit companies,” Chestnut said.

Cable expansion

Community Wireless officials have said in filings with the KCC that it intends to begin selling video television service throughout Lawrence within the next five years.

Community Wireless founder Josh Montgomery said exact timing will be determined by funding, but he expects to begin offering service in the next 24 to 36 months.

Montgomery said the company’s cable operations will allow users to access video television services through wireless technology. In a marketing video, Montgomery shows how the service can be used to watch programming from a television set up in remote locations, such as a city park and from a sidewalk on Massachusetts Street.

Montgomery also predicts the FCC will soon make it easier for cable companies to offer “a la carte” channels. Montgomery said he could not say specifically what channels the system would be able to offer because Community Wireless does not yet have any agreements in place with cable channels.

Sunflower Broadband filed a petition with the KCC asking that Community Wireless’ application be denied because the company has presented no evidence that it intends to operate a legitimate cable television service.

“In short, the application represents little more than a pie-in-the-sky, speculative venture seeking fast-track, unconstrained access to rights-of-way in the city of Lawrence,” Sunflower wrote in its petition to the KCC.

Instead, Community Wireless is seeking the video services license because it represents the cheapest way for the company to use the city’s right-of-way to boost its ability to provide Internet service in Lawrence, said Rod Kutemeier, Sunflower’s general manager.

Once the fiber optic cable is in the ground, Community Wireless will be able to use that cable to provide both video and Internet services. By applying for a video services agreement, Community Wireless will not have to share any of its Internet-related revenue with the city, Lawrence City Manager David Corliss said.

Corliss said if Community Wireless had sought to install the fiber for the sole purposes of providing Internet service, the city would have been entitled to negotiate a right-of-way usage fee with Community Wireless.

Under the video services agreement, Community Wireless is being asked to pay the city 5 percent of its gross revenues derived from video services. But the city does not have any control over how much Community Wireless uses the fiber to produce revenue for video versus Internet services.

“Community Wireless is looking to find a way to use Lawrence’s right-of-way and not have to pay extra fees to the city of Lawrence,” Kutemeier said. “I continue to think that the city needs to look deeper at what is going on.”

Montgomery denies those allegations and said that Community Wireless will be an active player in the video services market.

“This is an unfounded accusation with no basis in fact,” Montgomery said. “Our intent to provide a video service will be proved when we launch our video service.”

City subsidy

The KCC rejected Sunflower’s arguments. But City Hall leaders may start looking at changing its deals with Lawrence Freenet.

Since 2005, the city has been providing at least a $90,000 per-year subsidy to Lawrence Freenet in exchange for Freenet agreeing to provide some free Internet service in the community, according to city figures.

The subsidy comes in the form of reduced rates that the city charges Freenet to place wireless Internet equipment on city water towers and on City Hall. The city charges the company $10 per year to be on four water towers and City Hall. The city charges for-profit wireless telephone companies about $1,500 to $2,000 per month to place equipment on city infrastructure. The lower rates charged to Community Wireless amount to about $90,000 per year in revenue that the city forgoes.

Corliss said the amount of forgone revenue may be higher because the city also allows Freenet to place equipment on city traffic signals. But he said it is difficult to estimate the fair market value of that arrangement because the city has not allowed a for-profit company to place equipment on the traffic signals.

Chestnut said the latest plans by Community Wireless should lead to a review of the Freenet agreements. Community Wireless receives the majority of its money from Lawrence Freenet. In 2008, about 85 percent of all the money Freenet collected in user fees went to Community Wireless to pay for Community Wireless’ system operation.

Plus, Chestnut said he believes Lawrence Freenet has morphed into something much different from what it started out as in 2005. In 2005, Freenet leaders said they were starting the company with the idea of providing free Internet service to anyone who requested it, regardless of income. The business model called for users to send in a voluntary donation to the company. Now, Freenet requires users to pay a fee of $23.98 per month. The company provides free service to 104 accounts, which must qualify based on income, according to the company’s fourth quarter 2008 report.

“It is pretty obvious that Community Wireless is going to enter the market as a direct competitor to the for-profit companies,” Chestnut said. “I believe we have to ask ourselves whether our support has created the unintended consequence of creating an unlevel playing field.”

Sunflower officials are asking that the contracts be immediately voided, and they also are asking the city to investigate whether there is a conflict of interest between Montgomery, Community Wireless and Freenet. Sunflower officials are concerned that Montgomery, who was one of the founders of Freenet, also founded the for-profit Community Wireless company after negotiating the low-cost lease payments with the city on the basis that they would benefit a not-for-profit company.

Montgomery denies any wrongdoing.

The review of contracts also may lead to a cost-benefit analysis of whether the city is receiving enough benefit for the subsidy it provides to Freenet.

Based on the current rates charged by Freenet, the fair market value of the 104 accounts that Freenet provides for free is just under $30,000 per year. The city forgives at least $90,000 in fees for the community to receive those 104 free accounts.

In other cases where the city provides a subsidy to a business — such as a tax abatement where the city forgoes collecting future property taxes — the city requires a formal cost-benefit analysis that shows the company will be providing at least $1.25 in benefit for every $1 in subsidy it receives.

Corliss said the city did no formal cost-benefit analysis when considering the Freenet deal.

Freenet leaders said they are confident that the city receives a positive benefit from the arrangement. In addition to the free accounts, the city receives the ability to conduct video security at its various water tower sites. Freenet spokeswoman Kris Adair said that service has a fair market value of about $30,000 per year.

City Commissioner Mike Dever said he wants to study whether the city is receiving a good value from Freenet, but said he is encouraged by a new program that Freenet launched last week to expand its free offerings.

Freenet is now allowing anyone with a local mobile telephone number to access its Internet network for free. The service does have restrictions. Individuals cannot access the network for more than 30 minutes per day, and the service is not available in about 40 percent of the city where Freenet does not provide service because of technical limitations.

“I would like to have more people served,” Dever said. “But I feel like we’re moving in a direction where we can add an unlimited number of free subscribers. I still believe it (the city’s support) was an investment in the future.”

Sunflower officials contend the new service still will produce a low benefit for the city compared with the total subsidy the city is providing. Kutemeier said Sunflower has a free Internet program that provides free service to about 300 individuals who qualify based on income. The company also provides 63 hotspots throughout the area where people can access the Internet for free.

By Chad Lawhorn