Free Broadband for the Masses

Backed by VC cash, a former FCC official's startup is out to provide no-fee, ad-supported wireless service

There's little debate whether the U.S. is a laggard in high-speed Internet access. About 40% of U.S. households surf the Net over so-called broadband connections. That's about half the rate in Korea and Japan. And it's significantly behind many countries in Europe.

Harder to settle is what needs to be done. Enter John Muleta, a senior U.S. communications official under both Presidents Bill Clinton and George W. Bush. Muleta, former head of the wireless bureau at the Federal Communications Commission, wants to offer free wireless broadband to consumers across the U.S. So he has launched a new company called M2Z Networks, which has raised an undisclosed amount of money from three major venture-capital firms, including Kleiner Perkins Caufield & Byers, Charles River Ventures, and Redpoint Ventures.

M2Z aims provide a basic advertiser-supported service at no cost to consumers. It would charge fees for premium services, such as faster connection speeds. "The model here is broadcast TV," said Muleta, referring to free over-the-air TV, which is supported by ad revenue. He founded the company with Milo Medin, founder of the @Home Networks broadband service.


  But what may sound like a straightforward plan won't be easy to put into practice. M2Z's biggest obstacle is gaining access to the radio airwaves over which wireless signals travel. The FCC typically sells the airwaves, or spectrum, at auctions where rival bidders spend large sums with no guarantee that they can secure the specific chunks of spectrum they want. The biggest-ever FCC auction of spectrum, worth an estimated $8 billion to $15 billion, is set to begin next month (see BW Online, 05/05/06, "The New Wireless Wars").

Muleta wants to bypass the auction process altogether. He's hoping to strike a deal that would give him a preset block of underutilized spectrum in the range of 2155 megahertz to 2175 megahertz. The government has designated the spectrum for high-speed wireless services. Rather than fork over the up-front payments associated with auctions, M2Z wants to give the government 5% of annual sales.

Not if the wireless industry has anything to say about it. Wireless executives who declined to be identified said Muleta is trying to trade on his government background, using President Bush's aim to provide universal broadband by the end of next year as a way to make a buck. "It's crass," says one wireless executive. Wireless industry trade group CTIA-The Wireless Assn. opposes the proposal, too. "We don't see a need for the FCC to revisit their decision to allocate and auction this valuable spectrum for advanced wireless services," says Joe Farren, a spokesman for the group.


  M2Z, which stands for "move the cost of data transport to zero," says the plan is perfectly legitimate. It points to several precedents, including the distribution of spectrum to broadcast TV companies and a swap that gave valuable airwaves to Sprint Nextel (S). That transaction, negotiated when Muleta worked at the FCC, was aimed at reducing interference over airwaves used by public safety officials.

What's more, M2Z says, the plan would serve the public interest. While the vast majority of households have access to broadband sold by cable TV and phone companies, only 40% choose to purchase it. While the price of broadband has dropped to $15 or $20 a month under many plans, it's still too expensive for many low-income households. Other families simply may not see the value.


  But the limited scope of broadband usage has big economic implications, and Muleta is far from alone in drawing attention to it. New York Attorney General and gubernatorial candidate Eliot Spitzer this month outlined a plan to provide affordable broadband to all citizens of the Empire State (see BW Online, 05/17/06, "Eliot Spitzer's Digital Platform").

Households that use slow dial-up connections can't gain access to many of the advanced information, entertainment, education, and other types of services now available over the Web. And companies and investors will be reluctant to step up investment in such sites unless they believe they can reach a big enough audience. That means the U.S. could fall behind when it comes to the formation of broadband-driven companies, jobs, and services (see BW Online, "Gadgets for the Broadband Life"). And it means the next generation of tech leaders could be based in countries that have more advanced broadband infrastructures than the U.S. "The fact is the U.S. lags in broadband, and sooner or later that lag is going to create other lags, in everything from economic growth to education," says Bruce Sachs, a partner at Charles River Ventures.

Even if M2Z succeeds in bypassing the auction process, plenty of other challenges remain. It's far from clear that the company can make money using a combination of advertiser-supported service and paid premium service. The price of basic broadband has dropped from the $50 level over the past few years. By the time M2Z gets to market, basic broadband may be so cheap that even lower-income households can afford it.


  And the company will face plenty of competition from telecom companies that offer endless arrays of premium service. Companies like Verizon (V) and AT&T (T) are building superfast fiber networks (see BW Online, 05/24/04, "Verizon: Take That, Cable"). Internet companies such as Google (GOOG) may offer wireless broadband, possibly for free (see BW Online, 02/06/06, "Google and Skype are Friends?!").

Muleta is optimistic, though. M2Z plans to use a new kind of wireless technology called OFDM, which some say is faster and cheaper than current wireless options (see BW Online, 08/22/05, "Why Qualcomm Has Its Wallet Out"). Sachs says OFDM costs about one-tenth the price of wireless technologies on the market just a few years ago.

Combine OFDM with advances in antenna technology, and the company thinks it can build a basic network for as little as $1 billion, expanding as customers demand more capacity. "We think there's a demand for consumers for a very basic level of broadband, and that we can provide a lot of value to that market," Muleta says.

The most astonishing aspect of the proposal may be that $1 billion price tag. Regardless of whether M2Z succeeds, the fact that it can contemplate offering universal broadband with a relatively small investment reflects how the wireless revolution is opening up possibilities that regulators could only dream about a few years ago.

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