While EarthLink's statement about the job cuts doesn't include a single mention of Wi-Fi, the company's municipal Wi-Fi business is likely to be hit hard. A filing with the U.S. Securities and Exchange Commission made on Tuesday says the position of president of municipal networks is being eliminated and Don Berryman, who held the position, is one of the employees being let go. At the end of June, EarthLink had just over 2,000 employees.

In addition, EarthLink has been reining in its municipal efforts since earlier this year. Most recently, in July, the company said it would not take on any new municipal Wi-Fi projects until it's confident of a reasonable return.

EarthLink's woes could eliminate the potential for new competition in the broadband industry. "What you won't see any more is a new entrant in the telecom business coming in like EarthLink did and trying to build green-field networks and compete against the incumbent to build a third pipe to the consumer," said Ron Sege, CEO of Tropos Networks, the vendor that supplies EarthLink with Wi-Fi network equipment.

Instead, he suspects that existing operators will build Wi-Fi networks as an extension of their DSL (digital subscriber line) offerings and that cities may build the networks in order to use them for public safety applications or meter reading.

EarthLink's troubles point to a couple of problems with many of the municipal Wi-Fi business plans, said Phil Solis, an analyst at ABI Research. "The whole premise of doing municipal Wi-Fi was that it would be extremely low cost," he said. "But the low-cost assumptions were built on having 30 or 40 Wi-Fi [access points] per square mile." In practice, operators found they might need as many as 100, which changed the economics, he said.

In addition, some operators assumed that the municipalities would use the networks, but in some cases that didn't happen. Some newer contracts are requiring municipalities to commit to a certain level of business, guaranteeing the operators some revenue, he said.

Solis called EarthLink's restructuring a "reality check." Operators and cities are better off considering Wi-Fi, WiMax and cellular, depending on the application, he said. Wi-Fi can still work in dense areas and will work even better when 802.11n, a faster Wi-Fi standard, becomes widely used, he said.