EarthLink’s current contract to build a municipal Wi-Fi network in San Francisco appears to be dead following a restructuring of the struggling Internet service provider.

The deal, hammered out in months of negotiations last year and completed in January, calls for EarthLink to build a citywide network at no cost to the city and sell high-speed service to residents while Google provides a free, slower service over the same network. But after announcing layoffs of nearly half its workforce and a gloomier financial forecast, EarthLink said this week it won’t invest any more money in that business model.

“We will not devote any new capital to the old muni Wi-Fi model that has us taking all of the risk by fronting all of the capital, then paying to buy our customers one by one,” President and CEO Rolla Huff said on a conference call.

That includes currently planned networks where the company hasn’t yet made capital investments, EarthLink spokesman Jerry Grasso confirmed. In San Francisco and other such cities, networks would have to be built under new arrangements.

“We will approach them to discuss the needed changes to the business model,” Grasso said. He declined to comment on the state of discussions with any particular city.

San Francisco’s deal with EarthLink has yet to be approved by the city and county’s Board of Supervisors, where it faces fierce opponents. The deal is due for a vote in the Board’s Budget and Finance Committee next week that could send it on for full board approval. But the changes at EarthLink appear to make the current contract a dead issue.

EarthLink’s municipal Wi-Fi woes come as the company struggles across most of its businesses and as the overall climate for municipal Wi-Fi changes. The promise of free networks supported by advertising or residential subscriptions has faded, and EarthLink and other network providers are looking to local government as “anchor tenants” that support the projects by buying services. Chicago, which had been talking with EarthLink and others about a citywide Wi-Fi project, dropped the plan this week, citing high cost and low subscriber interest.

The company forecast municipal Wi-Fi capital investments of $30 million to $35 million in 2007 as it completes projects already begun in Philadelphia, Corpus Christi, Texas, and Anaheim, California, but is not forecasting any capital spending on municipal networks in 2008, Grasso said.

Aaron Peskin, president of San Francisco's Board of Supervisors, approached EarthLink earlier this year with proposed amendments to the Wi-Fi deal that he hoped would make it more palatable to opponents. However, he rejected the idea of anchor tenancy, saying the city's departments weren't ready to use the Wi-Fi network.