Real estate agent Gary Klatt, fed up with expensive home Internet connections, first scrapped Sprint’s service and later canceled Time Warner. He ended up with a wireless version from an unlikely upstart: his town of Chaska, Minn., population 22,000.

“I can use it wherever I go, and it does work in about 80% of the places I go,” said Mr. Klatt, 54. His Minneapolis suburb is one of about 100 municipalities from Philadelphia to Rio Rancho, N.M., installing antennas to provide discounted Internet access.

Communities are selling wireless Web access to lure employers and improve schools. In the process, they will take as much as $3.6 billion a year in potential sales from phone companies such as Verizon and cable providers including Time Warner, Boston-based researcher Strategy Analytics said. The threat to companies grows as cities from Philadelphia to San Francisco consider offering the cheaper service.

“They have a lot of potential to lose,” said Ed Paik, who manages Bank of America’s $400 million Columbia Utilities Fund in Boston. “It would certainly raise a couple of red flags for publicly traded companies.”

Like Chaska, Philadelphia and Rio Rancho are using wireless fidelity, or Wi-Fi, which connects computers to the Net through radio waves instead of phone lines used by Verizon or cable-television connections with Time Warner.

The cities attach routers, which direct Internet traffic, and antennas to streetlights and buildings to transmit a signal for any Web surfers using a laptop, handheld, or desktop computer equipped with a card that receives the signal.

Wi-Fi is less expensive to deliver because it relies on unlicensed airwaves, letting companies avoid licensing fees involved with commercial mobile phone networks. Wi-Fi also lets multiple users share one connection.

Philadelphia expects to charge about $10 a month for its residential Wi-Fi service, less than the high-speed Internet access via cable-television providers such as Time Warner’s $45 to $65 a month, or access over digital subscriber lines, or DSL, from Verizon for as little as $30 a month.

While Wi-Fi is used mostly for laptops and handheld computers, it can work with mobile phones. In Rio Rancho, Azulstar Networks, a closely held Grand Haven, Mich.-based builder of Wi-Fi networks that’s running the municipal service, sells phone service that relies on Wi-Fi.

Wi-Fi promises download speeds comparable to DSL and cable connections. City Wi-Fi gives subscribers mobility, such as going online from the backyard, or even while sitting in a car.

The prospect of taxpayer-funded competition adds to challenges for New York-based Verizon and other telephone carriers. They are pursuing mergers as demand for local calling wanes, prices for communications services decline, and competitors sell similar products.

Cable-television companies, including Time Warner, are also losing subscribers, in their case to satellite-television providers such as DirecTV Group and EchoStar Communications.

A Comcast vice president, David Cohen, said cities can’t do as good a job providing wireless Web access as carriers and shouldn’t spend taxpayer money to vie with companies. The competition may discourage some service providers from expanding in cities that supply low-cost Internet service, he said.

“If you’ve got a choice of growing your business in a traditional community or growing your business in a community that will take the tax dollars that you pay and use those tax dollars against you, what would your choice be?” Mr. Cohen said.

Philadelphia Mayor John Street disagrees. He plans to transform Philadelphia into the biggest wireless metropolis in America, a project that he said will foster business growth, lure tourists, and bring Internet access to low-income neighborhoods and public schools.

“This wireless broadband technology should be as common as electricity and water running into the house,” Mr. Street said.

Philadelphia’s success or failure may set the pace for adoption by other major cities, analyst Roberta Wiggins of the Yankee Group said.

“There are cities waiting on the sidelines,” she said.

Municipalities are allowed to provide Wi-Fi services unless barred by state law. Thirteen states have passed laws restricting or barring local governments from providing Web services, often at the behest of service providers.

Some big cities, including New York, are opting out of municipal-run Wi-Fi.

“We would be taking tax dollars needed for essential city services to keep the streets safe and clean and to provide better schools just to give people access to a service that the private sector provides,” said Gino Menchini, New York’s telecom and IT commissioner.