13 Comments

Summary:

Earthlink is playing a high stakes game of poker. At stake – beleaguered Atlanta-based ISP’s future. Its two big bets – cellular MVNO and muni wireless networks. Both are costly mega-million dollar investments. It has already carved out one (Helio) and raised outside capital from SK […]

Earthlink is playing a high stakes game of poker. At stake – beleaguered Atlanta-based ISP’s future. Its two big bets – cellular MVNO and muni wireless networks. Both are costly mega-million dollar investments. It has already carved out one (Helio) and raised outside capital from SK Telecom. Could its muni networks division be next, with a big cash infusion from outside investors?

It should have been quite a day for Earthlink. It wasn’t.

The stock ended down for the day, despite what seems to be good news. The company made a joint bid to San Francisco-wide wireless network along side search and online advertising giant, Google. The two companies, would offer two tiered service – a slower free version by Google, and a for-fee but higher speed (1 megabit per second) service by Earthlink.

On surface seems to be a great partnership. Earthlink takes out one of its biggest rival, and the joint bid is enough to calm the nerves of bureaucrats that always favor brand names. (Google, of course doesn’t have to worry about managing the network or those pesky headaches.) The bid to build-and-operate a municipal wireless network is one of the four strategic moves being made by Earthlink to grab a tiger called broadband by the tail.

Like America Online, Earthlink has been in a desperate fight to make itself over, using any and every broadband technology. Broadband over powerlines, Fixed Wireless, MuniWireless, Broadband MVNO, and Voice over IP – anything to get off its dependency on incumbent – DSL or cable – access pipes.

These are expensive initiatives that come at particularly harrowing time for the company. According to its most recent earnings statement, the company is losing premium dial-up customers who are switching to cheaper People PC offerings or to broadband. The broadband business’ profits are taking a toll, because of increased competition and costs. (I bet the incumbents are squeezing blood out of a stone here.)

During the fourth quarter of 2005, EarthLink maintained its position as the fastest-growing value narrowband ISP by adding 104,000 net PeoplePC Online subscribers, added 63,000 net broadband subscribers in the quarter. EarthLink continued to manage the decline of its premium narrowband subscriber base, which decreased by 174,000 net customers during the quarter….. Broadband revenues were $111.4 million, an increase of 4.9 percent over the prior year quarter, resulting from the growth in broadband subscribers partially offset by a decline in overall broadband average revenue per user.

The company essentially forecasted a flat revenue outlook for 2006, at about $1.3 billion. In the first quarter of 2006, the company is expecting an increase in its expenses, mostly due to “the expected municipal Wi-Fi market introductions in Anaheim, California and Philadelphia.” The new initiatives are going to cost between $75 million to $100 million.

“Its most profitable business is in decline … and it’s going into areas where it is late to market and has a lot of competition from some well-capitalized firms,” said analyst Jim Friedland at S.G. Cowan & Co. brokerage in San Francisco. “The company wasn’t in dire straits last year, but it’s not necessarily in better shape this year.”

Earthlink is currently planning WiFi networks in five cities, and the total cost of building networks in these cities will be in the $50 million range, according to informed industry insiders. Municipal Wireless is the easiest way for Earthlink to get out from under the yoke of large incumbents, and it has no option but to aggressively chase these opportunities. And to turn it into a viable business, many think the company needs to play in at least 20 cities, including some NFL towns.

Twenty cities at $10 million per, could put them in the $200 million capital expenditures. [ Great news for Tropos Networks, which has become a key supplier of WiFi gear for some of the major players in the Muniwireless marketplace – including Google (Mountain View) and Earthlink (Philadelphia, and Anaheim.)

While the company has ample cash on hand, the problem will not be funding it, but explaining it to Wall Street. Its core business is that of an ISP, which gets a certain specific valuation. The muni wireless effort is “access business” with a different valuation metric. Earthlink, which is running the muni wireless business as a separate division under, Don Berryman. By carving out this business, the company could easily tap outside capital for expanding its muniwireless business.

It certainly has past history of spinning out businesses. Helio, their MVNO was spun-out and has received backing from SK Telecom of South Korea. So why not Muni Wireless Business? In recent days I have heard fleeting rumors about Earthlink spinning off the muniwireless business as a separate entity, including an investment from a big investment bank.

I asked the question to Earthlink spokesperson Jerry Grasso and he said, “It is still a fully functional unit at Earthlink.” I tried to press him for answers, but he denied any immediate plans. He refused to give any details, on the Google-Earthlink joint bid as well. (I have an inkling how that deal is structured, but cannot confirm the details.)

I guess, we will have to wait for the analyst day tomorrow in New York to get a clearer picture on the future of muni networks business. The conference call starts at 8 am tomorrow morning. And that’s just a few hours away!

  1. Woah Om! I see gigaom.com on the Default skin of WordPress? Intentional? Testing?

    Share
  2. accidental more like it. sorry about that.

    Share
  3. earthlink owe me 580 bucks for turning back on a monthly cc charge for dial up *a year after* I got dsl eons ago. They acknowledge they did it but aren’t in any hurry to pay me back. I hope their profits improve so they cut me a check, but I don’t think the potentially ‘free’ cloud over San Francisco will be free for long based on their past behavior with me and others…

    Share
  4. Does anyone think that Google might be starting a more long-term relationship with Earthlink – something similar to what Google setup with Dell?

    Share
  5. Wall Street does not understand technology and Earthlink’s strategies rely on technology to succeed. It may be a tough year or two ahead for shareholders. The question is whether they can stay the course or pull a Mike Armstrong and abandon ship. It’s funny how short term needs of shareholders are often at odds with long term needs of company — maybe the public corporation wasn’t such a great idea after all.

    Share
  6. Jake Kaldenbaugh Thursday, February 23, 2006

    You say, “While the company has ample cash on hand, the problem will not be funding it…” and then you say, “By carving out this business, the company could easily tap outside capital for expanding its muniwireless business.”
    The question I have is: If EarthLink has enough to fund the business, then why would they take outside capital? If it is truly a great business that is misunderstood by Wall Street then their own capital will be the cheapest financing they can find and getting anyone else to fund it will be more expensive. And if it’s that great, then they’ll reap the rewards in the long-run.
    I don’t really see a problem here unless you’re worried about the short-run impact on their stock price, which only provides an opportunity for savvy investors to buy-in cheaply. Which, again, isn’t really a problem for me!

    Share
  7. jesse, you make a good point. i think there is a lot of pressure from wall street, to unlock value… whatever that means. i think in the end, that is going to come down to.

    Share
  8. jake the thing is they are in a tough spot. the cash on hand can go and fund these new initiatives. however the incoming cashflow is going to decrease as they lose dial-up people. so that is a tough act for them to pull off.

    i have no problems with the long term, but its the shareholders and institutional investors who might have a thing or two to say about this.

    Share
  9. I am the guy that started both EarthLink’s Wi-Fi and MVNO business, so I have a unique perspective and understand how EarthLink thinks, or at least used to think.

    Right now the company does have a nice little cash pile. Their core business is throwing off lots of cash, but is dying. They are using this cash to enter some markets where they see growth opportunities. Sound classic strategy.

    The street understands recurring revenue sub models. They are easy to predict. What they realized today is the depth of investment to turn the MVNO and Wi-Fi businesses profitable.

    EarthLink is not in the technology business. They are in the service business. They use technology to deliver service and their own IP is not deep.

    As a service company, EarthLink has not felt the need or wanted to run a large network. Just like the MVNO play, they buy network access at wholesale prices, bundle it up and sell it at a profit.

    But they can’t get their paws on the broadband pipes in the manner they want. Hence the Wi-Fi play. Om may be right that EarthLink will team up with somebody on the Wi-Fi front. Somebody to run the network that will allow them acceptable margins.

    Where this is all heading I do not know. But my bet is Sky is thinking about how to bring EarthLink (including muni), Boingo, and Helio together when the world of converged Wi-whatever and 3G networks emerges down the road.

    They get their pipe, have deep IP in mobile consumer apps, and growth.

    Share
  10. Jesse Kopelman Monday, February 27, 2006

    Lance I agree with you, but it is eerie how similar their position and strategy is to AT&T in the late 90s. Now personally, I think where AT&T went wrong is that they overspent on overvalued cable properties and had they done a little more due digence the whole thing might have turned out better. So, maybe in the end, for Earthlink, success or failure will come down to how well they spend their money.

    Share
  11. Jesse: I was merely offering a perspective on potentially what they were thinking longer term. Om said it best “they are in a tough spot.”

    Share
  12. Jesse: said… snip…eerie how similar their position and strategy is to AT&T in the late 90s. Now personally, I think where AT&T went wrong is that they overspent on overvalued cable properties …

    As a former Bell/ATT Labs muckity muck involved (on technical side) of cable deal, I can tell you the following:
    Wireless purchase, fiber plant purchase (teleport), cable
    RIGHT on target.
    OFF target & radar? MCI cooking the books.
    OFF target? the Tech nosedive.
    OFF target? the CEO losing his balls, and giving in to board of directors when they said wall st was not valuing stock right (it was) and that they needed IMMEDIATE return.

    The Strategy of OWNING our own customers WAS right.
    but implementation was screwed up.
    We sold wireless
    We sold cable
    We sold our balls
    We sold our selves to try and raise the F*## stock price which NEVER EVER went up.

    And what were the results?
    We’re buying wireless (cingular) again
    We got F*#$d in cable
    we now are just a brand, and retread at that

    So?
    the concept of OWNING the customer (last mile) was STILL right.
    We just didnt have the balls to look for the long term!

    Share
  13. The ACLU of Northern California recently sent a letter to the San Francisco Supervisors with an analysis detailing the privacy and free speech concerns of the final Earthlink/Google contract. Available here. http://aclunc.org/issues/technology/assetuploadfile147_4536.pdf

    For more information about municipal wireless and necessary safeguards for privacy and free speech, please see the ACLU-NC Technology and Civil Liberties page available at http://www.aclunc.org/tech and Technology blog at http://www.aclunc.org/techblog

    Share

Comments have been disabled for this post