Editorial: Don't Be Like EarthLink

EarthLink's in a lot of trouble right now, and provides valuable lessons to all independent ISPs.

by Alex Goldman ISP-Planet Managing Editor [October 4, 2007]

Whatever service you're providing as an ISP, EarthLink is offering it too. The company offers DSL, cable, satellite, and even, in one area, broadband over powerline. It's still a major dialup provider (in two distinct segments: premium EarthLink and value-priced PeoplePC). In a joint venture with SK Telecom, it offers the Helio cellular service. The company is like a laboratory studying services that independent ISPs might choose to offer.

The one service it's not offering is fixed wireless broadband (which is completely different from municipal wireless, a market the company's a big player in).

As for value-added services, the company offers all the regular services such as anti-spam, anti-virus, anti-phishing. It offers webhosting and, through Covad, VoIP.

But although it's strong in all of these areas, its focus has nothing to do with being an ISP. Given the current regulatory environment, this makes sense. Back in 2003 (things have only gotten worse since), we wrote that the current regulatory environment would:

"help only those companies that can fall back on protected, secure, reliable sources of income, such as telephone directories—sources of income that have nothing to do with the provision of broadband Internet service."

So what's EarthLink's focus today? In its most recent quarterly SEC filing, the company wrote:

"For the past several quarters, management has been focused on expanding our presence in growth markets, including VoIP services, municipal wireless broadband services, and business services. VoIP and municipal wireless broadband services are still in their early stages and continue to experience operational and competitive challenges as we expand and improve our capabilities."

Since then, EarthLink acquired a new CEO, Rolla P. Huff, former Chairman and CEO of MPower, and began to restructure.

Susan Kuchinskas of internetnews.com reported, "EarthLink has struggled to find revenue streams beyond broadband subscriptions."

She suspects the company's new management will try to sell it. "CEO Rolla Huff joined in June, after the sale of Mpower Communications, where he was chairman and CEO. His former Mpower crony, Joe Wetzel, joined EarthLink as COO in July. If past is prologue, the duo may plan to shop the company around, looking for a replay of the sale of their previous company, a regional provider of broadband data and voice services to business customers, for $204 million."

The company has always been brutally honest about churn (see chart below). Each quarter, it loses several hundred thousand and works hard to break even. Lost in those round numbers, however, is the fact that the broadband business has been growing nicely, as dialup subscribers left (however, in the most recent quarter, EarthLink lost 753,000 broadband customers that it had been managing for Embarq).

Although the company tends to lose money, most of those losses come from one line on its balance sheet, "net loss from equity affiliate." That's the Helio joint venture. The details are these:

For example, for the most recent three months, the company's gross revenue was $312,203,000, and its net loss was $16,290,000, but since Helio made a net loss of $40,054,000 for the company, it seems that EarthLink would be profitable if it abandoned Helio.

That leaves VoIP and business services. EarthLink's best investment, in my opinon, is the acquisition of New Edge (see EarthLink Means Business). It can build on that if it focuses on business services (as you can see in the chart, business ARPU is rising but subscriber counts are falling).

Learn now
There are lessons that ISPs can learn from EarthLink's experience. The first is that if business is tough for you, don't be surprised. It's tough for everyone who's not a monopoly. The second lesson is that although you too are eagerly searching for sources of income outside of providing pipes, you need to make your investment choices carefully. EarthLink is losing money in some ventures and has always lost money in them.

Indications are that it is backing out of municipal wireless too. That would leave it focusing on VoIP and business services, areas we've been recommending to ISPs for some time. The Christian Science Monitor reports that small scale municipal Wi-Fi projects are succeeding while big ones (which is all EarthLink was interested in) are failing. CNN reports that with new WiMAX entrants, the FCC is not worried that the failure of free Wi-Fi will end its dream of wireless competition, sorely needed to stir up the cable-DSL duopoly.

The bottom line is that you do need to offer more than the pipe, but avoid investing in pipe dreams.

— End