EarthLink, Juno, MSN, NetZero—Who's Wooing Whom?

The AOL Time Warner merger, current market conditions, and slim ad revenues have forced the nation's largest ISPs to initiate an interesting courtship ritual—the likes of which could procreate a competitor like Steve Case & Co. have never before rivaled.

by Patricia Fusco ISP-Planet Managing Editor [February 19, 2001]

ITC Service Co., a wholly owned subsidiary of ITC Holding Company, sold its 10.5 million plus shares of EarthLink Inc. late last week, to pursue other investments.

In a statement released by EarthLink, ITC executives Campbell Lanier and William H. Scott III resigned from EarthLink's board of directors as a result of its divestiture.

ITC Holdings refused to comment on the sale, but industry analysts estimate that the deal is worth about $97.5 million. The stock sell-off equates to about a 7.7 percent stake in EarthLink.

Interesting choices
Lanier's replacement on EarthLink's board is Robert Kavner. Kavner was previously a member of the EarthLink Board of Directors prior to its merger with MindSpring Enterprises.

Kavner is currently chairman of idealab!, the Internet development corporation responsible for creating GoTo.com, eToys, and the nation's largest no-fee Internet service, NetZero, Inc.

In an astonishing move, national Internet service provider Juno Online Services indicated it is open to buying a competitor—or being sold to a rival itself.

Free ISP is obsolete
Chief Executive Charles Ardai told Reuters on Friday that as the market is consolidating and reevaluating the pure-play free Internet access model is dead. Ever mindful that Juno supports more than 10 million of its total 14 million users with free access, Ardai said that he is open to new possibilities.

"I think yes, in a sense, the free model is dead and there are no stand-alone free ISPs," Ardai said. "Some got out of the business or expanded into billable services like us."

For many years Juno has been migrating its no-fee user base to premium, billable services. Its upsell business model has proven to be an effective method of turning freeloaders into revenue generating clients.

As NetZero recently discovered, the ad-based revenue model is at the mercy of the market. With Web advertising dollars in short supply, the one time "Defender of the Free Universe" recently announced it would stop sending ads to users PCs for just $9.95 a month.

Buy the numbers?
The fact that the NetZero chief now sits on the board of the second largest fee-based ISP in the nation, has analysts scratching their heads—wondering if a larger deal is in the works.

If NetZero would move to acquire EarthLink, it would combine its 7.5 million predominantly free users with EarthLink's 4.6 million fee-based subscribers. The melding of the two ISPs would be a direct competitor of Juno—in size, scale and business mix—which might have prompted Ardai to speak about possible mergers and acquisitions.

Broadband edge
Juno also has something that NetZero does not—the firm is still negotiating a long-term agreement to offer high-speed services over AOL Time Warner's cable lines. While Juno is dabbling in cable-fed high-speed services, Ardai said its primary focus remains basic dial-up access.

Ardai said Juno sees broadband as an important part of its future, not the core of its business at this time.

Juno started talks with Time Warner last year, before AOL completed its acquisition of the media giant. As a condition to approving the $106.2 billion deal, federal regulators required that Time Warner share its high-speed cable lines with rivals.

So far, the combined company's cable group has signed deals with EarthLink as well as AOL's Internet service, which makes EarthLink's stock more appealing to a company like NetZero.

Industry analysts have tagged companies like Juno and EarthLink as targets for acquisition amid the continued market consolidation. But the speculation about EarthLink, Juno, and NetZero—the nation's second, third and fifth largest ISPs, respectively—doesn't stop here.

Ready in Redmond?
Microsoft Corp. has been rumored to be interested in EarthLink for months, even though a takeover seems unlikely while the software giant settles its anti-trust case with the Department of Justice.

With ITC Service's separation from EarthLink and analysts speculating that the ISP is a prime target for acquisition, perhaps the software giant will strike a deal to combine EarthLink with its MSN Internet service arm. As the fourth largest ISP in the nation, MSN is one of the few firms that has the dollars to support such a move.

Snapshot scenarios
Will any of these deals happen? Only time will tell. Were NetZero to acquire EarthLink the companies combined user base would be about 11.6 million—enough to rival AOL's estimated 17.5 U.S. subscribers, less its Gateway and Compuserve branded holdings. But if MSN strikes first, then the two companies combined would support some 8.6 million fee-based users, as opposed to a combined NetZero-EarthLink's estimated 8.2 million paying customers.

Any way you look at it, Juno would face stiffer competition if any EarthLink came into play. With that in mind, Ardai's willingness to deal is not much of a surprise at all—it stands to be a savvy business decision.

The only question that remains, is whether AOL Time Warner would stand by on the sidelines while the landscape of the U.S. Market shifts—potentially propagating a bona fide Internet service with a size and scale that America Online has never before rivaled.

— End