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So where, then, does EarthLink (ELNK) fit into this cutthroat field? Although it has the second-largest ISP market share with 3.7 million subscribers, EarthLink has financial problems galore. Its share price seems to be stuck at around $11. The company is losing money and doesn't have a clear plan to offer services through cable broadband -- the next generation of home Internet access. True, EarthLink doesn't seem to be in any imminent trouble, but it's possible that majority shareholder Sprint (FON) could buy the company a year from now at a distressed price, leaving shareholders with little to gain. With so much to contend with, no wonder EarthLink is having trouble catching investors' eyes. If the company's broadband access through fast digital subscriber lines (DSL) -- sold mainly by regional telephone companies -- takes off as expected, then maybe EarthLink would be worth a closer look. But for now, EarthLink is dealing with high customer-acquisition costs and a stock market that doesn't exactly favor unprofitable tech companies. EarthLink investors respect the company's commitment to reliable Internet service, says company CEO Garry Betty. "The only thing they don't like is uncertainty," he says. "Right now institutional investors are sitting on the sidelines." Some are concerned about whether free ISPs such as NetZero will steal market share from EarthLink. Others wonder if Time Warner and AT&T, the nation's two largest cable operators, will play fair with EarthLink and allow it to cut reasonable deals in order to sell its service over their cable lines. These are important questions the company cannot fully address yet. NO POP-UPS. In a way, it's too bad, because EarthLink's financial situation has nothing to do with its service. As ISPs go, analysts regard its service is one of the best. The company has a different strategy than AOL. While many users love AOL's entertainment content, EarthLink prides itself on having no pop-up ads, no chat rooms, no layer upon layer of promos for films and music of the sort that AOL users seem to enjoy. EarthLink has managed to expand its customer base by concentrating instead on reliability. "EarthLink keeps it pretty clean," says FAC/Equities analyst Jeff Sadler. But that strategy puts EarthLink between a rock and hard place. Aside from AOL, which is merging with Time Warner, EarthLink is the only major independent company selling Internet access nationwide and still charging monthly fees -- $19.95 a month for unlimited access, vs. AOL's monthly fee of $21.95 for comparable access. (Juno Online Services has 730,000 paying subscribers, but most of its customers use the free Juno ISP.) Everyone else with sizable market share has been acquired or is owned by a phone company or cable operator. Nor does EarthLink have special tie-ins with local utilities. Local phone and cable companies are winning customers by supplying bundled-service packages designed to save customers money. Maybe they do -- but the ISP market has become so competitive that major providers are virtually giving away service as part of those package deals. You can get a year of AOL service free with the purchase of a Gateway computer, or get $400 off hardware at Circuit City with a three-year CompuServe ISP contract (AOL owns CompuServe, too). EarthLink is trying this bundling to a certain extent with Sprint's phone service, but the jury is still out on how successful it will be. LOW-MARGIN BIZ. Dial-up-access customers currently account for about 80% of EarthLink's revenues. But its future lies in the ability to sell its service over a combination of cable and DSL broadband, wireless handsets like Research In Motion's new BlackBerry, and perhaps satellite services. "The ISP business is a very low margin one, and the name of the game is thinking about how to up-sell and cross-sell services," says Emily Meehan of Yankee Group. "EarthLink is in a tough financial position because that is a very expensive proposition for them." While all this hasn't helped EarthLink, neither did the Internet stock market pullback in the early spring. Investors assaulted Net stocks to the point where many haven't recovered. Count EarthLink among the victims. Its shares tumbled to $11 from a 52-week high of $33 last December. Still, EarthLink continues to spend huge sums on marketing. Sales in the six months ended in June increased 48% over the same period in 1999. But the company spent three times as much on marketing to achieve that sales growth. SPRINT BUYOUT? EarthLink seems to be geared toward a more sophisticated Internet audience -- one that might look with disdain upon AOL's walled garden. EarthLink's strategy is fast, simple -- and most of all, reliable access to the Web. Unfortunately, that seemingly fabulous customer-service strategy hasn't paid off for investors. Is there a place for great, no-frills, commercial-free service in the ISP market? Investors don't seem to think so. Yes, $11 a share is cheap compared to $55 for AOL, but Sprint owns 27% of EarthLink and has the right-of-first-refusal to buy the company should a suitor appear. A year from now, Sprint would be allowed to buy EarthLink outright for "an appropriate market premium," says EarthLink CFO Lee Adrean. If EarthLink were trading at $8 a share then, a 50% premium would only put today's investors back where they started. And 50% above the current trading price would hardly give longtime investors the return they were hoping for. EarthLink may be a reliable ISP with no bells and whistles - but that's not enough to get investors banging the drums for it. Shook covers financial markets for BW Online in New York EDITED BY BETH BELTON |
