EarthLink's Bold Wireless Gambit


By Olga Kharif Sky Dayton has made a name for himself by jumping late into various technology markets -- and still making money. Back when the Internet was young, for example, he tells of spending 80 hours laboring to connect through one of the first Internet service providers. Frustrated by the experience, he founded EarthLink, which he designed to make hooking up a piece of cake. Today, with EarthLink the No. 2 U.S. dial-up service, Dayton is leaping into what he regards as another untapped niche -- this time for high-end wireless service.

On Jan. 26, he announced that he would head a U.S. joint venture between EarthLink (ELNK) and SK Telecom, Korea's largest wireless-service provider, which enjoys a 50% share of its home market and a worldwide reputation for innovation. The partners aim to provide wireless service to the cr?e de la cr?e of the U.S. market: business travelers and consumers who want the sort of advanced data services now offered mainly in Asia. Full details of the services, to be rolled out this summer, are still under wraps, but they'll likely include mobile TV and music downloads.

VITAL DIFFERENCE. The idea is for the joint venture to become the first U.S. high-end virtual wireless-service provider -- virtual because it doesn't own its network, leasing capacity instead from other operators. Until now, similar ventures, like Virgin Mobile, targeted only the low end of the wireless market.

Dayton's plans are pretty ambitious, to say the least. He figures on gaining 3 million subscribers -- and achieving $2 billion in revenues -- by 2009. And he plans to focus on this goal full time. On Jan. 26, he resigned his chairmanship of EarthLink. Two months earlier, he relinquished the CEO's job at Boingo, an aggregator of so-called Wi-Fi hot spots, which offers broadband wireless access in cafés and airports.

This latest bet is perhaps the riskiest of Dayton's career. Lots of established wireless service providers, like Sprint PCS, a unit of Sprint (FON), have rolled out mobile TV and other advanced data services. If the joint venture is to avoid the very real risk of getting lost among the wireless industry's ever-broader offerings and escalating competition, it will need to be very different.

All of the nation's largest cable companies are expected to have unveiled their virtual wireless services by the fourth quarter of 2005. Obviously, the telcos and the cable operators have greater marketing muscle and larger customer bases than EarthLink, with its 5.5 million dial-up and broadband subscribers.

"A VERY DIFFICULT EFFORT." The plan is to market the service through the 18,000-plus retail stores that already sell EarthLink, says Dayton. But Earthlink's home-grown wireless service, introduced last year and expected to be rolled into the joint venture, has hardly been an unqualified success. While it was recruiting 30,000 subscribers, rivals like Virgin Mobile -- also relatively new to the market -- signed up hundreds of thousands.

The equal partners have agreed to contribute a total of $440 million in cash and assets over the next three years, with EarthLink saying it will put in $80 million before yearend. That's sizable, sure, but not when judged against the war chests of the biggest players entering the market -- outfits Time Warner (TWX) and other cable giants. "It's going to be a very difficult effort," says Peter Mirsky, an analyst with Oppenheimer & Co. in New York.

Mirsky makes a valid point, since cable-TV operators will be offering something that neither EarthLink alone nor its joint venture can match: In addition to Internet access and wireless, the cable guys can woo subscribers with comprehensive packages that also include home cable TV. That could prove a potent selling point, since time-tested market experience leaves little doubt that the larger the bundle, the more favorably consumers are likely to respond.

NEEDED BOOST. Much will depend on how the joint venture differentiates itself from rivals. "We expect to have a service that's so cool, people will want it," Dayton tells BusinessWeek Online. SK's well-deserved reputation for innovation in wireless services lends credence to Dayton's boast, as does its emphasis on treating subscribers right. The Korean outfit's customer service, says A.T. Kearney Vice-President Andrew Cole, who worked with SK Telecom, "is better than U.S. operators."

While the joint venture will own SK's platform in the U.S., which will deliver those advanced services, SK Telecom is also a strategic partner of Verizon Wireless, the country's second-largest service provider. Just how much that relationship ends up helping Verizon (VZ), and just how much it assists the joint venture, remains to be seen, given that SK Telecom is supposed to be helping Verizon implement advanced data services -- precisely the expertise it is slated to contribute to the joint venture.

Still, this is perhaps EarthLink's best chance to find an avenue of growth in rapidly changing world of wireless. Numbers of its premium-service dial-up subscribers are dwindling at the alarming rate of about 10% a year, estimates Mark Zadell, an analyst with Calyon Securities in New York. Broadband subscriber additions are also slowing, partly because more than 50% of U.S. households already have high-speed Web access. Growth in the numbers of broadband subscribers will fall from 29% in 2004 to 17% this year, Zadell figures.

PRICES AND PACKAGES. Dayton & Co. hope to find more growth in the high-end of the wireless market, a segment that strikes some analysts as extremely fertile ground. Potentially, the joint venture could enjoy above-average margins: While wireless carriers receive an average of $45 per customer every month, Cole figures Dayton and SK might see 50% more than that, figures Cole. Another possibility: EarthLink could bundle residential phone service, broadband access, and wireless into one package, thus competing more effectively with telcos than it does today.

Much of the venture's success hinges on execution. And here, perhaps, Dayton's familiar magic will be vital. He's "a tremendous choice," says Cole. "He's young, innovative, and he has a tremendous track record of success." It's a record Dayton is betting will remain untarnished when the future reveals what it has in store for his most ambitious undertaking yet. Kharif is a reporter for BusinessWeek Online in Portland, Ore.


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