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A Net Pioneer's Wireless Wager


It's nearly five in the afternoon at the sparsely furnished seventh floor offices of Helio, a Westwood (Calif.) startup selling hip, youth-oriented cell phones that link to the MySpace.com (NWS) social networking Web site. As twentysomethings in jeans and T-shirts race around the buzzing office, Internet mogul Sky Dayton is planted in front of a stand-up desk, his one concession to an achy back caused by too much snowboarding. He's checking out some critical performance data. Helio's latest sales figures? Nah. Dayton's attention is riveted to a program that lets him know when the surf is up near his Santa Monica (Calif.) home, which, he's pleased to report, is the case today. "I'm outta here soon," he says.

Riding the wave has always been Dayton's forte. A onetime coffeehouse owner, he became a millionaire at 26 after launching Earthlink Inc. (ELNK), an early and still active Internet service provider, then taking it public in 1997. Turbulence back then was when he got carded as he ordered a beer in Boston at the initial public offering road show that year. But wipeouts followed, too: ECompanies, the incubator he started in 1999 with former Walt Disney Co. (DIS) Internet honcho Jake Winebaum, became a symbol for dot-com busts after launching duds such as eParties.com and Icebox Inc.

Now 35 with three kids, the guy who once took meetings in sandals is back with a new mantra: wireless. Dayton heads two companies that are making high-risk bids to harness the radio waves. As chairman of one eCompanies venture, Boingo Wireless, he intends to build the nation's largest operator of Wi-Fi hotspots, linking travelers at airports and hotels to the Internet. He's also CEO of Helio, a telephone operation he has imported from South Korea. Helio, which was launched in May, targets the under-30 crowd with superslick phones that surf the Web. They give users the ability to buy games and videos and share them with friends, including uploading them to a MySpace page.

The big idea behind both ventures is to use wireless technologies to connect folks who are constantly on the go, whether they're clubbing or jet-hopping. These are no seat-of-the pants ventures, like Dayton's credit card-funded Earthlink launch. His well-heeled Boingo investors include Sprint PCS (S) and Mitsui & Co. (MITSY) Five-year-old Boingo is nabbing hotspot deals, such as one in May to buy the operator of wireless services in 12 airports that include JFK and LaGuardia in New York. Meanwhile, Helio's co-owners, Earthlink and South Korean communications giant SK Telecom, have agreed to pump $440 million into its launch.

Both ventures have ties to Earthlink, where Dayton is still a major shareholder and board member with the clout that comes with being its original visionary. With its dial-up subscription business dwindling, Earthlink is going wireless: It has projects under way or planned to provide Wi-Fi services to cities such as New Orleans, San Francisco, and Anaheim, Calif. Earthlink pays a small amount each year to license Boingo software for its existing wireless subscribers, and, down the road, Dayton sees a future where Helio might link with Earthlink's wireless services to provide data downloads for cell-phone customers.

TONS OF RIVALS

If Helio takes off, so could Dayton, financially. Since Earthlink's merger in 2000 with MindSpring Enterprises, Dayton's stake in the combined company has shrunk to 1.8%, worth some $17 million, from $123 million six years ago, as he sold off some shares and the stock tanked. To take on the Helio job, Dayton stepped down from the Earthlink chairmanship that he had held for 11 years. Today, he collects an undisclosed salary from the venture, with the potential for a large bonus if it hits a home run.

But Boingo and Helio are a long way from delivering Dayton's first big hit in a decade. Both face tons of competition in markets dominated by large players, says Parks Associate wireless analyst Michael Cai. Rivals such as T-Mobile (DT) already provide some of the same services offered by Boingo, which is just approaching profitability. Helio is one of several mobile virtual network operators (MVNOs), such as Amp'd Mobile Inc. and Virgin Mobile, offering content for younger phone users. At $200-plus ($275 for the stylish Hero model), Helio's phones are a tough sell, as is the service, which starts at $65 a month. Moreover, Helio loses its MySpace exclusivity in September; site owner Fox Interactive (NWS) is already hunting up new deals. Helio may post a loss of up to $170 million this year, according to Earthlink financial statements.

KOREAN MODEL

Earthlink expects Helio to ring up 3 million subscribers by 2009. That seems ambitious, seeing how other MVNOs have struggled. Dayton says Helio is modeled after a wildly popular service that SK Telecom runs in South Korea. "Every kid I saw over there had one of their phones like jewelry hanging from their wrists," he says. Indeed, in addition to ads he has placed on MTV, SpikeTV, and the YouTube video site, some of Helio's promotions are specifically aimed at Korean Americans.

Success with either service would help Dayton live down the scorching that some big-name investors, including Disney, Goldman Sachs, (GS) First Boston (CSR), and Kohlberg Kravis Roberts (KKR), took in the eCompanies venture. Now largely dormant, eCompanies produced Boingo and Business.com, a site run by Dayton's partner, Winebaum. (Business.com is now financed in part by BusinessWeek parent The McGraw-Hill Companies Inc. (MHP)) The fund had a few wins, such as cellular gaming site JAMDAT, which was bought by Electronic Arts Inc. (ERTS) But the original backers are still waiting to break even.

Dayton is undeterred. To promote Helio, he came up with the idea of sponsoring club parties and other events. And when Dayton's not pumping the product? You can find him holding surf clinics for the Helio staff.

By Ronald Grover


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