EarthLink Gambles on Wireless

[David Farber <dave () farber net>]

Begin forwarded message:

From: Dewayne Hendricks <dewayne () warpspeed com>
Date: October 16, 2005 2:15:29 PM EDT
To: Dewayne-Net Technology List <dewayne-net () warpspeed com>
Subject: [Dewayne-Net] EarthLink Gambles on Wireless
Reply-To: dewayne () warpspeed com


EarthLink Gambles on Wireless
As the ISP watches its revenues decline, it moves more aggressively  
into wireless transmission modes.

By Brad Smith
October 15, 2005
<http://www.wirelessweek.com/article/CA6273195.html>
This year will be the year that EarthLink, one of the country's  
largest ISPs, decided to cast its future success with wireless  
communications.

EarthLink has 5.4 million subscribers, based on second-quarter  
numbers, but has seen its subscriber churn rate increase while  
revenues declined. Revenues decreased from $348.6 million in the  
second quarter of 2004 to $325.7 million in the same period this year.

TRADITIONAL MARKET DECLINE In addition, the company's traditional  
core market of narrowband Internet subscribers has been in steady  
decline, although the decline is offset by increases in broadband  
subscribers. EarthLink's narrowband subscribers fell about 200,000 in  
the second quarter, compared to the same quarter in 2004, to 3.7  
million. Its broadband subscribers increased nearly the same amount,  
to 1.5 million. The overall churn rate went from 4.4 percent to 4.5  
percent.

In an effort to improve its numbers, Earthlink has moved more  
aggressively into wireless.

EarthLink's executives have said the company's strategy is to sustain  
and build on its broadband and premium narrowband subscriber numbers  
while expanding into new growth markets. Wireless is a key part of  
that new growth opportunity, although the company says it must make  
new investments that will weigh on profits in the short term.

The company's first big step this year was its MVNO joint venture  
with Korea's SK Telecom, SK-EarthLink, which will launch formally in  
early 2006. The new company's COO, Wonhee Sull, says the carrier will  
target the 18- to 30-year-old market with music, video, gaming and  
location-based services.

SK-EarthLink will use a combination of CDMA2000 EV-DO and Wi-Fi to  
entice consumers. It also plans to market exclusive handsets,  
although it has not said if they will be dual-mode EV-DO/Wi-Fi devices.

When the joint venture was created in March, both companies invested  
a total of $166 million in cash and non-cash assets and agreed to  
invest another $274 million over the next three years. EarthLink  
invested $43 million in cash and $40 million in non-cash assets,  
including 27,000 wireless customers it already was serving through a  
resale agreement. It upped its investment in August by another $39  
million in cash and said it will invest $98 million more over three  
years.

Those 27,000 wireless customers gave SK-EarthLink its first  
customers. The joint venture also started marketing in the second  
quarter a new voice and data service using the Palm Treo 650 phone.  
The take-up rate of that service hasn't been disclosed.

"As SK-EarthLink continues to develop, launch and market new products  
and services, we expect SK-EarthLink to incur losses," EarthLink's  
second-quarter SEC filing said. "Consequently, our earnings and  
earnings per share will be adversely affected because we record our  
proportionate share of SK-EarthLink's losses in our results of  
operations."

STUMBLING BLOCKS EarthLink hit a couple of legal and regulatory  
stumbling blocks that made it start looking at other ways of serving  
its traditional ISP markets. Those also may have pushed it to offer  
new Wi-Fi services.

The company doesn't own any network facilities, so it buys broadband  
access from incumbent local exchange carriers (ILECs), competitive  
local exchange carriers and cable providers.

The first adverse decision, at least from EarthLink's point of view,  
came from the U.S. Supreme Court in June when it overturned a lower  
court ruling that had classified cable broadband Internet access as a  
telecommunications service. The Supreme Court ruling means cable  
companies do not have to open their networks to ISPs for last-mile  
access.

EarthLink has deals with a few cable companies, principally Time  
Warner Cable, to give it broadband access and those deals weren't  
affected by the Supreme Court ruling. But the court's decision will  
affect any future deals with cable companies and likely will play a  
role in renewing any current contracts.

A bigger blow may have come from the FCC, which issued an order in  
August that reclassified DSL as an information service and eliminated  
the requirement that ILECs grant access to ISPs at wholesale rates.  
The FCC granted a 1-year transition period so ISPs could negotiate  
access arrangements.

EarthLink says its existing contracts with ILECs probably are not  
affected by the FCC ruling, but that it could affect any extensions,  
renewals or new contracts. EarthLink also has contracts with Covad  
for DSL access, for which Covad has contracted separately with the  
ILECs. EarthLink says if Covad isn't able to get "reasonable" line- 
sharing rates, it may have to stop selling broadband access services.

Hence, EarthLink's decision to seek other transmission technologies.  
The company recently created a new municipal broadband business unit  
that focuses on Wi-Fi mesh networking for cities. And it garnered a  
successful bid to provide such a network for the city of  
Philadelphia, beating out Hewlett-Packard in the process. The network  
likely will be the largest Wi-Fi network in the country, covering 135  
square miles using equipment from Tropos Networks and Motorola's  
Canopy unit.

[snip]

Weblog at: <http://weblog.warpspeed.com>



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