EarthLink's Wi-Fi dreams may be fading

Layoffs signal a major setback in the company's effort to break free of its dying dial-up business and become an Internet player.

EarthLink's dreams of competing against the big telephone and cable companies are fading as it slashes nearly half its total work force in an effort to cut costs.

On Tuesday, EarthLink announced that it would shed 900 employees. The reason was simple, said Rolla Huff, CEO of the company. EarthLink, which has had four solid quarters of losses and a sinking stock price, needs to return value to its shareholders. And this means eliminating jobs that don't help the company add subscribers or increase revenue.

EarthLink's traditional dial-up Internet access business, which has seen hefty declines in growth over the past few years, will likely see major cuts, especially in marketing.

But the company's newest initiative, building and operating citywide Wi-Fi networks, will also be hit. Don Berryman, the head of EarthLink's municipal Wi-Fi initiative, will be leaving the company as part of the restructuring, Huff confirmed during a phone interview. Huff, who became CEO in June, also reiterated the company's decision, announced earlier this summer, not to make any new investments in muni Wi-Fi until it comes up with a new business model.

"Wi-Fi is generally sold at a lower price point. And we simply have not found a way in the old business model to provide the returns necessary for further investment."
--Rolla Huff, CEO, EarthLink

"I love the concept of citywide Wi-Fi," he said. "But a business model built around EarthLink fronting all the capital and then paying for subscribers one at a time is not viable. We'll continue to scale the networks where money is already spent, but we won't deploy new capital on this strategy under the old business model."

For many, EarthLink's cutbacks signal a major setback in the company's evolution to break free of its dying dial-up business and become an Internet player with new services to attract subscribers.

EarthLink's traditional Internet access, which includes dial-up as well as broadband access, still generates the bulk of the company's revenue. But its growth is slowing considerably.

In the second quarter of 2007, EarthLink said it lost a total of 177,000 subscribers, mostly from its consumer narrowband access business. At that time, the company predicted it would lose a total of 450,000 to 500,000 subscribers in 2007. On Tuesday, it revised those figures and said it expects to lose an additional 200,000 subscribers by the end of 2007, bringing its total to 3.9 million subscribers.

More than two years ago, EarthLink launched its citywide Wi-Fi business as a way to help increase its subscriber base. Then-CEO Garry Betty, who died early this year after a battle with cancer, also saw muni Wi-Fi as a perfect way to rid the company of its dependence on other companies' infrastructure. While EarthLink also offers broadband Internet access, it has been forced to offer its service over DSL and cable modem services using its competitors' infrastructures. Citywide Wi-Fi would put EarthLink in control of its own infrastructure, and thus, its own destiny, Betty believed.

In the short term, EarthLink's muni wireless projects, which are just now starting to get off the ground in Philadelphia and Anaheim, Calif., were also expected to help offset subscriber growth losses and build the company's independence. But so far, its $20-a-month service hasn't produced the returns necessary to make further investment viable.

"Wi-Fi is generally sold at a lower price point," Huff said. "And we simply have not found a way in the old business model to provide the returns necessary for further investment."

Facing the broadband challenges
The company is also facing stiff competition from traditional broadband providers. AT&T is now charging $20 a month for DSL service with speeds of 1.5 megabits a second. And Verizon Communications announced this week that it is offering its 768 kilobits per second service for $15 a month for life if customers agree now to a two-year contract.

There are already signs that some cities are also starting to lose enthusiasm for citywide Wi-Fi networks. On Tuesday, officials in Chicago said the city is backing away from its planned municipal Wi-Fi service after failing to reach an agreement with either AT&T or EarthLink, which had each bid to build the new network.

At issue were provisions that would require the city itself to become an anchor tenant of the network, according to a report in the Chicago Tribune. EarthLink has also gotten into a stalemate with city officials in San Francisco, which awarded EarthLink and Google the contract to build its network last year. But the project has been tied up in a political morass as city council members negotiate the final contract with the companies.

Ron Sege, CEO of Tropos, the company that provides the Wi-Fi gear EarthLink uses to build these networks, said EarthLink has focused too much of its strategy on consumers. He thinks the company needs to refocus its marketing efforts to entice cities to buy its Wi-Fi service for public safety and other municipal communications needs.

"The hope that municipal Wi-Fi would become the third pipe into the home to compete against Verizon and the cable industry hasn't lived up to expectations," he said. "The real market is in offering low-cost Internet access and mobile services to cities that need to mobilize their work force and provide public safety infrastructure."

Craig Settles, an independent wireless consultant, also believes EarthLink needs to diversify its target audience for its Wi-Fi services.

"In addition to making cities anchor tenants, EarthLink should also address the business market," he said. "Mobile business services offer greater profit margins, and they tend to stick around longer than price-conscious consumers."

Ideally, business users in one EarthLink city, such as Philadelphia, could use the service in other EarthLink Wi-Fi cities like Anaheim, Houston or San Francisco. But for such a business to really take off, EarthLink has to invest in building these networks in more cities.

And with more of EarthLink's citywide Wi-Fi networks on the map, EarthLink could find itself in a strong position to partner with Sprint Nextel and Clearwire to complement the WiMax service those companies are building nationwide.

Huff hasn't ruled out investing in building Wi-Fi networks in other cities. But he emphasized the need for a completely new business model to make such investment possible.

"We would like to make municipal Wi-Fi networks work," he said. "But it all boils down to coming up with a new model. We were not going to deploy any new capital to build in cities under the current business model."

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