2HRS2GO: New Earthlink poses little AOL threat
Today's engagement of Mindspring Enterprises Inc. (Nasdaq: MSPG) and Earthlink Network Inc. (Nasdaq: ELNK) was inevitable.
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To some extent, it was expected. By combining, Mindspring and Earthlink can at least slash back office, technical support and marketing costs, and improve strategic focus. Maybe they can even use the same laundromat to clean their underwear.
"I think there will be some people wetting their pants in Virginia," said Mike McQuarry, Mindspring's president and chief operating officer. "Frankly I'm so excited I may wet mine."
I suspect he's alone in soiling himself over this. Earthlink and Mindspring surely will benefit from their merger, but not at AOL's expense.
The new combination had to happen, because Mindspring and Earthlink couldn't match AOL's growth on their own. Steve Case's behemoth adds 1 million subscribers in a quarter and a half. Earthlink tries to do that in three. Mindspring takes about a year.
Mindspring and Earthlink might be able to accelerate their growth together, but it won't decelerate AOL. Even the combined companies won't come close to matching AOL's marketing resources or ability to leverage its customer base for more revenue from advertising, distribution deals and e-commerce partnerships.
At this point, America Online has the pattern of a natural force. No one could dethrone AOL during its troubled network expansion a couple of years ago, and the company has only improved since then; today's announcement won't change that, unless the new Earthlink uses its cost savings to hire crackers who will take down AOL's network.
It's not as if Internet access has become a zero-sum game. There's still plenty of growth around the world to accomodate a few players. Speaking of the world, the global market remains largely untapped by either Earthlink or Mindspring, so their combination won't so much as nick AOL's aggressive overseas operation in the near future.
You could even argue that combining Earthlink and Mindspring helps America Online to a small extent, because now AOL has fewer rivals to consider. Certainly makes it easier to focus the targeting cross-hairs.
Regardless of what other ISPs do, America Online will likely remain the runaway leader for a long time. Perhaps small regional providers ought to be worried, but those companies became inconsequential a long time ago in the minds of most investors.
If anything, the marriage of Earthlink and Mindspring isn't so much an aggressive growth tactic as it is a survival one. The true threat to dial-up ISPs isn't America Online, but everything else: free Internet access; ISP-bundling with PCs; and broadband access. By combining forces, Earthlink and Mindspring can expand their offerings more rapidly to stay ahead of those threats. The new Earthlink has the leverage to dictate better DSL reseller terms from the Baby Bells. It can command better advertising and commerce deals from partners.
But it won't be wetting anyone else's shorts anytime soon.
Other issues:
Shares of Pacific Internet are rising today, perhaps because people are hoping that Pacific Century's announcement will spawn interest in the former since SembCorp Industries, which owns 42 percent of Pacific Internet, is looking to sell most of its stake.
But Pacific Century's ties with CMGi and other recent investors are more likely to hurt a traditional dial-up access provider like PacNet, because Pacific Century plans to offer digital TV and high-speed Internet access. That's why CMGi and others are interested in the first place.