EarthLink aims to evolve

Trying to shed its dependence on cable and phone companies, the ISP courts broadband customers by diversifying in a big way.

Internet service provider EarthLink is taking big steps to gain its independence from the cable and DSL providers it relies on for access to broadband customers.

The company has taken some heavy knocks in the past few months. In June, the U.S. Supreme Court upheld an earlier ruling declaring that cable providers do not have to share access to their networks. The Federal Communications Commission soon followed with a ruling that essentially said DSL providers don't have to offer discounted rates to ISPs, such as EarthLink, which use DSL networks to deliver services.

The two rulings sounded like death knells for a company that has become increasingly dependent on the cable and DSL providers that give it access to their networks.

But EarthLink isn't taking the setbacks lying down. Instead, the company has been busy exploring new technologies that would allow it to bypass the cable and DSL networks altogether. Examining opportunities in everything from broadband service delivered via power lines to wireless broadband systems such as WiMax and citywide Wi-Fi, EarthLink is determined to find a technology that puts it in control.

"When I look at the company in totality, I see the eroding dial-up base," said Keith Dalrymple, an equities analyst at Halpern Capital. "However, the service is stickier than I would have thought. And importantly, the company has several initiatives I expect to restart growth."

Municipal Wi-Fi looks to be the technology with the most legs at the moment. Just last week, the company announced a contract to build a wireless broadband network for the city of Philadelphia. EarthLink will shoulder the $10 million to $15 million it will cost to blanket the 135 square miles of the city. In exchange, EarthLink gets access to the rights of way to build the network and will also benefit from the city's marketing efforts to promote the new service.

While other municipalities have created local wireless networks, Philadelphia is the largest city to date to formalize such a project. EarthLink is also throwing its hat into the ring for other large projects. The company is one of 24 providers bidding for a contract to build and manage a wireless network in San Francisco. EarthLink will go up against some heavy hitters for this contract, including Google, which is proposing a 300kbps service it plans to offer for free.

EarthLink isn't stopping with Wi-Fi. The company is also exploring the use of electrical power grids to deliver broadband service into homes. It's currently testing services with Duke Power in Charlotte, N.C., Progress Energy in Raleigh, N.C, and Consolidated Edison in New York. But most experts agree that broadband over power line, or BPL, isn't likely to become a widespread broadband alternative for years.

Still, EarthLink's efforts are a clear sign that the company is looking to free itself of the large cable and phone companies that essentially control its destiny.

"We have been so disenchanted about our ability to get access to broadband pipes that we felt like we needed to take a more proactive stance," said Garry Betty, chief executive officer of EarthLink. "Our model would prefer that we be a non-facilities-based provider, but if you don't have people who own the network willing to sell it to you at a price that you can make a living, you've got to change the name of the game."

EarthLink is in a tough position. Including its dial-up and broadband customers, it currently has 5.4 million Internet subscribers. But that figure is expected to fall by as much as 50,000 this year, according to the company's own projections. Today, 1.5 million, or roughly 20 percent, of its Internet customers subscribe to broadband service. Boosting that figure is crucial to the ISP's survival, and so far it has been an uphill battle.

The major problem the company faces is that it's dependent on phone and cable companies to sell it access to their networks. The company has commercial agreements with most DSL providers across the country, and as a condition of the America Online-Time Warner merger, EarthLink also has deals with Time Warner and Brighthouse cable.

EarthLink works well with cable and phone companies, Betty said. "But it's a hard living. It's like being a sharecropper. They are basically selling (access) to me for almost what they are selling it to consumers. And it's hard."

These relationships are unlikely to dissolve as a result of the recent Brand X Supreme Court ruling and changes to the FCC policy

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