EarthLink's heavy cuts reap rewards

The Internet service provider was profitable in 2008, but all the cuts have left it without a long-term strategy for the future.

Internet service provider EarthLink has successfully cut its way to profitability.

The Atlanta-based company on Thursday announced it posted a yearly profit of $189.6 million in 2008 compared to a net loss of $135.1 million in 2007.

Despite the profit, the company's annual revenue fell 21 percent to $955.6 million. The company said it had expected the dip in sales as it anticipated the continued loss of dial-up and broadband subscribers. EarthLink ended 2008 with 2.8 million subscribers compared to 3 million in 2007.

EarthLink CEO Rolla Huff started making major cuts to the company's business in 2007, and many of those initiatives were finished in 2008. Top on his hit list was getting out of the citywide Wi-Fi business. EarthLink had led the charge in building Wi-Fi networks that blanketed cities, winning contracts in cities such as Anaheim, Calif., Houston, Philadelphia, and San Francisco. The company has since shut down those efforts. It also sold off its stake in the mobile virtual network operator, Helio, which has been bought by Virgin Mobile.

EarthLink also slashed its workforce by 900 employees and closed offices in Orlando, Fla.; Knoxville, Tenn.; Harrisburg, Pa.; and San Francisco. It consolidated offices in Atlanta and Pasadena, Calif.

The biggest benefit of the cuts is that EarthLink has managed to revive its balance sheet. The company now has $534 million in cash and marketable securities, which should help it stay afloat for some time.

But the cuts also present a bit of a problem for the company. It now lacks any kind of strategic long-term investments. Essentially, the company is riding out the wave of the dial-up Internet business. Huff said last quarter he hoped to consolidate the dial-up business, buying up assets like AOL's dial-up business. But when pressed about a possible acquisition of AOL assets during the EarthLink's quarterly conference call Thursday, Huff said that the company is "not thinking about it anymore."

While there are still plenty of dial-up accounts out there today generating cash for the company, that business is dying on the vine and will eventually go the way of other retired technologies, such as the VCR and the fax machine.

Broadband is clearly the future of the Internet. Cable and phone companies have already been investing heavily in their broadband networks. And wireless operators are also getting their own broadband networks ready for deployment using new 4G wireless technologies. These networks will take time to build and won't be everywhere, but President Obama's economic stimulus package, which is expected to offer money for more broadband deployments in rural areas, could help accelerate a wave of new broadband offerings for people who would otherwise be forced to use dial-up service for Internet connectivity.

All of this leaves EarthLink without a clear growth strategy. Once dial-up dies off, the company has no wireless or fixed infrastructure of its own to offer competing services. And even though cost-cutting has helped the company return to profitability, it won't help solve the company's fundamental problem, which is a lack of future strategy.

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