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EarthLink looks out for No. 2

The sky's the limit for the national ISP. At least that's what founder and chairman Sky Dayton likes to think.

3 min read
The sky's the limit for national Internet service provider EarthLink Network. At least that's what founder and chairman Sky Dayton likes to think.

Dayton founded the company in 1994 at the age of 23. Now, one week after his 27th birthday, he hopes the company will break free from the pack to become the No. 2 Net access provider behind the giant America Online.

To Dayton and the circle of more experienced executives he's assembled, playing second fiddle to AOL is just fine. The company is positioning itself as the only ISP other than AOL that drives users to a customizable home page with news, information, and other services.

The ISP-meets-portal strategy appears to be paying off. Last month, the company reported second-quarter revenue of $37.6 million, more than the $29.2 million last quarter and double the $18.8 million it reported for the like quarter a year ago. It reported a second-quarter loss of $4.8 million, compared with a loss of $6.4 million a year ago.

EarthLink also has seen its stock and subscriber figures climb in the past year. Share prices have climbed from about 10 a share in late 1997 to about 40 today. If not for a 2-for-1 stock split announced in July, shares would be trading at more than 80 each now.

The stock closed yesterday at 41.8125, up less than 1 percent, despite an otherwise tough day for technology stocks. Shares have traded as high as 46.25 and as low as 5 in the past 52 weeks.

In addition, EarthLink's customer base is growing, and analysts look at the capital investments the company made last year and see the potential for continued growth.

Kurt Rahn, an EarthLink spokesman, said the ISP has 710,000 users and is capable of handling up to 2 million subscribers. In contrast, AOL has more than 12 million subscribers; no one expects them to be unseated by EarthLink or any other ISP any time soon.

But with current growth rates, as they are, EarthLink may need that extra network capacity. "It is going to emerge as the solid No. 2 ISP in the next year or so," said Glenn Powers, an Internet analyst with Cruttenden Roth.

Powers said EarthLink is adding about 50,000 customers per month, despite an industry standard turnover of about 4 percent of users a month.

"It's got probably the best subscriber growth rate," he added. "Seven or eight percent a month is a spectacular rate of growth."

No one is anointing the ISP the silver medal yet, but Powers expects subscribers to total 1.5 million by the end of 1999.

Andrea Grosz, an analyst with Everen Securities, projected in her most recent report that EarthLink would top 2.3 million users by 2002. Grosz expects only AOL, MSN, and AT&T WorldNet to have more subscribers by then.

A host of Net access providers are jockeying to be second best. But Powers said only AOL, EarthLink, and MindSpring Enterprises are really adding any significant number of subscribers.

EarthLink added about 130,000 users as part of a deal in which Sprint took a 30 percent stake in the company earlier this year. Under the agreement, EarthLink is expecting 150,000 new users each for the next five years by leveraging Sprint's marketing channels, Rahn said.

Moreover, a new agreement with Apple Computer makes EarthLink the exclusive access provider for the iMac, which begins selling this weekend amid optimism for strong sales.

The relationship with Macintosh users is nothing new for EarthLink. Sources say Dayton is a Mac loyalist; the company also boasts that nearly one-quarter of its subscribers use the Macintosh platform.

EarthLink will appear as the default service when iMac users fire up Apple's OS 8 Internet Setup Assistant. Users will also get one month of Net free access through EarthLink.

Grosz said the Apple deal isn't "huge" but it could help keep the company's solid Mac base.

The company has a reputation for strong service, which has led to a loyal customer base, she added. "EarthLink does not have intense capital expenditure requirements because it uses third-party network providers. We believe this strategy allows the company to build its subscriber base more quickly and maintain focus on user-friendly access software and customer service," Grosz wrote in a report. "Furthermore, we believe the company's aggressive marketing strategy set it apart from its competitors."

If EarthLink can place second, Dayton will consider that a win.