MindSpring Enterprises and EarthLink Networks reached a new
level of success this week, each announcing that they had reached the
milestone of a million subscribers.
But after a year of meteoric subscriber growth,
the two leading independent
ISPs are heading into a rapidly changing market, where growing competition
from telephone companies and new Net access technologies could put the brakes
on their rapid rise.
On Monday, EarthLink announced that
it had hit 1
million subscribers as of the end of 1998, several months earlier than
both it and Wall Street had expected.
Today, MindSpring announced that it
had purchased Netcom's subscriber base and facilities from ICG, giving the Atlanta, Georgia-based ISP
another 400,000 dial-up customers.
The company won't release its exact numbers until the end of the month, when it reports its final 1998 financial results, but said its membership would reach seven figures with the close of the Netcom deal.
"We are confident that at the end of the quarter we will be over a
million," said Ed Hansen, a MindSpring spokesman. "Probably well over a
The news capped a year of consolidation and wildfire growth in the ISP
sector. America Online announced recently that its subscriber base had reached 15 million, and analysts said that the growth curve isn't ready to flatten yet. "This sector is growing like gangbusters," said Gregory Miller, a financial analyst with Jefferies and Company.
Is independence possible?
MindSpring and EarthLink both have set their sights on becoming the No. 2
national ISP behind AOL. EarthLink stepped out of the strictly independent category by striking a deal with Sprint earlier this year, while MindSpring has managed to maintain its distance from the other big telcos.
Speculation that MindSpring would be bought up by a larger company has been circulating for nearly a year, however. The Atlanta ISP has been profitable
for its last four quarters, making it one of the only major ISPs in the black.
"I would not be surprised if it were not independent a year from now,"
Miller said. "But could they stay independent if they wanted to? Absolutely."
MindSpring has reached a critical mass of subscribers for sustaining its business, and has an excellent management team, Miller added. But these are the same characteristics that could make the company very attractive to a buyout candidate or a partnership similar to the Sprint-EarthLink deal, he said.
Executives at MindSpring don't rule this possibility out, although they said they want to keep the values of their company intact.
"We talk to people all the time," Hansen said. "Could it happen? Yes. Is
there a probability of it? Hard to say. MindSpring is doing very well on
New hurdles ahead
Nevertheless, independent ISPs will face steeper competition from several angles during the next year.
On the dial-up side, most of the major long-distance and local telephone
companies have started investing more resources into development of their own ISPs. These companies hope to be able to offer a full package of telecommunications services, providing consumers with packages that include local and long-distance service, Internet access, and even wireless and cable TV in some cases.
Most of these package offers are still in their early stages. AT&T must win regulatory approval for its
acquisition of Tele-Communications Incorporated
before its local phone strategy picks up speed, and the Baby Bell companies
also must win regulators' approval before they can fold long distance
service into their product mix. But eventually, analysts said, these bundled packages will be a strong incentive for consumers to consolidate all of these services with a single company.
EarthLink is partially shielded from this trend by its relationship with Sprint, which owns nearly a third of the company and funnels its own Internet customers toward the ISP.
MindSpring executives say they are paying close attention to the telephone
companies' actions, but have yet to see the giants eat into their
"Every time the long distance companies or incumbent Bell companies start
to talk about boosting their Internet plans, everybody says it will be the
death knell for independent ISPs," Hansen said. "It hasn't happened to us.
And clearly, we're doing better than many of the local phone companies."
A related, if slightly longer-term concern, could be the rise of high-speed
Net access technologies like DSL (digital subscriber lines) and cable modems.
AT&T is fighting to keep exclusive control of the cable pipes owned by TCI,
so that it would not have to allow other ISPs to offer their services over
the cable lines. The Baby Bell companies are asking federal regulators to
allow them to offer DSL directly to subscribers, so it could be bundled in
a package with the rest of a customer's phone services.
If regulators grant one or both of these requests, it likely will make the transition of traditional dial-up ISPs into the broadband market more difficult, analysts said. Meanwhile, they added, the rivalry between EarthLink, MindSpring, and the telco ISPs is unlikely to drive prices for consumers down.
"The market is so huge, I don't think you're going to see them beating each
other into the ground," Miller said.
The telcos are more likely to compete on the basis of their bundled
services than to start a price war, he added. And the main move in
prices in recent months has been upward, from companies like America Online
that have a secure base, he added.
Any price changes from the independent ISPs are more likely to follow AOL
upward, Miller said.
MindSpring's stock was up more than 7 points to 73.625 in midday trading
today. EarthLink was up 3 to 68.625.