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.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
7 min read
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

on DSL, simply because the phone and cable companies benefit from EarthLink's traffic on their networks, analysts say. But DSL providers especially have been turning up the heat in their quest to win customers. For example, Verizon Communications and SBC Communications have each slashed prices on their DSL services to $14.95, far below the prices Earthlink can offer its customers.

What's more, cable companies and DSL providers have been bundling broadband with other services to offer a "triple play" package that includes TV, high-speed data and telephony.

To combat these trends, EarthLink is also getting into the bundling game. The company will soon launch its voice over IP, or VoIP, service, called TrueVoice. The service is similar to ones offered by Vonage and AT&T, and it will be available to all EarthLink broadband customers throughout the country. EarthLink plans to aggressively price the offering. TrueVoice, plus an 8mbps DSL service, will cost around $70 per month.

"My worry is that by placing all these small bets on all these different things that EarthLink won't end up being able to be a national player in any one of them."
--Joe Laszlo, analyst, Jupiter Research

The company is also launching a line-powered voice service over DSL provider Covad's network. This service differs from other VoIP offerings because it doesn't require a special adapter to sit between the phone and the broadband connection. Instead, phones simply plug into any phone jack in the house. Voice calls run over the traditional local telephone network (whose copper lines are leased by EarthLink at regulated rates) until they get to Covad's central office, where they're turned into a VoIP call.

EarthLink is not completely new to the voice business. It has been reselling Vonage's VoIP service to its broadband customers since 2004. And in June, it launched a free Internet calling product called Vling. The service is very similar to one offered by Skype, which was recently bought by eBay for $2.6 billion.

Plenty of broadband contenders
But competition in the Internet phone business is stiff. Aside from Skype-eBay, there are other new competitors EarthLink has to worry about. AOL has announced its own free Internet voice service, and the company also plans to offer a phone-based VoIP service in early 2006. And Google and Yahoo also have IM-based VoIP.

EarthLink plans to take VoIP one step further by adding a Wi-Fi component into the mix. In 2006, the company will introduce a dual-mode wireless phone, which will allow people to automatically switch between a Wi-Fi-based VoIP network and the regular cell phone network. This service could prove to be a boon in Philadelphia, where residents could use the Wi-Fi network EarthLink is building to bypass the cell phone network when they are talking on their mobile phones within the municipal Wi-Fi coverage area.

EarthLink isn't stopping with VoIP and municipal broadband. It's also getting into the cell phone business. In April, it invested in a wireless joint venture with SK Telecom of South Korea. The new service, which will use the networks of other carriers like Sprint and Verizon Wireless, will launch in 2006. While most Mobile Virtual Network Operators have focused on providing low-cost prepaid cellular service, EarthLink is targeting a high-end demographic. The plan is to bring new cutting-edge services and devices, like the ones SK Telecom has deployed in South Korea, to the U.S. market.

"Basically, we're targeting kids with money," Betty said. "The see-me, feed-me, spoil-me kids are who we are going after. We think they'll find our service something they absolutely can't live without."

But analysts have concerns about EarthLink's strategy to diversify. They think the company may be spreading itself thin.

"My worry is that by placing all these small bets on all these different things that EarthLink won't end up being able to be a national player in any one of them," said Joe Laszlo, an analyst with Jupiter Research.

But Betty argues that all the markets the company is going after are large enough that even if EarthLink gets only a small fraction of the total business, it will still be significant. For example, there are roughly 200 million mobile users in the U.S today, and 40 million of them fit into SK EarthLink's target market. Betty said if the company hits its estimates it will have 1.5 percent of the market, which would translate into $2 billion in revenue by 2009. For EarthLink, 3 million new customers and $2 billion in revenue is huge, but it's a drop in the bucket compared with the rest of the industry, he said.

"If you look at some of the analyst reports out there, we won't have any customers in three years," he said. "But we've got some exciting initiatives under way that I think will continue to transform and evolve our business over the next two to three years. EarthLink of the future will look very different from EarthLink of today and in the past."