The Southern California ISP will issue up to $34.5 million in shares at a time when stock prices of other Net service providers are well below their 1996 highs. EarthLink is going against the grain with its market strategy as well, targeting individuals and small businesses while others are focusing on high-speed corporate accounts.
And EarthLink isn't following the conventional wisdom that an ISP must own its own telecommunications infrastructure to control its destiny. Instead, it rents capacity from UUNet Technologies and will soon have a similar arrangement with PSINet.
Does EarthLink's maverick approach make it a risky investment?
"That's not a bad thing, to buck the tide. It can be a good investment strategy," said Internet stock analyst Bill Gurley of Deutsche Morgan Grenfell.
But EarthLink's IPO also reflects the reality that ISPs must get big to survive with the influx of the Baby Bells, AT&T, and other telecommunications giants into the Internet access game. EarthLink needs the money for marketing.
Still, the company has managed to stay in the public eye by the number of distribution deals it has done--nearly 200 so far, with announcements running at a rate of one or two per week. Blue-chip partners include United Airlines, film studio Columbia TriStar, publisher U.S. News and World Report, and software vendor CyberMedia.
"United Airlines has a reason to get its constituency on the Net to access its online reservation system," said Sky Dayton, EarthLink's 25-year-old chairman and co-founder. "The benefits for United are customer retention, lower costs, fewer mistakes. It makes everything faster. They have a big reason to get their customers on the Internet, and that's a perfect fit for us."
The inspiration for Columbia TriStar was its movie The Net, released last year. "The Net created incredible interest in the Internet," Dayton said. "After seeing the movie, people were clamoring to get onto the Internet."
And for EarthLink itself, the myriad distribution deals are simple: "We get customers who have a reason to get on Internet at little cost to us," Dayton said.
While high churn rates and subscriber acquisition costs are a major expense for most ISPs, EarthLink's prospectus indicates that its marketing costs are below industry averages. EarthLink has an estimated 200,000 subscribers today.
EarthLink keeps its name in front of the customer even in distribution deals. When a United subscriber signs onto the Net, the default home page is cobranded with United and EarthLink.
"We have control of the beginning of the clickstream," Dayton said. "Our responsibility is to provide a productive and entertaining Internet experience. Unless we have significant control of the clickstream, we can't ensure that happens."
EarthLink just added its "start page," a customized page that its subscribers see first when they log on. It includes news from Individual, stock prices, movie listings, and more. "It's part of assuring that person has a positive experience," Dayton said.
That's because happy surfers mean less subscriber turnover. But controlling the clickstream has other business advantages too.
"If an ISP doesn't own a subscriber's start page, then the subscriber is nothing but a cost," said Michael Kolowich, CEO of Individual. With subscribers coming to an ISP's home page, revenue can be generated through ads or premium content or services.
EarthLink, for example, recently signed a deal with to offer content from CompuServe's basic service at a reduced price to the ISP's subscribers.
Wall Street's views on the EarthLink offering are mixed.
"They have made a good decision to stay out of backbone game, because that game is tough and costs are going to go up and up," analyst Gurley said. But not owning its infrastructure has a down side for EarthLink too.
As the offering prospectus discloses, EarthLink pays UUNet and soon PSINet based on the time it's subscribers stay online. But most subscribers pay a flat $19.95 a month rate regardless of usage, so EarthLink's strategy of maximizing subscribers time online comes at a real financial cost.
Kate Delhagen, an analyst at Forrester Research, thinks EarthLink's focus on customer service--employees call subscribers who aren't using their accounts to see if they're having technical problems--can be a differentiator.
"It's a heavy investment on customer service play for much lower customer acquisition costs and more loyal customers," Delhagen said. "The lifetime value of a subscriber may well be higher than an AOL customer."
"Is EarthLink offering value? Undeniably yes," Gurley said. "Is it a sound economic model? That question is harder to prove."