EarthLink, enemy of broadband, seeks Philadelphia deal this quarter

EarthLink’s dump of its municipal wireless business is almost complete. It walked away from Alexandria and Arlington, Virginia, in April; handed its Milipitas and Corpus Christi systems over to the municipalities; and is set to shut down wireless service to New Orleans on May 18. That leaves just Anaheim and Philadelphia.

Tourist-rich Anaheim is an anomaly. EarthLink’s one-page contract with the city can’t be much of a burden. But there is most certainly a resolution in the works for Philadelphia.

As I argued in a previous post, I believe the best option for Philadelphia is for EarthLink to pass the system to a nonprofit organization with network management experience. EarthLink was not able to find an interested buyer for its New Orleans system, so there’s still no reason to think that is an option for Philly. But I don’t think anyone in Philadelphia, even in the Nutter administration, wants to see the system simply dismantled. So I believe nonprofit intervention is also the most likely scenario. I believe it will happen this quarter, in time for the MuniWireless conference in Philadelphia.

EarthLink is highly motivated. The walk-aways, shut-offs, and give-backs with the cities listed above all happened in this quarter. EarthLink wants to close out Philadelphia this quarter, too. Losses from these soured deals will be offset by $50.8 million of incomeEarthLink received in April from the sale of its share of Covad to Platinum Equity.

As it dumps its municipal wireless business, EarthLink has found that its strongest profits are to be found not in broadband service but in dial-up. The dial-up customers, while declining, are relatively stable and highly profitable, while new customers are expensive to acquire and quick to exit. This strategy has allowed the company to cut the cost of marketing for new customers. EarthLink has also laid off more than half its work force, outsourcing all of its tech support, which probably has helped it get rid of costly customers.

This streamlining yielded first quarter profits of $57.8 million, a huge turnaround from the $30 million it lost in the last quarter of 2008.

EarthLink now sees potential profits in our stagnant digital divide. CEO Rolla Huff has his eye on the remaining 8.5 million subscribers to AOL dial-up service, which Time Warner has said it wants to slough off, as well as United Online, which owns Juno and NetZero, and Microsoft’s MSN subscribers. EarthLink is the second largest dial-up service provider with 2.6 million customers. Huff estimates the total number of commercial dial-up subscribers to be 15 million to 18 million. Consolidating all of those customers would generate a lot of cash.

EarthLink still has the same problem that motivated it to dive headlong into wireless deployments, as I explained in The Philadelphia Story: without its own infrastructure, its DSL days are numbered. But now, instead of pushing forward to build new infrastructure, it is retreating to the old phone lines that are still protected by common carriage.

In other words, EarthLink, once the harbinger of digital inclusion, is becoming the enemy of broadband.

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3 Comments

  1. Now, to be fair, EarthLink can’t be called the enemy of broadband. At least 15 years of spectrum and telecom policy, regulation, and jurisprudence are the enemy of broadband. EarthLink cannot get the non-discriminatory wholesale access to wire or fiber that is mandated in, say, most of Europe and Japan. Look at what happened when BT was forced to turn DSL into an infrastructure subdivision that they can’t control. DSL raw costs keep dropping. Many providers are in the works. Broadband access has grown enormously in the UK, even in remote areas. And you can get 8 Mbps ADSL for free when you sign up for mobile phone or satellite TV service, among other options.

    EarthLink’s only option for survival was to add lines of business: MVNO (Helio), Wi-Fi (Feather), and some DSL/cable resale through partners that gave them decent prices. None of that has succeeded.

    I can’t blame them for focusing on lower-cost customer acquisition that has a high margin. The last numbers I saw were that 25 percent of Americans accessing the Internet used dial-up. I wrote an article over a year ago for The Economist about dial-up’s slow death in which researchers I spoke to were pretty convinced that numbers would continue to fall but slowly in the U.S.; that most people who wanted broadband had already gotten it, except in some areas where it’s still rolling out. So there will be a core that wants nothing better than dial-up or doesn’t care enough, until such a point as dial-up actually becomes expensive, and broadband is cheaper.

    In the UK, there’s a trend that dial-up will essentially disappear except for specialty purposes within about 2 years.

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