nothing wrong with being # 2 as far as i'm concerned...<ggg>
Thursday April 29, 9:07 pm Eastern Time
Flexing marketing muscle, EarthLink aims to be No. 2
By Scott Hillis
PASADENA, Calif., April 29 (Reuters) - EarthLink Network Inc. (ELNK - news) does not want to be the No. 1 Internet service provider. No. 2 will do, for now.
Long eclipsed by America Online Inc. (AOL - news), Earthlink is emerging from obscurity as a front-runner in the race to capture the second place.
Executives at the company's Pasadena, Calif., headquarters dream about one day catching AOL, but say beating out rivals like AT&T Corp.'s (T - news) WorldNet and independent MindSpring Enterprises Inc. (MSPG - news) is a more pressing task.
''Our challenge is not to challenge or even overtake AOL, it's to distance ourselves from our competition,'' Senior Vice President Bill Heys said in an interview.
EarthLink appears to be on track. It has trimmed its losses, to $4.6 million in the first quarter from $4.9 million a year earlier and hopes to post its first profit this year.
''The only thing that's preventing us from being profitable right now is the money we're spending on marketing. If we spent 20 percent of our revenues on marketing, we would be profitable today,'' said Kirsten Kappos, EarthLink's vice president of corporate communications.
EarthLink is quickly signing up new members and, more importantly, convincing them to stay.
It signed up 155,000 new members in its first quarter, bringing its total to 1.15 million -- within striking distance of AT&T's 1.3 million and gaining on the estimated 2 million on Microsoft Corp.'s (MSFT - news) MSN. Another half a million are expected to join by the year's end.
It boasts that its ''churn'' -- the proportion of members who switch to another service -- is about 4 percent, half the industry average.
That performance has pushed the stock as high as $99 over the past year and has attracted investment from the likes of famed financier George Soros. EarthLink shares were down $4.19 to $66.06 on Thursday amid a sell-off in Internet stocks.
There are signs, however, that the upstart, launched in 1994 by then 24-year-old Sky Dayton, is straining to keep up with all that growth.
PC Magazine, which last year voted EarthLink the best gateway to the Internet, this year honored AT&T WorldNet, saying EarthLink scored poorly in terms of getting connected, download times and throughput.
''Unfortunately, EarthLink seems to be suffering some growing pains -- its network performance was consistently worse than the industry average,'' the magazine said.
Moreover, Everen Securities has lowered its intermediate outlook on the company to market-perform from out-perform, citing lower-than-expected revenues and problems with a promotion with computer-maker Packard Bell.
EarthLink officials brushed off the criticism, saying the company had gained 60,000 net customers from the Packard Bell promotion and that the low number of customer defections spoke louder than the PC Magazine survey.
''If you look at our churn rate that's half the industry average. We think that's a better benchmark than someone sitting dialing randomly,'' Heys said.
Other analysts have maintained buy or strong-buy ratings.
''I don't really pay attention to these quarter-to-quarter blips,'' said Mark Cavallone, an analyst with S&P Securities Group in New York. ''The bottom line loss was less than I anticipated and that's a trend I think will continue.''
To propel it to a national stage, Pasadena-based EarthLink is banking on a sweeping marketing strategy. It pumped more than a quarter of revenues into marketing last quarter, compared with just 4 percent a year ago.
In the latest deal to extend its reach, EarthLink earlier this month announced a pact with Microworkz.com, which makes bargain-priced computers, to provide a year of free Internet access to buyers of Microworkz machines.
The EarthLink brand is also spread through partnerships with Sony Music, Wal-Mart Corp. and others who offer discounts or bundle sign-up software with their own products.
Sprint Corp. (FON - news), which has a 28 percent stake in EarthLink, is trying to entice its 15 million customers to sign up with EarthLink.
Weaning people off AOL has been a central theme of EarthLink's marketing strategy.
As EarthLink Chief Executive Officer Garry Betty put it, ''I won't be so bold as to say we'll be bigger than AOL over the short term, but...I don't see why in the longer term we couldn't do something as significant as they have.''
Eventually, the company believes it can match the reach of AOL, which it derides as a kind of ''Internet lite'' suitable for cyberspace novices, but disappointing to seasoned Web explorers.
''AOL is Disneyland. We're the United States,'' Heys said.
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