EarthLink Links Up With MindSpring
The Motley Fool - September 23, 1999 12:54
September 23, 1999/FOOLWIRE/ -- After a relatively quiet
summer without much in the way of merger activity, Internet consolidation is
back, baby! This morning, rival Internet service providers (ISPs) EarthLink
(Nasdaq: ELNK) and MindSpring (Nasdaq: MSPG) agreed to merge their
operations to form the second largest ISP in the country behind online
services giant America Online (NYSE: AOL). Under the deal, each MindSpring
share will be converted into one share of the combined company while each
EarthLink share will be exchanged for 1.615 new shares.
All told, the combined company will sport roughly 3 million subscribers,
$650 million in annualized sales, and a combined market capitalization in
the $3 billion neighborhood. The companies get a "D" in the name creativity
department, opting to call the new entity plain-old EarthLink instead of
mimicking Excite@Home (Nasdaq: ATHM) with a fancy appellation such as
EarthSpring, MindLink, or EarthSprings2Mind. The new EarthLink will set up
shop in MindSpring's current digs in Atlanta. MindSpring founder, chairman,
and CEO Charles Brewer will assume the chairman's reins, while current
EarthLink president and CEO Garry Betty will serve as CEO.
The companies are making a valiant attempt to sell the merits of the
combination to the investing public, spinning the bigger EarthLink as "the
clear alternative to America Online" and stressing that there is significant
room for growth with 70% of U.S. households still not connected to the Web
thang. Will that be enough to drive future share price appreciation and make
the new EarthLink positively earth-shattering? Or is the beefed-up ISP just
another hum-drum sausage link to the Web?
One way to create value and score points in the Internet access area is to
rip pages out of the AOL playback and do an end-run around the online
giant's weaknesses. The companies seem to have the connectivity part of the
Internet down cold. But to attract and keep the eyeballs so prized in
today's net-crazy environment, EarthLink will need to build on the other
four parts of what fellow Fool Jeff Fischer has termed the five "C's" of
AOL's business model -- connectivity, content, community, commercials, and
commerce.
Content is currently a gaping hole at the two companies' fledging portals.
Outside of EarthLink's bLink online magazine, MindSpring's personalized Web
domain hosting services, and a smattering of lame contests and surveys,
unique content offerings are pretty weak. In the community-building area,
both companies took a big step forward last month by signing separate
co-branding arrangements to use AOL's Instant Messenger software, which is
the online duct tape that holds much of AOL's successful community together.
These areas will need to receive more attention post-merger. With PC
companies such as Gateway (NYSE: GTW) and Dell (Nasdaq: DELL) and free ISP
firms such as Freeserve entering into the Web access area and pushing prices
down, strong content and community positions will be valuable assets for
ISPs both in attracting new clients and in keeping the existing users on
board.
Perhaps the most intriguing areas for investors are the dual-pronged
commercial opportunities that an ISP brings to the table by controlling the
advertising Web users see day-in and day-out and by direct-selling an
endless amount of products to the large installed user base. By combining
their decent-sized user bases into one jumbo user base, the two companies
will carry more clout with advertisers and will attract new business. The
larger scale also produces an opportunity for more co-marketing arrangements
with retailers to sell products to a large group of potential buyers.
The sixth, wild card "C" for the new EarthLink, however, is the companies'
stellar customer service track records. The two firms were ranked numbers
one and two in overall national ISP customer service in a recent JD Power
and Associates study.
Hitting AOL where it hurts and taking advantage of the love/hate service
relationship the company has with many of its users might be EarthLink's
best competitive weapon.
Touting its throne as the country's most customer-friendly ISP will not
provide a huge competitive advantage against the AOL armada, but it
certainly won't hurt either as the new EarthLink blitzes the airwaves with
ads and seeks to add more net-heads to its ranks of users. Creating
substantial value for shareholders in a market dominated by such an
entrenched competitor as AOL will certainly be a challenge. But with
MindSpring on board, EarthLink poses a much larger threat than it ever has
before.
-- By Brian Graney |
