From CNBC
cnbc.com
Sep 23 1999 5:02PM ET
EarthLink's Race To Wire The World
by John W. Schoen
Senior Producer
MSNBC "It's going to be a very scrappy Christmas."
-- Jeff Sadler, FAC Equities
If bigger is better in the race to capture Internet subscribers, Mindspring {MSPG} and EarthLink {ELNK} just got a whole lot better. But analysts say the rules are changing so fast in the Internet service business, it?s anybody?s guess whether the combined company will ultimately come out a winner.
Consider the current competitive landscape. Cable companies are beginning to roll out high-speed Internet access in large numbers. Telephone companies are bundling cheap Web access with long distance service.
Computer makers are giving out "free" Internet service to buyers of new PCs. Established players like America Online {AOL} and Microsoft {MSFT} are offering $400 computer rebates to sign up new customers. And a new breed of "free" Internet providers like NetZero ? with a business model based entirely on advertising and e-commerce transaction fees -- is rapidly winning market share.
"It's going to be a very scrappy Christmas," said Jeff Sadler, an analyst at FAC/Equities.
With 19 million subscribers, AOL is the acknowledged overlord of the Internet service business. By teaming up, Mindspring and EarthLink (each tied for fourth place behind AOL, ATT and Microsoft?s MSN service) now leapfrog a crowded pack of contenders to take second place. They also avoid the costly battle they faced going head-to-head to establish a national brand. (The new company will take the EarthLink name.)
"In 2000, we'll spend over $300 million in marketing and sales behind a single brand," EarthLink CEO Charles Betty told CNBC. "It allows us more effective than we could be individually."
--The race to sign up Internet subscribers has attracted a crowded field that includes some major players.
Company.................. Subscribers
AOL-Compuserve ...........19,600,000
EarthLink/Mindspring .....(combined) 2,800,000
MSN .......................1,800,000
AT&T WorldNet .............1,500,000
Prodigy* ..................1,096,000
WebTV .......................800,000
@Home .......................620,000
NetZero** ...................613,000
BellSouth ...................565,000
GTE .........................517,000
RCN .........................500,000
One Main ....................472,000
SBC .........................461,000
Gateway.net .................400,000
Roadrunner ..................320,000
USWest.net ..................225,000
BellAtlantic.net ............200,000
Juno ........................160,000
*Includes 7/99 C&W ISP Acquisition
**Active users (since 5/99)
Source: Jupiter Communications
But it?s not clear just how fast the new EarthLink will be able to grow. Analysts say Mindspring loses nearly half its customers each year to churn ? a level of turnover that will eat up a big chunk of that marketing budget. Betty told analysts the company's combined subscriber base will hit 5 million by the end of 2000 and 8 million by the following year -- numbers that drew skepticism from analysts.
"Unless they?re planning further acquisitions, I think that?s a stretch," said Zia Daniell Wigder, an Internet analyst a Jupiter Communications.
Rapid growth is so critical to the combined company?s success because in the Internet service business, size does matter.
For one thing, bigger players can negotiate better deals with telecom providers that provide the access ramps to the information highway. A bigger pool of subscribers also helps draw advertisers who are looking to reach the largest audience.
And bigger ISPs are more attractive to the growing number of e-commerce partners who offer the potential of yet another revenue stream ? transaction fees that ISPs can charge every time one of their customers buys a product from a retailer through the Internet.
EarthLink CEO Charles Betty (left) and Mindspring CEO Charles Brewer discussed their companies merger on CNBC Thursday.
While the deal puts the merged company in a distant second place to AOL, it can still feel the rest of the pack breathing down its neck.
ATT, with about 1.7 million subs, is busy bundling Internet and long distance service ?- a strategy that has drawn the Baby Bells into the Internet service business as well. By combining the marketing and telecom costs for voice and Internet access, local phone companies can price their service aggressively -- putting pressure on standalone Internet providers like Mindspring.
Microsoft?s MSN network -- estimated by some analysts to be at or near 2 million subscribers ? is busy signing up new subscribers with $400 rebates to buyers of new PCs. And the company has reportedly considered offering free Internet service to grow its subscriber base.
"The only reason they?re not doing it now is that it wouldn?t look good while they have this case going on with the government,? said Davenport & Co. analyst Drake Johnstone.
Some new entrants to the market are already offering so-called "free" service. Netzero (whose IPO is expected this week) claims to have signed up some 1.7 million subscribers in less than a year -- though analysts estimate less than half of those are active users.
Compaq?s Alta Vista unit is expected to spend between $50 and $60 million between now and Christmas to boost its subscriber base by offering free service. These "free" providers are hoping to build a quick subscriber base to capture some of the growing revenues spend on Web advertising and fees generated by e-commerce transactions.
Analysts are divided on whether the "free" access business model will work. So far AOL ?- the acknowledged leader in capturing advertising and transaction revenues -? is generating about $6 a month per subscriber in advertising and transaction fees, according to Johnstone.
The average Internet service provider spends about $10-$12 a month per subscriber for marketing, telecom costs and customer service. So the "free" ISPs are counting on future growth of ad spending and Web transactions. The bet is that -- with some two-thirds of U.S. households still without Internet access -- those revenue streams are expected to continue to grow rapidly.
But the ultimate threat to dial-up ISPs may lie not with "free" providers ?- but with the high-speed access offered by cable modems. Dial-up ISPs promise the eventual rollout of a competing service known as digital subscriber line ? or DSL.
While each side claims to be able to offer faster service, local telephone companies are rolling out different versions of DSL - some of which are not as fast as cable modems. At the moment, cable modems seem to have the edge: there are currently some 1.2 million cable modem households in the U.S. and about 200,000 DSL subscribers, according to Forrester Research.
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