Yah, Curtis, I knew about Soros, but let's look a little closer: only 2 million shares were initially offerred to the public. Soros has 7.1% of 2 million = 142,000. Based on Wed, Thu, Fri volume he could have unloaded already. I'm not saying he did - but hedge funds aren't exactly known for assuming the role of responsible nurturer of companies, like a VC or certain institutions might. Who knows the Soros story might play really well and the stock might run up and Soros will be dumping all the way up. I'll be watching the SEC Edgar database and will post here immediately.
As for the business model: currently the radio merger mania shows us this sort of model can win points with Wall Street because when you buy revenues you can amortize the costs but the earnings show up in full on the next balance sheet and so higher and higher p/e can be justified by the analysts running these 'shows'. Therefore the stocks' prices can be moved higher and this cheap currency used for more purchases. The result is that radio conglomerates are outrageously overpriced on a market cap to book-value basis.
Eventually the pyramid built on debt and cheap currency has to tumble. The cost of servicing the debt becomes very significant and eats away at earnings, and whole tranches of stock you used to buy up the smaller players come out of restriction and these guys dump.
Just as important as the above, the internet isn't exactly like radio. First off, quality bandwidth is going to be a scarce commodity for some time to come: it is impossible to predict that in the future that those with quality bandwidth are going to have enough of it to offload cheaply enough to ELNK to make their business model work. From what I've been reading, the quality players are going to become more and more in demand for high-speed corporate links and intranets only they can offer, and eventually will abandon the consumer market altogether.
The huge telcos and long-distance companies will use their economies of scale, experience in servicing customers on large networks, and bundling advantage, to make what is a losing proposition for most retail ISPs currently into a marginal money maker for them.
Even if we assume that EarthLink can get all the bandwidth they need the company is still headed for disaster. Look at AOL. AOL has been running its own network for quite some time and it is either #1 or #2 in backbone ownership on the internet (PSIX is the other slot). AOL is run by an extremely smart guy Steve Case whose brother happenns to be the CEO of Hambrecht & Quist. These guys run their own show with their own equipment and they are facing the biggest business disaster in modern times because the couldn't meet an onslaught of demand.
How in the world will EarthLink deal with an onslaught of demand their marketing campaign will (according to them) generate with a motley empire of disconnected , heterogeneous , POPs , kludged together and patched into higher bandwidth infrastructure whose quality and availability of they have no control over? I see a disaster even bigger than AOL's in the making.
These guys are completely relying on the savvy of the remnants of a hundred little ISPs to keep the whole popsicle-sticks and Elmer's Glue empire together. Almost none of these little guys were profitable on their own. So EarthLink must massively ramp up subscribers to overcome their fixed costs and make a profit. But that's expensive! AOL was/is one of the truly master marketing companies of modern times -- and they are failing miserably to provide minimally acceptable service! They're being sued. Subscribers are bailing out like crazy.
One last thing I can tell you from my own direct experience with a few local ISPs in my area who EarthLink purchased, is that THE QUALITY EMPLOYEES ARE NOT STICKING AROUND. Partly because people who prefer to work for small start-ups don't like working for massive, national, companies -- especially internet people. And partly because EarthLink is pressuring its employees to convert to Scientology. |
