To: Frank Perlmutter who wrote (132 ) 6/24/1999 5:49:00 PM From: SJS Respond to
Some more thinking on ISP consolidation:The ISP market is suddenly in the midst of a large consolidation, which shouldn't be too surprising given that it is an incredible fragmented market. We can't find a definitive list of how many ISPs there are in the country, but with so many small regional firms, it has be in the upper hundreds, if not more. The large names, like Mindspring, Earthlink (ELNK), and PSINet (PSIX), are the ones that the investing market focuses on, but the overall ISP market is a collection of smaller companies. There is tremendous opportunity to build a long term customer base of gigantic size on a subscription model. So the question on everyone's mind, then, is who would want Mindspring? The first obvious choice is a PC maker. Gateway (GTW) is rumored to be buying Earthlink. Could be Gateway is also talking to Mindspring. Wouldn't be the first time that a rumor was basically right, but wrong on the details. Second thought is other PC makers. Is it Dell (DELL)? The trend of the season is to sell PCs on the cellular phone model: basically give the box away in exchange for a contractual subscription to internet services. Dell has the highest ASP (average selling price) in the industry and a focus on the corporate market; the cellular model is actually bad for them. Buying Mindspring would indicate a shift in their overall strategy, something we'd be surprised to see without some preparation from Dell for the Street, which hasn't happened yet. Could Apple (AAPL) be a possibility? Certainly Apple needs to do something. Would free or sharply discounted iMacs for internet service revive Apple as a player? It certainly is an intriguing idea. A third possibility for Mindspring, probably the most realistic right now, is being acquired by a larger ISP. PSINet and Earthlink are both larger, and are possibilities, but one of the more aggressive telecommunications companies would also be possible strategically. But it wouldn't surprise us if someone like Prodigy Communications (PRGY), which is playing catchup in the ISP world, and has an extremely aggressive management team, turned out to be pursuing Mindspring. Prodigy, you may recall, actually started the whole online world back in the mid-80's, and since being set free from the IBM/Sears management has embarked on an aggressive growth plan. At any rate, seeing who buys Mindspring, if it happens, will be interesting as it may well be an indicator of a larger trend in where the online world is headed. - RVG
