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ISPs Try to Keep Customers Who Love 'Em and Leave 'Em
By Kevin Petrie
Staff Reporter
7/16/99 9:00 AM ET
MindSpring (MSPG:Nasdaq), EarthLink (ELNK:Nasdaq) and OneMain.com (ONEM:Nasdaq) have signed up droves of subscribers. But the tougher task will involve keeping them -- and getting them to break out their wallets for additional services.
For now, these Internet service providers are winning investor applause largely through sheer growth. They're also pairing with telephone carriers; just Wednesday EarthLink disclosed plans to offer services through a network owned by MCI WorldCom (WCOM:Nasdaq). And then there's the even more titillating possibility of selling out, in EarthLink's case to PC maker Gateway (GTW:NYSE). All of this has pushed up the ISPs' stock prices after they crumbled with the Internet sector during April and May. While still below their previous highs, MindSpring and EarthLink have nearly doubled since mid-June. OneMain has more than doubled.
With valuations at rich levels, the real task for these ISPs will be to keep their monthly churn rate below the industry average of 4%. Professional investors say that by promoting touchy-feely portals and hosting Web sites for small-business owners, among other things, these three could prove they're worth their high prices.
"If you're a plain-vanilla ISP, you're gone," says Ian Link, manager of the Franklin Global Utilities fund, soon to be renamed the Communications fund. He finds MindSpring and EarthLink overvalued, at 20 and 8 times revenue, respectively, in the four most recently reported quarters.
Link, who doesn't own these stocks, wants to see whether the companies become an "indispensable" part of customers' lives. To do that, he figures they need personalized stock portfolios flashing each morning, which also notify investors when stocks hit their target prices. They need services such as schedules to remind customers about birthdays and suggest a florist.
MindSpring, for one, doesn't have these additional features yet. "We are starting to look into more sophisticated ways to create customer loyalty," says Lance Weatherby, a MindSpring executive vice president.
Success in this evolution is all the more important because competitors are flexing their muscles. AT&T (T:NYSE) intends to sell Internet services and high-speed cable modems as well as voice calls. Baby Bells SBC (SBC:NYSE) and BellSouth (BLS:NYSE) are piping the Internet to increasing droves of customers.
These rivals also can afford to slash connection prices, and upstarts like NetZero even offer free access, counting instead on ad revenue. So the flat $20 monthly rate for Internet services offers little in the way of security, especially since it'll probably fall.
America Online (AOL:NYSE) is, of course, the one to beat when it comes to profiting on the creation of a cultish community. The ISP, based in Dulles, Va., grew its ad and commerce-fee revenue 94% to $275 million from one year earlier, while subscription revenue increased 50% to $869 million during the March quarter.
The smaller ISPs are trying to create their own niches, often cooking up a local flavor. Making customers loyal is "the No. 1 focus of our business," says Stephen Smith, CEO of OneMain, a Vienna, Va.-based rollup of 17 ISPs that serve 450,000 subscribers in smaller metro areas across the U.S.
In mid-September OneMain's customers will be able to access a home page tailored to their dial-up area code, replete with community calendars and local high-school sports scores. If it snows in one region, OneMain will run snowblower banner ads. Smith spends four to five days each month telling money managers: "We're a lot more than an ISP."
His company has to be. Smith agrees that Internet access prices will plummet, forcing his firm to generate new lines of revenue. For example, his company makes about 6% of its revenue providing Web-hosting services for small-business owners and expects that portion to swell nicely in 2000.
And while it's tough to measure, added features already seem as if they're a factor in the growth in signups. EarthLink's membership swelled by 180,000 in the June quarter, and it kept its monthly churn rate at 3.5%. Customers can use EarthLink's default home page to register for Sprint (FON:NYSE) long-distance calls, and small-business owners can have EarthLink host their Web site. Its Web-hosting revenue, in fact, is growing faster than dial-up subscriptions.
Still, ISPs likely will continue to encourage churn with their expansion efforts.
In February, EarthLink openly courted potential defectors from Netcom (which had just folded into MindSpring) and other rivals by offering on the eBay (EBAY:Nasdaq) auction site to waive initial fees and pay subscribers $50 if they stuck around for three months. EarthLink estimates that, on the list of potential customers, there are three times as many "switchers" as there are Internet newcomers.
One example is Chuck McCurdy, research director with money manger Veredus Asset Management. "I don't have any brand loyalty when I get onto the Internet," he says. Next month, McCurdy intends to ditch BellSouth.net, which furnishes his Louisville, Ky., home with 56K modem access on two phone lines for $19.95 each per month, and sign with the $30 cable-modem service from InterMedia Partners, which contracts with Excite@Home (ATHM:Nasdaq). "I'm going to save 10 bucks," McCurdy says, and feed on more bandwidth. (Veredus doesn't own any ISPs.)
So MindSpring, EarthLink and OneMain have a long way to go to keep customers like McCurdy -- and to justify their steep valuations.
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