Will EarthLink Consolidate Dial-Up?

This Dying Business Could Give ISP New Life

In less than a decade, the number of dial-up users in America will total 5-7 million people — 10 million less than the estimated number of narrowband subscribers today. It’s a shrinking industry and yet it’s one that could, with the right business model, be profitable. Analysts say the way to make that happen is for one provider to consolidate the remaining dial-up market in the United States. And that provider, they say, is EarthLink Inc. (ELNK). But if EarthLink misses this opportunity, some question whether the company even will be around 10 years from now.

Whether EarthLink, which declined to be interviewed for this article, has embraced this idea is unknown. But if you’ve listened to the company’s earnings calls comments, dial-up consolidation is one of the evident themes.

In fact, dial-up is where the 14-year-old ISP got its start, having made its name as a dial-up provider with nationwide coverage. EarthLink has, since then, entered the broadband business as well, but it counts only 900,000 high-speed subscribers. For a while, the Atlanta-based firm tried different tactics: it attempted muni Wi-Fi; it partnered with SK Telecom to run MVNO Helio; and it experimented with broadband power line (BPL). Still, nothing was working. Then, Garry Betty, the EarthLink CEO who championed the new directions, died. That was in January 2007.

It was nearly six months before EarthLink appointed a successor, Rolla Huff, who’d been dethroned as head of Mpower Communications when it was bought by TelePacific. Huff strode into EarthLink determined to streamline a company that faced unhappy shareholders and a skeptical industry. Huff stopped funding Helio. He pulled EarthLink out of muni Wi-Fi ventures in Anaheim, Calif., Philadelphia and other cities. And he ended money-draining BPL partnerships.

Investors and analysts applauded the decisions. EarthLink’s stock prices improved and have remained steady. Cash stockpiles mounted. In 2008’s second quarter, EarthLink stood out as one of the few telecom firms to report a profit and raise its guidance for the remainder of the year.

There’s just one problem: there’s not much left if EarthLink doesn’t become the go-to dial-up provider. EarthLink doesn’t offer content, like rivals AOL and Microsoft Corp.’s MSN. It doesn’t boast e-commerce assets like competitor United Online, which owns Classmates.com and the floral company FTD.com. Rather, EarthLink, as one analyst said, is just an Internet gateway company. What it needs to be, according to xchange sources, is the sole dial-up provider in the country.

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