EarthLink disses dial-up

With narrowband growth flat, No. 2 ISP will target high-speed subscribers EarthLink, the nation's No. 2 ISP, has decided it can't compete with America Online for dial-up business, so it will concentrate its efforts on amassing new broadband customers.

While announcing third quarter results for the ISP, CEO Garry Betty said EarthLink added 924,000 customers to its total paid subscriber base, which grew to 4.6 million. But more than 750,000 of those came from completing the acquisition of ISP OneMain.com, and about 55% of the remainder were added through the aggressive buyout of other rival ISPs.

Betty attributed EarthLink's minimal "organic" growth to four competitive factors. Primary among these were rebate programs from AOL and Microsoft's MSN Internet access service, in which customers can get about $400 back if they subscribe when they purchase a new PC.

"Our information says that about 40% of all the PCs that get sold at retail are sold with a rebate program from either MSN or AOL through its CompuServe subsidiary," Betty said."The other thing that happened this year is that AOL and MSN are giving computer manufacturers a year of free service bundled with the computers they sell."

EarthLink also is "dabbling" with rebate links to PC manufacturers but is not convinced that the return on an investment in re-bates is wise."The math doesn't take long - if you do 100,000 customers in the quarter, that's $40 million in cash," Betty said. "You get that cash back over three years, so we're not big proponents of [re-bates]."

Ad-supported ISPs that charge no fees to subscribers also diminish EarthLink's potential market.

"Free [Internet access] has continued to have an impact on the low end," Betty said.

Third, the shrinking number of new PCs coming online reduces the effectiveness of EarthLink's traditional direct-mail marketing methods. To boost narrowband share, EarthLink has to increase brand awareness.

"Not enough consumers are aware of EarthLink," Betty said. The ISP will soon launch a marketing campaign - an expensive proposition - that will contribute to a loss of $47 million to $52 million on fourth quarter earnings.

"There's a very strong underlying interest in and demand for broadband, and that is driving the sequential growth that we're seeing in that area," Betty said, noting that EarthLink added 59,000 broadband customers in the quarter (including 6000 acquired through OneMain.com) for a total of 139,000 installed broadband subscribers. The ISP expects to bolster that high-speed base with 65,000 net additional customers in the fourth quarter.

EarthLink thus becomes the latest ISP to downgrade the growth prospects in the narrowband sector. Recent decisions by AT&T and WorldCom to spin off their consumer dial-up access services along with their struggling consumer long-distance businesses signal their pessimism about the potential for future expansion in narrowband access.

"Dial-up is dying as a profit center," said Drake Johnstone, an analyst with Davenport & Co. "The right strategy now is to shift resources to tap into the pent-up demand for broadband Internet service - and to do so quickly and efficiently."