EarthLink, MindSpring show some speed: ISPs bid to win by being No. 2

Last week's teaming of EarthLink and MindSpring, the country's fourth and fifth largest ISPs, makes the ISP game "a two-horse race," said Michael McQuary, Mind-Spring's current president and chief operating officer. Most observers seem to agree.

Leapfrogging to the No. 2 ISP slot after America Online, the combined ISP - to be called EarthLink - will have about 3 million members by the end of the third quarter, still a distant second to AOL's 20 million subscribers, but ahead of Microsoft's MSN and AT&T WorldNet.

The merging ISPs share "an almost fanatic focus on great customer service and support," and that will enable it to steal market share from AOL, said Charles Betty, EarthLink's current CEO. "They have a lot of challenges with user satisfaction."

In the most recent J.D. Power and Associates survey, MindSpring ranked highest among national ISPs for overall customer satisfaction, said MindSpring Founder, Chairman and CEO Charles Brewer. "In fact, we are No. 1 and No. 2," he said, referring to EarthLink's second-place ranking in the same survey. "Our mission is to become the leading [ISP] in the world, as measured by number of members, member satisfaction and profitability."

Officials also unveiled plans to counter AOL's reach and brand recognition. The new company will spend more than $300 million next year to acquire new subscribers at a cost of less than $180 per net new subscriber. "Our initial estimate is that we should end 2000 with approximately 5 million members and pass the 8 million member mark by year-end 2001," McQuary said.

He added that the combined viewership of the two companies' Web portal sites equals about 12% of the total Web audience, pointing to the prospect of increased incremental revenue from advertising sales.

Early analyst reaction indicates that the ISP market is ripe for a hot fight over the No. 2 slot and that an EarthLink/MindSpring combo has a good chance to be that runner-up.

"Both companies have equally strong brand recognition," said James Poirer, an analyst with Market Data Corp. "The decision to choose one name over the other for the new company must have been a coin toss." Both ISPs have been engaged in a new marketing push lately, sending out sign-up disks at a faster-than-ever rate, he said. MindSpring began its first TV ad campaign this month.

"Both AT&T and Microsoft MSN have had a long ride in AOL's backdraft, and essentially they haven't done anything to consolidate their positions," said CeCe Falk, a senior Internet analyst with Kopkind Investment Corp. "They just can't seem to put their ISP efforts together. Now is a good time for EarthLink and MindSpring to join forces because they probably have a year's breathing room before cable and [DSL] begin to take serious bites out of the consumer ISP market."

Brewer will serve as chairman of the new EarthLink. Betty is slated to take over the CEO position, and McQuary will become president.

The deal, expected to close in early 2000, will be a straight stock swap. Based on both companies' closing stock prices last week, the new EarthLink will have a market capitalization of about $3 billion.

Geographically, the two companies also fit together. The new company will be based in Atlanta, MindSpring's home and the center of its predominantly Southern territory. Pasadena, Calif.-based EarthLink has mostly concentrated its marketing efforts in the West.