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NEW
YORK—EarthLink Inc.’s wireless Internet service, billed
as an antidote to slowing subscriber growth in its main
business, may bring in less than analysts expected as
cities encounter delays in introducing the technology.
The
service met with roadblocks such as having to color
California antennas to match decorative light poles and
spending five months negotiating with Philadelphia
building owners for rooftop space. In some locales,
EarthLink is paying construction costs and offering
discounts to city workers.
It may
be about to get worse. When the networks are built, most
customers may not be regular subscribers who pay
lucrative monthly bills. Users may be travelers from out
of town who sign up for a few days and leave, limiting
the predictable revenue stream EarthLink wants after
three straight quarters of losses.
“The
rollout has been disappointing,’’ said Srinivas Anantha,
a CIBC World Markets Corp. analyst in New York, who
rates the shares “sector underperform” and doesn’t own
them. “It’s slower than what investors were hoping
for.’’
EarthLink, the fourth-largest US Internet provider,
offers the wireless-fidelity, or Wi-Fi, service in five
cities and scaled back plans to expand through the US.
The technology lets people surf the Web on laptops and
handheld devices in public squares, restaurants and
shops.
EarthLink has named Rolla Huff president and chief
executive officer, replacing interim CEO Michael
Lunsford. The slowdown may put pressure on the new
leader as the company copes with the loss of 18 percent
of EarthLink’s dial-up customers from the end of 2003
through 2006 and millions in spending to start a
high-end mobile phone service.
Growth
engine
EARTHLINK surged fivefold in each of its first two full
years of trading in 1997 and ‘98 as consumers flocked to
the Web. After peaking at $66.50 in April 1999, the
bubble burst and the shares slid to $4.33 in October
2002.
Former
CEO Garry Betty, who died in January, conceived the
Wi-Fi project as a way for EarthLink to avoid paying
phone and cable providers to use their lines to transmit
Internet signals, said Donald Berryman, the company’s
vice president in charge of the project. The business is
now seen as a “large part of the growth engine’’ for the
company, he said.
“The
cities were so eager to bring in these Wi-Fi networks,
we spent a lot of our resources and marketing efforts’’
on them, Berryman said. “We felt like we needed to take
a step back and spend more of our resources in building
out.’’
Malls,
roofs
LOCAL
governments and utility companies complicated the plans
by seeking incentives to let EarthLink use light poles,
signs and rooftops for the 17-inch antennas, and space
for the refrigerator-sized sites that connect the
signals to the network.
In
Milpitas, California, EarthLink had to hide network
connecting sites in a sign at the mall after the
officials balked at putting them around its
new city
hall, said Bill Marion, the information service
director. EarthLink also spent $1 million to convert
Milpitas’s existing wireless network.
Corpus Christi,
Texas,
is getting 5 percent of the money from the service under
a revenue-sharing agreement negotiated with EarthLink,
Berryman said. EarthLink has committed up to $112.5
million to build networks, with as much as $60 million
earmarked for Houston alone.
“It’s
pretty darn complicated because government wants
something out of this, and the citizens want something
out of it, and everyone needs something out of it,’’
said Leonard Scott, who manages the network in Corpus
Christi. “Everyone wants something for nothing, and
there’s not free options here.’’
Recovering investment
EARTHLINK’S chance of recouping its investment depends
on getting the right mix of customers, said Jefferies &
Co. analyst Youssef Squali. The company says less than
half the subscribers will be local, down from an earlier
prediction of as much as 70 percent. EarthLink expects
government agencies and out-of-town visitors to be half
its clients.
“That’s
not great because government users are almost all
subsidized,’’ Squali said. “In some cases, it’s actually
free.’’
Revenue
from travelers is hard to predict, and there is more
competition to get them because hotels and wireless
providers such as Sprint Nextel Corp. offer rival
services.
Though
they pay a higher fee to use the service—$7.95 a day,
instead of $19.95 a month after a six-month
promotion—these users add less to sales than monthly
subscriptions, analysts such as Cowen & Co.’s Jim
Friedland said.
EarthLink’s Wi-Fi customers so far are high-end users
who don’t mind paying an extra fee to access the
Internet outside their homes, and low-income subscribers
with subsidies through city contracts with EarthLink,
Berryman said.
The
company won’t release subscriber numbers until the
program is more established, he said.
“The
implication is that things aren’t going as well as
expected, or at least that things aren’t progressing as
quickly,’’ said Patrick Elgrably, a Morningstar Inc.
analyst in Chicago. ``But I don’t think that it’s time
to give up yet.’’ |
