Wednesday, August 29, 2007

EarthLink: Except for Helio, New Course Set

Saying it has made no final decision about its Helio investment, EarthLink officials have made a few things clear. It simply won't proceed with municipal WiFi networks in Alexandria, Va.; San Francisco; Atlanta; Houston, St. Petersburg, Fla. and Arlington County, Va. unless the terms of those franchises are altered.

It will continue to operate or invest in the networks in Corpus Christi, Tex.; Philadelphia and Anaheim, Calif.

What EarthLink is looking for is risk sharing by other stakeholders, possibly including the municipal governments, chipmakers, network infrastructure vendors or other stakeholders who benefit from continued deployment of municipal WiFi networks. In other words, EarthLink simply won't build if it has to put up all the cash.

For those of you who wonder about the business case, EarthLink is voting with its own wallet: there isn't an adequate return when it has to build the network.

So far at least, EarthLink seems to have made no final decisions about its Helio wireless venture, either. The problem is that EarthLink already has invested more than $100 million into the joint venture with SK Telecom, and it will watch that investment go down the drain if it doesn't try to get it into gear.

At any rate, Helio does not seem to be "top of mind" for the EarthLink management team. That belongs to the business-focused networking business of its New Edge Networks division. Getting New Edge to profitability is job one.

Among the current problems: gross margin of just five percent and churn of 2.7 percent a month. Of those two problems the bigger issue is gross margin. Monthly churn of 2.7 percent, while not pleasant, isn't terribly unusual in the small and mid-sized business market. But five percent gross margin is not a business.

EarthLink also is cutting back its customer acquisition efforts, and doesn't necessarily think it will be a bigger company in the future, measured by subscriber count. Instead, it will focus on selling more products to its existing base of customers.

That doesn't preclude acquisition of customer bases that are stable. EarthLink always has been an acquirer of customer bases, so that's in keeping with its legacy. But after a careful analysis of its customer cohorts, it has found what just about every other company with a recurring services revenue model also should find.

And that is that most of a company's churn occurs very early in a customer relationship. A good chunk--perhaps as much as a third or more of total churn--occurs within a few months. Perhaps half of all churn happens in the first year. Get past that point and churn actually is pretty low.

So the municipal WiFi decision essentially is made. For the markets not yet built, get concessions or get out. Run the three networks already operational. With immediate attention focused on New Edge, and different customer management straegies in place for the consumer Internet access business, that just leaves Helio unresolved.

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