In a deal that emphasizes a trend toward consolidation of data networks, EarthLink and Sprint announced today they will merge their Internet access businesses - creating a network with nearly 600,000 customers that the new partners plan to expand rapidly.
In the $US180 million deal, Sprint will invest $24 million in EarthLink, provide a $100 million line of credit to the company, and offer $45 a share for 1.25 million shares of EarthLink common stock. The deal will merge EarthLink's 450,000 customers with Sprint's current roster of 130,000, and Sprint is committed to providing 150,000 customers a year for the next five years.
"We think this deal moves us out of the middle lane and into the fast lane, and puts us into a position to compete for the top spot [among Internet and online service providers]," said EarthLink founder and chairman Sky Dayton, adding, "We think we can be a strong number two [behind America Online] in 12 months."
That means EarthLink would have to pass Microsoft Network, with 1.85 million customers; CompuServe, with 1.4 million; and Prodigy and AT&T, which have approximately 1 million each, according to Forrester Research.
"Only 20 percent of [US] households are on the Internet," Dayton said. "The Internet is on the top of people's minds, but few are on it yet. Our mission is to be there for the next 80 percent as they come online."
The 600,000 customer mark puts EarthLink neck-and-neck with Netcom as the largest of the "independent" Internet service providers, according to Forrester, though EarthLink claims to be ahead. Independent ISPs are those not run by telephone or cable companies, said Ross Rubin, an industry analyst with Forrester. "Of course, after this deal, EarthLink is a little bit less independent," Rubin said.
Both Sprint and EarthLink stressed that despite the teleco's large investment, EarthLink will remain independent. The terms of their deal stipulate that Sprint, which gets two seats on the EarthLink board, can buy no more than a 30 percent stake in the company for the next 39 months, at which time it can make an offer to buy all of the company - and not less than all of it.
For now, EarthLink maintains strategic and operational independence, Dayton said. "We're better off as an independent, entrepreneurial company that can be nimble in the market," Dayton said.
Even so, it is Sprint's brand name and marketing power that the two companies hope will make EarthLink a contender with the heavies in the industry.
"We believe we now have the most powerful ISP in the industry," Dayton said. Jim Dodd, Sprint's vice president for Internet Services, echoed that assessment, pointing to the synergy between Sprint's cellular and paging services and EarthLink's Internet access service. "We've been in the retail Internet access business for a year now [with Passport]," said Dodd in the same post-announcement interview. "But we were motivated to move to get to the next level."
In the near term, Sprint and EarthLink customers can look forward to the convenience of one bill for their long distance, cellular, paging, and Internet services, Dodd said; and in the longer term, "heavy communicators" will benefit from integration of those services.
The Sprint deal expands EarthLink's local dial-ups to more than 1,200 - more than any other Internet or online service provider, the company said.
But passing by its competitors won't be easy, analysts said. "All of the other providers will be tough competition," said Kathey Hale of Dataquest. "None will give up, even Microsoft, [whose core is not Internet access]."
But EarthLink has set itself apart from competitors like Netcom, which are losing money and refocusing on business customers, Hale said. "EarthLink has shown a continued interest in ISP services for consumers," Hale said. "It stands out as a bastion in that regard."
"This is a smart move on Sprint's part," Hale said. "It's actually an admission of failure. They thought they could build a contender on their own, but they realized they should buy into one, instead."
EarthLink stock surged as much as 20 percent on the news; Sprint shares were up fractionally.
