Sprint, EarthLink join forces
The new service will be known as EarthLink Sprint. The deal should boost EarthLink's (ELNK) finances and help it grow more rapidly. Sprint, (FON) meanwhile, can focus on what it views as a strategic new market while keeping resources free for other corporate imperatives, observers said.
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 | Looking for the next Michael Dell? One candidate is EarthLink founder and Chairman Sky Dayton. |
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"This deal pairs a nimble, growth-oriented Internet company with what is arguably one of the biggest, most powerful brands in the world," said Sky Dayton, EarthLink's founder and chairman, in an interview. "We think we can go after No. 2 and have millions of customers," he added. Dayton said EarthLink believes that aside from America Online Inc., large online services and ISPs such as The Microsoft Network -- currently No. 2 behind AOL -- and NetCom On-Line Communications Services Inc., are seeing little growth.
The deal should allow EarthLink, which has built a solid Internet access business but lacks broad brand recognition, to take advantage of Sprint's marketing muscle. Sprint, meanwhile, will gain stature in the ISP arena, said Jill Frankle, an analyst at International Data Corp. in Framingham, Mass.
"The timing of this deal is particularly good, coming right after the AOL price increase announcement, because Sprint's cash infusion will allow EarthLink to keep its $19.95 pricing and concentrate on marketing the service to frustrated AOL users," Frankle said. AOL announced Monday plans to hike its $19.95 unlimited-access plan to $21.95.
Whether Sprint and EarthLink can gain a significant number of angry AOL users "will depend on how much noise they make," she said, noting that the huge growth in AOL's customer base can be largely attributed to its ongoing marketing blitz and extremely strong national brand recognition. "This deal makes a lot of sense. It doesn't come as a surprise," said Kate Delhagen, an analyst with Forrester Research in Cambridge, Mass. In the wake of the agreement, "the other telcos won't sit still," she added, with so many other smallish ISPs out there as potential acquisition candidates.
Under the deal, EarthLink gains Sprint's Internet Passport customers, giving it a total of some 600,000 users. Sprint also guarantees to deliver a minimum of 150,000 new customers annually to EarthLink for a five-year period. EarthLink also gets a $24 million cash infusion, along with a $100 million credit line from Sprint.
In return, EarthLink gives Sprint a 30 percent minority stake. Sprint will get 4.1 million shares of convertible preferred stock directly from EarthLink, and will pay $45 per share for 1.25 million shares of EarthLink on the open market (EarthLink shares opened at $35 per share). EarthLink also will make Sprint its exclusive telecommunications provider.
The combined Sprint/EarthLink customer base would surpass Netcom's estimated 510,000-strong user base, but would still lag behind Prodigy Internet and AT&T's WorldNet service.
"We look at this as a better way to offer the Internet to our customer base," said Thomas Weigman, president of Sprint's consumer services group. Weigman said Sprint made the move because while the Internet presents a big opportunity, it also present the potential for losses. "We sat there and said, 'We could be throwing a lot of money away,' " Weigman said. The alliance with EarthLink means Sprint can be much more aggressive in the Internet space than it would be on its own.
Sprint's core telecommunications business is in a viciously competitive market, and the company also has substantial investments in an international alliance with Deutsche Telekom and France Telephone.
EarthLink has racked up significant losses in its brief history, despite solid customer gains, so the infusion of cash provides it with significant breathing room as it grows. But the deal is not just about more money for EarthLink. Other key benefits, according to EarthLink CEO and President Gary Betty, are "access to Sprint's distribution channel and their ability to prime the pump for us to grow as fast as we've been growing."
With Sprint's support, EarthLink can become the No. 2 Internet access provider within 12 months, though it will take longer than that for the company to gain 2.5 million members to surpass MSN's estimated worldwide total, Betty said.
"Basically, we're doubling our ability to offer organic growth, and it does provide a greater sense of financial stability for our members," he said. "This is a great deal."
EarthLink will continue its relationships with UUNet Technologies Inc. and PSINet Inc., and will add Sprint as a third network for traffic, which should improve its customer service. Sprint Corp. and EarthLink Network Inc. are combining their Internet access businesses in a $180 million deal that analysts said would make the combined company the up-and-coming player to watch in the Internet access space.
The new service will be known as EarthLink Sprint. The deal should boost EarthLink's (ELNK) finances and help it grow more rapidly. Sprint, (FON) meanwhile, can focus on what it views as a strategic new market while keeping resources free for other corporate imperatives, observers said.
| |
| Looking for the next Michael Dell? One candidate is EarthLink founder and Chairman Sky Dayton. |
| |
"This deal pairs a nimble, growth-oriented Internet company with what is arguably one of the biggest, most powerful brands in the world," said Sky Dayton, EarthLink's founder and chairman, in an interview. "We think we can go after No. 2 and have millions of customers," he added. Dayton said EarthLink believes that aside from America Online Inc., large online services and ISPs such as The Microsoft Network -- currently No. 2 behind AOL -- and NetCom On-Line Communications Services Inc., are seeing little growth.
The deal should allow EarthLink, which has built a solid Internet access business but lacks broad brand recognition, to take advantage of Sprint's marketing muscle. Sprint, meanwhile, will gain stature in the ISP arena, said Jill Frankle, an analyst at International Data Corp. in Framingham, Mass.
"The timing of this deal is particularly good, coming right after the AOL price increase announcement, because Sprint's cash infusion will allow EarthLink to keep its $19.95 pricing and concentrate on marketing the service to frustrated AOL users," Frankle said. AOL announced Monday plans to hike its $19.95 unlimited-access plan to $21.95.
Whether Sprint and EarthLink can gain a significant number of angry AOL users "will depend on how much noise they make," she said, noting that the huge growth in AOL's customer base can be largely attributed to its ongoing marketing blitz and extremely strong national brand recognition. "This deal makes a lot of sense. It doesn't come as a surprise," said Kate Delhagen, an analyst with Forrester Research in Cambridge, Mass. In the wake of the agreement, "the other telcos won't sit still," she added, with so many other smallish ISPs out there as potential acquisition candidates.
Under the deal, EarthLink gains Sprint's Internet Passport customers, giving it a total of some 600,000 users. Sprint also guarantees to deliver a minimum of 150,000 new customers annually to EarthLink for a five-year period. EarthLink also gets a $24 million cash infusion, along with a $100 million credit line from Sprint.
In return, EarthLink gives Sprint a 30 percent minority stake. Sprint will get 4.1 million shares of convertible preferred stock directly from EarthLink, and will pay $45 per share for 1.25 million shares of EarthLink on the open market (EarthLink shares opened at $35 per share). EarthLink also will make Sprint its exclusive telecommunications provider.
The combined Sprint/EarthLink customer base would surpass Netcom's estimated 510,000-strong user base, but would still lag behind Prodigy Internet and AT&T's WorldNet service.
"We look at this as a better way to offer the Internet to our customer base," said Thomas Weigman, president of Sprint's consumer services group. Weigman said Sprint made the move because while the Internet presents a big opportunity, it also present the potential for losses. "We sat there and said, 'We could be throwing a lot of money away,' " Weigman said. The alliance with EarthLink means Sprint can be much more aggressive in the Internet space than it would be on its own.
Sprint's core telecommunications business is in a viciously competitive market, and the company also has substantial investments in an international alliance with Deutsche Telekom and France Telephone.
EarthLink has racked up significant losses in its brief history, despite solid customer gains, so the infusion of cash provides it with significant breathing room as it grows. But the deal is not just about more money for EarthLink. Other key benefits, according to EarthLink CEO and President Gary Betty, are "access to Sprint's distribution channel and their ability to prime the pump for us to grow as fast as we've been growing."
With Sprint's support, EarthLink can become the No. 2 Internet access provider within 12 months, though it will take longer than that for the company to gain 2.5 million members to surpass MSN's estimated worldwide total, Betty said.
"Basically, we're doubling our ability to offer organic growth, and it does provide a greater sense of financial stability for our members," he said. "This is a great deal."
EarthLink will continue its relationships with UUNet Technologies Inc. and PSINet Inc., and will add Sprint as a third network for traffic, which should improve its customer service.