Novice Investing - Finding The Weakest Link at Earthlink

Date: Thursday 07th 2008f August 2008 01:39:46 PM

Finding The Weakest Link at Earthlink - 10/01/2006

By: Novice Investing Staff

Earthlink Inc. (ELNK) is the provider of Internet Service which includes broadband and narrowband services. It has also branched out into web hosting, wireless offerings, VOIP services and advertising. Earthlink's 2005 annual report will dissect the company further and helps you to determine if you should invest in Earthlink's common stock.

Earthlink's annual report went straight to the point of several sources of its revenue stream. Narrowband (dial up access) still accounts for much of Earthlink's revenue with 58% share. Total subscriber for this segment is 3.6 million. Broadband comes second with 34% total revenue and 1.6 million subscribers. Earthlink is well aware of the decline of



Earthlink is well aware of the decline of its core narrowband internet access and it has employed in various marketing techniques to entice customers to use other services. The seven marketing techniques employed by the Earthlink are:
1. Advertising. Using conventional advertising media such as billboard, print, electronic and broadcast media, Earthlink is spreading the word about their services. This may include regional and national televisions and internet ads.

2. Direct Marketing. Earthlink promotes their service directly to consumers in the form of direct mail or inserts into your local newspapers. It would generally give out incentives such as free trial for customers to sign up for Earthlink's services.

3. Original Equipment Manufacturers. Earthlink has a deal with Dell Computers and Hewlett Packard to preinstall its Internet Access Software. Having your software already preinstalled is one of the best way to encourage customers to sign up for internet services. Further, Dell and Hewlett Packard shipped numerous PCs to customers and retailers. That will give Earthlink some decent exposure to customers.

4. Sprint Partnership. In this strange arrangement, Sprint will buy narrowband and broadband service from Earthlink. Sprint will then resale this bandwidth to its own customers. In its 2005 annual report, Earthlink states that the Sprint partnership generated more than 10% of gross organic subscriber additions.

5. Retail. No trick here. Earthlink distributes its services in retail stores such as BestBuy, Circuit City, Fry's Electronics, RadioShack, Staples and Officemax.

6. Affinity Marketing. Earthlink strikes a deal with its affinity partners such as AAA to cross promote Earthlink's products to potential customers. They will typically bundle Earthlink's product offerings with other packages.

7. Member Referral Program. Earthlink will reward existing users for referring a new customers to use Earthlink. Earthlink will typically waive one month of standard Internet access fee for each additional customers who was referred by the member.

Earthlink also actively differentiate its product offering for its premium narrowband and broadband subscribers. This enables the company to survive in the highly competitive industry. There are eight features touted by Earthlink for its premium plan which is called TotalAccess. Just to mention it briefly, these additional features include: Pop-up blocker, spamBlocker, Spyware blocker, ScamBlocker, Earthlink Accelerator, Virus Blocker, Parental Controls and Protection Control Center. You can read more about the definition of each feature on Earthlink's 2005 annual report.

To ensure that most US population can get Earthlink's narrowband and broadband connection, the company has partnered with other telecommunication companies which include MCI, Qwest, Level 3 Communications, Covad, Bellsouth and SBC Communications. Earthlink can cover about 92% of the US population with these partnerships.

Earthlink acknowledged that it encounters significant competitive risks from all sides of its business segments. Narrowband, broadband, wireless, webhosting and VOIP are all tough businesses to be in. However, the company seems adapt in changing its approach to market its services. It has aggressively moved into providing wireless broadband network to several cities including Philadelphia and Anaheim in 2005. This is one potential untapped market which can give Earthlink's significant competitive advantage. Research had shown that building a Wi-Fi network is much cheaper than building your own DSL line or cable TV. For the same amount of money, you can reach a lot more population within your network. Before investing in Earthlink, this business segment is what you should be watching for. If not, you will be mainly investing in a dying narrowband business while competing fiercely for broadband customers. Margin will be hurt and so will the stock price.

On the positive note, Earthlink has a solid balance sheet with a positive net cash of $ 380 Million as of December 31st 2005. That will be enough to help it fund its Wi-Fi initiatives. Further, it still has decent cash flow coming in from its eroding dial-up customers.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Earthlink Inc. (ELNK) or any other securities.

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