EarthLink's high-stakes game in muni-WiFi and Helio

EarthLink's high-stakes game in muni-WiFi and Helio
It appears EarthLink is reaching a crossroads in its high-stakes game of pushing itself beyond the ISP world. It's two major initiatives--Helio, the MVNO partnership with SK Telecom, and muni-WiFi initiatives--are turning into unwieldy mega-million dollar investments for the company. And they are both unproven business models.

Last week, EarthLink revealed it is pulling back on its muni-WiFi business to focus on its existing contracts and larger cities for the rest of the year. This announcement came following the revelation that EarthLink lost $30 million during the first quarter, or 24 cents per share, as more subscribers exited from its core traditional dial-up business. For the rest of the year, EarthLink plans to focus on driving up usage in large cities rather than launching new projects. The company plans to cut in half its capital expenditures on municipal WiFi.

EarthLink has been aggressively bidding on muni-WiFi contracts. Its plan is to make money through paid services such as monthly subscriptions and "anchor tenant" deals with city governments. But so far EarthLink has about 2,000 monthly consumer subscribers to its muni-WiFi services, which executives estimated on Thursday cost an average of $40 per household to deploy.

Meanwhile, Helio is bleeding money and will need significantly more than the $440 million its parent companies pledged to the MVNO. Helio generated $30.4 million in revenue during the first quarter, but posted a net loss of $63.1 million. Helio will be incurring some significant costs in 2007. EarthLink expects Helio will generate net losses of $330 million to $360 million in 2007, and reach positive cash flow in 2009. EarthLink's proportionate share of Helio's loss in 2007 is expected to be $160 million to $180 million, compared with $85 million in 2006. EarthLink has to decide if it will be throwing more money at that initiative. It's possible that Helio's ownership will be forced to diversify in 2007.

Is EarthLink's pull-back on muni-WiFi enough? When a public company's non-core business generates substantial losses, investors begin to ask questions. It's going to take a while for EarthLink to bring in some significant revenue from these initiatives. Its goal is to bring in ARPU from these networks that is more than $21.95. But many subscribers aren't even paying the $21.95 price yet because they are on discounted introductory plans. Additionally, EarthLink needs to bolster government users for applications such as wireless parking meters and video surveillance.  

So far, EarthLink's investors have reacted positively to the news that the company is scaling back its muni-WiFi initiatives. Now it has to show investors it can make a return on its big investments in two business initiatives that are unproven business models in terms of profitability.--Lynnette