How long will EarthLink play its high-stakes game?

How long will EarthLink play its high-stakes game?
It appears EarthLink CEO Roll Huff may have some painful decisions to make soon in the ISP's high-stakes game of pushing itself beyond the ISP world. The company's two major initiatives--its muni-WiFi initiatives and Helio, the MVNO partnership with SK Telecom--are turning into unwieldy mega-million dollar investments for the company.  

During the company's second-quarter conference call last week, Huff acknowledged that his company's approach to the muni-WiFi market is flawed. To make sure the company gets a return on its investment, he wants "municipal government to step up and become a meaningful anchor tenant on completion of a build."

Huff indicated that EarthLink is conducting a detailed review of its muni-WiFi business model and is beginning to talk with the municipalities about its new vision for muni-WiFi. That means getting municipal customers, who thought they were getting a nice free ride, on board.

"The WiFi business as currently constituted will not provide an acceptable return. We're actively exploring ways to scale this business more economically. We're going to look for municipal government to step up and become a meaningful anchor tenant on completion of a build. That would go a long way in our being able to get an acceptable return on this investment," said Huff. "Until we're convinced that we can build new networks and get an acceptable return we will delay any further new build-outs."

Meanwhile, Helio is taking a toll on EarthLink's bottom line. The company posted a loss of $16.3 million in its second-quarter filing, down from a profit of $16.6 million in the second quarter last year. Revenue for the quarter fell 6 percent to $312.2 million, down from $332.1 million a year ago. Helio cost the company about $13.3 million in lost net income.

For the third quarter, EarthLink predicted it will come between roughly break even or losing $10 million in net income, with losses of $20 million to $25 million from Helio. For the full year the company predicted between breaking-even and earning $20 million, with Helio losses of $75 million to $85 million.

Reports circulated a few weeks ago when Huff first took the helm as CEO that he might cut Helio, but EarthLink and co-owner SK Telecom are making good on their promise to each invest an additional $100 million in the MVNO. Both partners have already approved respective initial funding of $30 million.

Wireless may represent the new frontier for many Internet companies, but EarthLink has embarked on two initiatives that are far from proven models for making money. It's going to take some time for EarthLink to bring in some significant revenue from these initiatives, especially as EarthLink continually works to find the right business model for muni-WiFi. How patient will Huff and EarthLink's investors be? Will EarthLink become a model for these yet-to-be proven business initiatives or an example of a company that took too many risks? -Lynnette

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