George Mannes

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EarthLink's Push Leaves AOL in Low-Cost Vise

George Mannes

Watch out, America Online. EarthLink's (ELNK Quote - Cramer on ELNK - Stock Picks) thriftiness shows signs that pricing pressure in the dial-up Internet business is getting stronger.

EarthLink, the nation's largest independent Internet service provider, said Wednesday that it was moving forward with the rollout of a discount ISP brand. News and details about the debut, which will be built on the PeoplePC business that EarthLink bought last year, came a day after EarthLink announced it was cutting costs by laying off 1,300 employees, or about one-quarter of its workforce.

The moves, which came as EarthLink released fourth-quarter financial results and forecast further cost-cutting for 2003, illustrate how the subscriber base for AOL Time Warner's (AOL Quote - Cramer on AOL - Stock Picks) America Online service continues to be nibbled at from above and below -- from low-cost alternatives such as United Online (UNTD Quote - Cramer on UNTD - Stock Picks) and from high-speed Internet services offered by cable TV companies. AOL Time Warner, whose Internet service has been suffering from slowing subscriber growth and plummeting ad sales, is slated to report fourth-quarter earnings after the markets close Wednesday.

EarthLink's focus on expense-cutting also sheds light on the challenge EarthLink faces in making a transition from a narrowband business that is profitable but is leaking subscribers, to a broadband-based retail business that is growing but is not yet profitable.

Following Wednesday morning's release of financials from EarthLink, shares in the company fell 35 cents, or nearly 6%, to trade at $5.62. AOL Time Warner rose 3 cents, to $13.69, while United Online rose 82 cents, or more than 6%, to $14.06.

Straight, Narrow

For the fourth quarter ended Dec. 31, EarthLink performed in line with analysts' estimates, reporting $347.9 million in revenue, $1.2 million better than the three-analyst consensus forecast from Thomson Financial/First Call. The net loss for the quarter was $32.9 million, less than half the fourth-quarter 2001 net loss of $73.9 million.

Looking ahead, the company isn't forecasting surprising revenue growth. Its full-year 2003 revenue guidance range of $1.44 billion to $1.50 billion is on the low side of the current analyst consensus of $1.50 billion.

But EarthLink made clear promises on the expense side of the ledger. In part because of the layoffs, which stem from the closing of several customer call centers, EarthLink says it will cut customer service expense for all narrowband and broadband customers by a dollar per month per customer over the next year. In addition, narrowband technology costs should drop a dollar per customer per month over the next year, while per-customer monthly technology costs for the broadband customers to whom EarthLink directly retails its service should drop by $3 to $4.

Excluding the estimated $41 million cost of exiting its call centers, EarthLink says it expects to lose $45 million to $65 million for 2003, compared with a $148 million loss for full-year 2002.

The company, which expects to offer low-frills Internet service via the PeoplePC brand for $10 or $11 per month, says it has been able to re-sign more than 40% of the PeoplePC customers whose long-term Internet service contracts have expired.