As ISPs Shift Their Business Models, MindSpring's Got Access Pricing on the Brain
SAN FRANCISCO -- Internet service provider MindSpringundefined may be feeling pressure to rethink its pricing policy.
Suddenly many companies offering Internet access are cutting the price of getting connected to the Net. On Tuesday,
Qwest
(QWST)
said it would bundle free Net access with long-distance calls.
NetZero
, a Westlake Village, Calif.-based ISP set to go public next month, offers free service and depends only on ad revenues to bankroll its largesse. Even, the cash-rich software monopoly
Microsoft
(MSFT)
is threatening to axe rates, perhaps to zero, for its MSN service.
Free service will be the norm in North America in six to 12 months, according to Christopher Jenkins, president of ISP
ZipLink
(ZIPL)
of Lowell, Mass. It's already a phenomenon in the U.K.
Then there is MindSpring, still a member of the old school. Since its founding in early 1994, Atlanta-based MindSpring has mushroomed to 1.2 million subscribers via acquisitions and its reputation for reliable service. In the second quarter ended June, MindSpring earned $7.5 million, excluding tax-affected amortization charges, while revenue grew 242% to $85.7 million from $25.1 million.
The company relies on access charges from subscribers, not advertising revenue, which is why questions about its straight subscription model are starting to loom large. The official word: MindSpring will not give away its service.
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"We haven't seen a compelling
free model that we think works for us," says Lance Weatherby, executive vice president of marketing at MindSpring. In the second quarter, MindSpring snared 84% of its revenue from charging individuals for Net access, with the rest coming from Web-hosting services and ads.
"They're really sticking to the older model, where they just make a name for themselves in terms of customer service," says analyst Joe Laszlo with the market research firm
Jupiter Communications
. His firm advises Microsoft and
America Online
(AOL)
but not MindSpring. "Were I at the head of MindSpring, I'd be thinking about whether that's the best way to go."
In the past few months, rumors have circulated that MindSpring might still sell itself to a PC maker or phone company. But Laszlo doesn't think MindSpring, independently minded for some time, is about to sell itself.
Look to the subscriber race for clues, says Laszlo. On June 30, MindSpring counted 1.23 million, slipping behind rival
EarthLink's
(ELNK)
1.3 million subs. The two ISPs have grown generally in lockstep; both stood at around 1.1 million in March.
Laszlo says that if EarthLink pulls ahead of MindSpring by 250,000 subscribers or more by Sept. 30 -- not counting subscribers gained through acquisitions -- MindSpring might want to partner with a recognized consumer name such as
Sony
undefined
to attain a higher profile with potential customers.
Phillip Coburn, a global tech strategist with
Warburg Dillon Read
, says combining data and other communications services might prove advisable. "I would look for
smaller ISPs like MindSpring to bundle or enter a joint venture with someone," Coburn says.
Indeed, some rivals have exploited offline brand names. For example, EarthLink recently entered into a marketing agreement with long-distance carrier
Sprint
undefined
.
Weatherby himself concedes that MindSpring's plan is subject to quick review. If Microsoft delivers on its threats, "I'd hate to be in the cross hairs," he says.
Fortunately for MindSpring, some loyal customers won't simply bolt.
Take Ward Good, a vice president with brokerage firm
Scott & Stringfellow
in Richmond, Va. He says he would sign with a free service if one came knocking but remain with MindSpring to comparison-shop. "I suspect
any free service would be not be of the same quality," says Good, who relies on MindSpring to keep steady connections and shield his 11-year-old daughter from inappropriate email spam.
Reliable service explains why Good has advised his investment clients to hold onto MindSpring shares even as the stock fell in recent weeks.
Analyst Ted Broomfield with the investment bank
SoundView Financial
advises investors to trust Microsoft's assessment that the Internet business is lucrative, regardless of which business model prevails. "Buy now, because the valuation per subscriber is going up." MindSpring's loyal subscribers are now valued at about $1,300 each. EarthLink subs are worth $950 apiece.
Eric Efron, co-manager of the
(USAUX)
USAA Aggressive Growth Fund, has invested in several smaller ISPs that rely on subscription models similar to the one used by MindSpring, whose market capitalization is a bit big for his small-cap taste.
Efron expects ISPs, including MindSpring, to keep enlisting subscribers this year without suffering from price competition. However, "I also think they should have a plan B in case the dynamics of the industry change."
