ISP Has Main Street's Respect, Lacks Wall Street's

OneMain.com pursues a rural strategy that obscures its promise from those on the Street.
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Barry Percy is

OneMain.com's

(ONEM) - Get Report

secret asset. Percy expects the home-grown e-commerce site he runs in Burlington, Vt., to double its revenue this holiday season. To handle that traffic, Percy isn't moving to a bigger, better-known ISP. Rather, he is staying with

Together Networks

, the local ISP that OneMain bought in March.

Percy knows the local employees at Together, and feels at ease working with them. "I like to minimize my exposure to unknowns," he says. By building a network of small ISPs in rural markets, OneMain has managed to create a business with $82 million in revenue that maintains a grass-roots approach. But that rural focus has yet to catch on with Wall Street.

While many Internet offerings have met with staggering success in a market infatuated with hot Internet plays, OneMain closed at 16 1/4 Friday, below its March IPO price of 22. City-centered ISPs get more respect. OneMain is down 25% from its offering price of 22 in the last month, while

MindSpring

(MSPG)

has risen more than 23 times over from its offering price.

Being left out of the Net rally rankles OneMain CEO Steve Smith. "We've exceeded every conceivable metric on every conceivable level in three quarters since going public," says Smith, who should know a good deal when he sees it: As a

Morgan Stanley

banker, he closed 55 financing and merger deals in nine years.

OneMain beat financial estimates by 25 cents a share, with losses of 90 cents a share, in the June quarter. In the September quarter, it beat estimates by 2 cents a share with losses of $1.12 a share. And while

America Online

(AOL)

may generate more revenue per subscriber, analysts say OneMain has better retention rates.

Instead, investors are pouring capital into AOL and ISPs with strategies for broadband deployment and e-commerce in metropolitan areas. Many investors are concerned that competition from free, ad-based services such as

NetZero

(NZRO)

will prompt traditional ISPs such as OneMain to slash rates or go free. They also want proof that OneMain can digest its many acquisitions.

Then there are the company's strengths. OneMain is luring a lot of first-time users with connection speeds ranging between 14.4 kilobits per second and 56 kilobits per second. Rural homes have more PCs per household than city slickers, though Internet usage runs lower, according to data from

Scarborough Research

. OneMain sees this as growth waiting to happen. To date, the company has encountered little interference from AOL or MindSpring. Dialing up AOL requires a long-distance call in most of OneMain's markets. And many regional ISPs "just don't have the capital needed to grow," according to Smith.

To build up OneMain, Smith selected 17 market leaders -- positive cash flow required -- after visiting some 70 candidates during a marathon automobile trip in the summer of 1998. While OneMain has snapped up more ISPs since its March IPO, Smith expects to slow the deal-making and fuse OneMain's various operations under the common brand early next year.

Already, OneMain counts more than 600,000 customers in 29 states. By next July, OneMain.com aims to serve 1 million subscribers. To integrate them, Smith is paring network and administrative costs. "Around March, they will already have moved 200,000 subscribers to new systems," says Youssef Squali, equity analyst with OneMain underwriter

ING Barings

.

Excluding acquisitions, Squali expects OneMain to increase revenue at a 30% annual clip through 2004, both from subscriptions and additional services such as Web hosting.

Still, some clients tell Squali, "Call us when the integration process is complete."

That hesitation is keeping OneMain cheap. Analyst Ted Broomfield with

Soundview Technology Group

calculates that its "enterprise value" per subscriber is $512, compared with $1,482 for MindSpring and $11,120 for AOL. Enterprise value, or market cap minus cash plus debt, gauges future growth against current investments. ISPs often incur debt by building out their networks. (Soundview has acted as banker for OneMain but not for AOL or MindSpring.)

Alan Harris, manager of the

(MNNAX) - Get Report

Munder NetNet Fund , has invested in MindSpring, its merger partner

EarthLink

(ELNK)

and America Online, but not OneMain. Harris says OneMain lacks "a nationwide recognized brand identity," and speculates that investors have treated OneMain differently because they don't understand rural markets as well.

For its part, OneMain is pushing even harder on the rural strategy. Starting in January, subscribers in Bakersfield, Calif., can visit their "hometown Internet" and cruise for high school sports scores, town classifieds and other locally tailored content.

And true to its small-town focus, the company is strong on customer service to keep its customers loyal. OneMain has lost an estimated 2.2% of its subscribers each month -- compared to roughly 2.5% to 5% for AOL, by Squali's count. AOL declined to comment.

Now, if those city snobs on Wall Street would just pay attention.

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