EarthLink's Shake-Up Man?

Networks
EarthLink's Shake-Up Man?
Dan Frommer, 06.26.07, 6:00 AM ET

EarthLink has a new boss: The Internet service provider named Rolla P. Huff president and chief executive Monday. Shareholders of the money-losing ISP will appreciate his investor-friendly mantra--cash, cash, cash. But with many hurdles looming, it's not clear how he will return the company to profitability, and a shake-up could come next.

Huff, who previously ran regional phone and Internet provider Mpower Communications, replaces interim chief Mike Lunsford, who stood in for long-time chief Charles "Garry" Betty, who died in January. Huff takes the helm of a company that thrived selling dial-up Internet access in the dot-com heyday, survived the bust, and is now one of the largest nationwide ISPs, with more than 5 million subscribers and $1.3 billion in 2006 revenue.

But he joins EarthLink (nasdaq: ELNK - news - people ) with many challenges. Last quarter, the company lost $30 million on $290 million of revenue. Its hottest investment, "virtual" wireless carrier Helio, is burning through cash. Its business installing citywide wi-fi hot spots faces numerous competitors. And its older business lines, like dial-up Internet access, are a dying breed, while subscriber numbers are flat.

"I'm not ruling in or ruling out any of the things that we're doing now," Huff said.

Helio, a joint venture with Korean wireless giant SK Telecom (nyse: SKM - news - people ), could be first to see Huff's ax. The company, run by EarthLink founder Sky Dayton, re-sells access to Sprint Nextel's (nyse: S - news - people ) cellphone network, adding custom, youth-focused services like a music video store and access to News Corp.'s (nyse: NWS - news - people ) MySpace portal.

For these services, Helio charges a healthy premium. Last quarter, its nearly 100,000 subscribers spent, on average, $90 to $100 per month on service, much more than the industry average.

But it appears the upstart carrier will need to grow much faster to become profitable: Last quarter, Helio lost $63 million on $30 million in revenue. It must compete with large, nationwide rivals like AT&T (nyse: T - news - people ), Verizon Wireless and Sprint Nextel for customers, each with more than 50 million subscribers, many of whom are locked into two-year contracts or family plans.

As of April, EarthLink expected to invest another $50 million to $100 million in Helio. But beyond that, Chief Financial Officer Kevin M. Dotts said, "subsequent investments would likely be made by third parties." And similar companies haven't fared well: Amp'd Mobile filed for bankruptcy on June 1, claiming it couldn't keep up with "rapid growth." And the Walt Disney Co. (nyse: DIS - news - people ) shuttered its Mobile ESPN service last fall.

"Helio is a very cool product," Huff says. But, he adds, "at the end of the day, I've got to be convinced that every line of business is on a path to create cash flow."

Same goes for EarthLink's other newish business: building citywide wi-fi networks with partners like search giant Google (nasdaq: GOOG - news - people ). So far, EarthLink has built networks in cities like New Orleans, Philadelphia and Corpus Christi, Texas. Consumers like the idea of low-cost, wireless Internet access across town. But bureaucracy has gotten in the way of some proposed installations, and new competitors have emerged: last November, Microsoft (nasdaq: MSFT - news - people ) said it will go after the metro wi-fi market, sponsoring a network in Portland, Ore.

Meanwhile, the citywide wi-fi model faces competition from telcos and cable companies, which deliver more bandwidth through a wire than wi-fi can supply through the air, and a new type of wireless network called WiMax, which has greater service range than wi-fi. Sprint Nextel hopes to reach 100 million people with its WiMax network by the end of next year, and rival Clearwire (nasdaq: CLWR - news - people ) recently struck a deal to sell its wireless broadband alongside satellite TV giants DirecTV (nyse: DTV - news - people ) and EchoStar (nasdaq: DISH - news - people ).

That doesn't leave EarthLink with much. At the end of last quarter, it had 5.3 million customers, including 3.3 million dial-up subscribers. The company has a solid broadband business, selling digital subscriber line (DSL) access through phone lines and cable Internet service through Time Warner Cable (nyse: TWC - news - people ). One especially bright point: selling broadband access to corporations. That segment grew more than 500% year-over-year by subscriber count, with business subscribers' average monthly bills soaring from $33.25 a year ago to $73.32 last quarter.

But overall, EarthLink lost 42,000 more subscribers than it gained last quarter, and consumers' average monthly bills fell 70 cents to $18.13. Huff has his work cut out.