Will Earthlink Spinoff Muni WiFi Biz?

Earthlink is playing a high stakes game of poker. At stake – beleaguered Atlanta-based ISP’s future. Its two big bets – cellular MVNO and muni wireless networks. Both are costly mega-million dollar investments. It has already carved out one (Helio) and raised outside capital from SK Telecom. Could its muni networks division be next, with a big cash infusion from outside investors?

It should have been quite a day for Earthlink. It wasn’t.

The stock ended down for the day, despite what seems to be good news. The company made a joint bid to San Francisco-wide wireless network along side search and online advertising giant, Google. The two companies, would offer two tiered service – a slower free version by Google, and a for-fee but higher speed (1 megabit per second) service by Earthlink.

On surface seems to be a great partnership. Earthlink takes out one of its biggest rival, and the joint bid is enough to calm the nerves of bureaucrats that always favor brand names. (Google, of course doesn’t have to worry about managing the network or those pesky headaches.) The bid to build-and-operate a municipal wireless network is one of the four strategic moves being made by Earthlink to grab a tiger called broadband by the tail.

Like America Online, Earthlink has been in a desperate fight to make itself over, using any and every broadband technology. Broadband over powerlines, Fixed Wireless, MuniWireless, Broadband MVNO, and Voice over IP – anything to get off its dependency on incumbent – DSL or cable – access pipes.

These are expensive initiatives that come at particularly harrowing time for the company. According to its most recent earnings statement, the company is losing premium dial-up customers who are switching to cheaper People PC offerings or to broadband. The broadband business’ profits are taking a toll, because of increased competition and costs. (I bet the incumbents are squeezing blood out of a stone here.)

During the fourth quarter of 2005, EarthLink maintained its position as the fastest-growing value narrowband ISP by adding 104,000 net PeoplePC Online subscribers, added 63,000 net broadband subscribers in the quarter. EarthLink continued to manage the decline of its premium narrowband subscriber base, which decreased by 174,000 net customers during the quarter….. Broadband revenues were $111.4 million, an increase of 4.9 percent over the prior year quarter, resulting from the growth in broadband subscribers partially offset by a decline in overall broadband average revenue per user.

The company essentially forecasted a flat revenue outlook for 2006, at about $1.3 billion. In the first quarter of 2006, the company is expecting an increase in its expenses, mostly due to “the expected municipal Wi-Fi market introductions in Anaheim, California and Philadelphia.” The new initiatives are going to cost between $75 million to $100 million.

“Its most profitable business is in decline … and it’s going into areas where it is late to market and has a lot of competition from some well-capitalized firms,” said analyst Jim Friedland at S.G. Cowan & Co. brokerage in San Francisco. “The company wasn’t in dire straits last year, but it’s not necessarily in better shape this year.”

Earthlink is currently planning WiFi networks in five cities, and the total cost of building networks in these cities will be in the $50 million range, according to informed industry insiders. Municipal Wireless is the easiest way for Earthlink to get out from under the yoke of large incumbents, and it has no option but to aggressively chase these opportunities. And to turn it into a viable business, many think the company needs to play in at least 20 cities, including some NFL towns.

Twenty cities at $10 million per, could put them in the $200 million capital expenditures. [ Great news for Tropos Networks, which has become a key supplier of WiFi gear for some of the major players in the Muniwireless marketplace – including Google (Mountain View) and Earthlink (Philadelphia, and Anaheim.)

While the company has ample cash on hand, the problem will not be funding it, but explaining it to Wall Street. Its core business is that of an ISP, which gets a certain specific valuation. The muni wireless effort is “access business” with a different valuation metric. Earthlink, which is running the muni wireless business as a separate division under, Don Berryman. By carving out this business, the company could easily tap outside capital for expanding its muniwireless business.

It certainly has past history of spinning out businesses. Helio, their MVNO was spun-out and has received backing from SK Telecom of South Korea. So why not Muni Wireless Business? In recent days I have heard fleeting rumors about Earthlink spinning off the muniwireless business as a separate entity, including an investment from a big investment bank.

I asked the question to Earthlink spokesperson Jerry Grasso and he said, “It is still a fully functional unit at Earthlink.” I tried to press him for answers, but he denied any immediate plans. He refused to give any details, on the Google-Earthlink joint bid as well. (I have an inkling how that deal is structured, but cannot confirm the details.)

I guess, we will have to wait for the analyst day tomorrow in New York to get a clearer picture on the future of muni networks business. The conference call starts at 8 am tomorrow morning. And that’s just a few hours away!