Layoffs Necessary for EarthLink’s Survival, CEO Says

A day after struggling Internet service provider (ISP) EarthLink announced a major restructuring, the company’s leader said the decision to lay off about 900 employees was painful to make but necessary if the Internet pioneer is to survive.

The cost cuts announced Tuesday should help the Atlanta company stay afloat, EarthLink President and CEO Rolla Huff said Wednesday. However, slashing the workforce by nearly half is not a decision he made lightly, he said.

“While I am confident we made our company stronger yesterday, it was incredibly tough for our company, for our people and the communities we operate in,” Huff noted. “EarthLink has been blessed with a group of talented people, so it made these reductions incredibly difficult for us.”

Stopping the Churn

Nevertheless, the cuts in payroll and other areas are necessary for EarthLink to survive, said the CEO. The company can no longer afford spending large amounts of money and effort trying to court new, but “marginal” customers, he added. Too many of these customers end up leaving after a short time, said Huff, so EarthLink will now focus on acquiring “more tenured customer bases” if doing so can be accomplished at reasonable cost.

“The marginal subscriptions we’ve been spending a substantial amount of our resources on to acquire are providing little or no value,” Huff commented. “It’s important to note our future focus will not be driven by subscriber counts.”

Smarter About WiFi

Instead, EarthLink hopes to right itself by “scaling the overall business in other ways,” he said. Although the company will not abandon its foray into municipal WiFi, it will not continue those efforts in the same fashion.

EarthLink is “repositioning the WiFi business” in an effort to increase its value “without the high cash spend” it has been incurring, Huff noted. “I believe there are several constituencies with a vested interest in seeing it (municipal WiFi) exist,” he said. “Whether its the municipalities, the chipset makers or even the WiMax (Worldwide Interoperability for Microwave Access) providers, there’s a desire to see WiFi networks exist today.”

However, “no one player will be willing to front all the capital required to make this a reality,” he said, adding that success in the municipal WiFi market will require a “broader sharing of cost.”

That said, EarthLink has carved a niche, Huff said.

“If I’m right, there could be a real upside since we are the industry leader,” explained the CEO. He hopes to be able to scale upwards the municipal WiFi networks EarthLink has already built, such as in Philadelphia, but it will not “devote any new capital to the old model” which, he said, had EarthLink “taking all the risks” to not only front the capital but to also acquire customers.

Rock and a Hard Place

It was almost inevitable that EarthLink would find itself in its current situation: being squeezed out of business by cable and telephone companies that control the infrastructure needed to distribute broadband, said JupiterResearch analyst Barry Parr.

“There are a couple of things going on here, obviously,” Parr told the E-Commerce Times. “One is that Internet networks are not open and the people that own the pipe are basically controlling access to it. At the end of the day, the ISP business is so capital intensive that it was bound to be a concentrated business anyway. It was just a question of who was going to wind up controlling it.”

Different Routes to Success

Indeed, EarthLink was at a competitive disadvantage, noted Enderle Group Principal Analyst Rob Enderle.

“The problem is the folks they are competing with actually own more of the tools they are using to compete,” Enderle told the E-Commerce Times. “EarthLink, which prospered during the dial-up years, is being killed by broadband. It did try to get creative with mesh WiFi networks to get around the problem, but the cost was excessively prohibitive and, in hindsight, it should have tried to drive WiMax instead exclusively.”

Another way EarthLink tried to survive was investing in Helio, a wireless provider. The company is not giving up on that effort, according to Huff. Enderle believes the Helio business “was simply doomed in that they did not have the resources to transform their core revenue to broadband and launch a cell phone service successfully even though the service, and unique phones, actually turned out to be surprisingly good.”

Again, EarthLink found itself without the money needed to compete in a market dominated by larger players, Enderle noted. “So, right now, EarthLink appears to lack the resources they need to jump technologies,” he said. “Their best path is to find someone who wants to buy their user base and is in a position to deliver on the WiMax future or take these customers to more traditional cable or DSL services.

To longtime Internet watchers, the slide of EarthLink brings a tinge of sadness. EarthLink was a pioneer in the Internet explosion and enjoyed a good reputation in a market that was filled with less-respectable ISPs.

“It’s unfortunate that EarthLink wasn’t one of those companies [that controlled the broadband pipelines],” said Parr. “They definitely had a good reputation in a business where most of the service providers are disliked by their customers.”