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EarthLink to Expand in Telecom With Wireless Data Services

Posted on: Wednesday, 26 January 2005, 21:00 CST

A $440 million partnership between EarthLink and SK Telecom will sell wireless data services along with the eventual ability to deliver music, games and video to high-end cellular telephones.

Oh, and you'll be able to make cellular voice calls, too.

The partnership, announced Monday, created a joint venture called SK-EarthLink. It gives South Korea-based SK Telecom a foothold in the American market, and the Atlanta-based Internet provider gets a strong partner to enlarge its presence in telecommunications.

The goal isn't to compete with mass-market cellular giants like Cingular or Verizon, said Brent Cobb, EarthLink's vice president of wireless.

The venture will target two market segments: professionals who are already heavy users of voice and data services, and what Cobb called the "vanity market" of customers who one-up each other with advanced cellphone features. Cobb said such customers should be willing to pay a premium price.

EarthLink already has a toehold in the cellular voice and data business, offering a service mostly to owners of BlackBerry devices that combines voice calling with the ability to use the Internet. The 30,000 customers for that service will immediately be served by the joint venture. The first of the new services should be available by year-end.

By 2009, the two companies expect the venture will have a nationwide business with 3 million customers -- still a drop in the bucket compared with the approximately 49 million subscribers to Cingular, the largest U.S. cellular provider.

SK-EarthLink expects those 3 million customers to produce revenue of $2 billion by 2009. That's a significant boost for EarthLink, said Michael Grossi, senior vice president at the Adventis analyst firm in New York.

"If you assume that (EarthLink's) core Internet business will be about $1.5 billion in 2009 ... then the $2 billion in revenues will basically mean that it doubles the size of the company in just five years," Grossi said. "That's why this is so attractive."

The venture plans to eventually offer music that can be downloaded and played on the phone, downloadable videos, or even telephones that can pinpoint the locations of nearby friends.

Those features are why the joint venture will succeed, said Garry Betty, EarthLink's chief executive.

U.S. wireless customers are "underserved by existing voice-oriented wireless operators," he said.

But conventional cellular companies already offer many data services, said Jeffrey Kagan, a Marietta-based telecom analyst.

"The major networks are all tuning up their speed, pictures, video, TV, with everything coming across the phone," Kagan said.

"How is this different? And they (the venture) are going to use existing wireless networks, so if this new company can offer these services, the actual carriers can offer it, too."

Kagan was referring to the fact that the joint venture will not own the networks it uses. Instead, it will buy network services.

EarthLink spokesmen declined to identify the carriers it will use, but Kagan said past relationships suggest Verizon and Sprint are likely suppliers.

EarthLink and SK will each have 50 percent ownership. Each company will appoint three members to SK-EarthLink's six-person board. The venture already has nearly 70 employees and plans to have 100 by year-end. Spokesmen declined to say where its headquarters will be located.

Cobb, who will become a senior executive with the venture, said about $180 million in cash came from EarthLink and $220 million from SK Telecom, with $40 million of the investment non-cash.

He said the venture will go after the "BMW side of the market ... we will charge more than most of the carriers."

Cobb said a typical monthly bill for voice and data services might be $50 from other carriers. He speculated it might be around $70 from SK-EarthLink.

He said the convenience of a bundled Internet and cellular bill, along with EarthLink's experience in stopping spam e-mail, viruses and spyware, will help make the premium palatable.

Despite Kagan's reservations, he noted that while the 3 million customer target "is a small number for a telephone company, but -- as an add-on service to an ISP -- it is respectable, especially if they (subscribers) are big spenders."

Kagan said "traditional ISPs are not going to grow unless they expand into places like phones and television. Cellphones are a natural addition for a certain customer segment."

Sky Dayton, EarthLink's founder, will be the chief executive of the joint venture.

EarthLink's stock closed at $10.43, up 15 cents in Wednesday's trading.

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Source: The Atlanta Journal and Constitution

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