EarthLink Means Business

EarthLink's acquisition of New Edge Networks positions the company to offer more business services, part of an ongoing trend as ISPs move towards the VAR and integrator market.

by Alex Goldman ISP-Planet Managing Editor [December 14, 2005]

Atlanta, Ga.-based EarthLink announced yesterday that it has agreed to acquire Vancouver, Wash..-based New Edge Networks for $144 million, consisting of $114.3 million in cash and 2.6 million shares of EarthLink stock (NASDAQ: ELNK).

New Edge Networks will be a wholly-owned subsidiary of EarthLink, and EarthLink will retain all 345 New Edge Networks employees including president and CEO Dan Moffat.

At ISP-Planet, we continue to recommend (see Editorial: ISPs Can Survive) that ISPs look to the business market for growth, because the residential market is cluttered with too many large corporations selling bundles in which Internet access is a loss leader and because regulation is hostile to independent ISPs.

ISPs across the nation are agreeing, acquiring business services providers. Next week, we'll be writing about RCN's acquisition of Con Ed Communications. Earlier this year, we told you about Covad's acquisition of WISP NextWeb (see Covad's Acquisition of NextWeb Makes Sense).

EarthLink is pursuing several intriguing business ideas (the company always seems to be trying several different new things at any time). For example, earlier this year, in our article Winning Municipal Business, we wrote about EarthLink's plans to build municipal wireless Internet networks for major cities across the U.S.

EarthLink continues to explore new niche markets for its dialup business. Earlier this year, the company announced its GenerationLink program which enlists high school students to tech seniors aged 60 and over how to use the internet.

A strategy for signing up small business customers
EarthLink is focusing business groups on specific industry opportunities. The New Edge Networks acquisition fits right into the value and small to medium enterprises business unit, whose president is Bill Heys. Heys explains that the value part of the business unit is EarthLink's PeoplePC division. New Edge has no role there.

But Heys' knowledge of the PeoplePC division provides valuable insight into why EarthLink made the acquisition. "20 percent of our dialup is going to broadband every year, and an additional 20 percent is going to value."

In the past, the residential business was so profitable that it was the focus of EarthLink's business. "We entered the business market some time ago," says Heys. "But we were growing so rapidly with our consumer product that we did not have a comprehensive suite of services for business customers."

That had to change, and it will, fast.

New Edge will completely transform EarthLink's small business division. Heys says EarthLink already derives $70 million annually in revenue from its services for companies in the 1 to 5 employee range.

With New Edge Networks, Heys says, EarthLink will now be able to serve companies with multiple locations, from five locations to 1,000. EarthLink will therefore be able to serve large distributed businesses.

EarthLink already had a webhosting business as well as anti-spam and anti-virus products. This year, it acquired Aluria (see EarthLink Goes Security Shopping) to add anti-spyware. Aluria had also started to aim for business customers with its Paladin product.

With New Edge Networks, EarthLink gets a solid VPN product. "VPN is the critical piece we were looking for," says Heys. This year, the company had introduced a VPN powered by Positive Networks. Now EarthLink can use its own VPN product.

More new features
VPN may have been the key feature of the acquisition, but EarthLink gets a lot more. Moffat of New Edge Networks explains that the company has built APIs that interface with the systems maintained by the carriers. The result is simple and elegant. "We can provide connectivity at any business address in the United States," says Moffat. "We call it our 'big foot' coverage area."

So now you know, the sasquatch lives near Vancouver, Wash.

New Edge Networks brings services worth $120 million in annual revenues to a department that had $70 million in business services revenue, nearly tripling the department in revenue terms.

New Edge Networks has focused on building facilities in areas not covered by the major carriers. Jim Wagner of internetnews.com reports (see EarthLink's New Edge) that Heys sees New Edge and EarthLink as complimentary, with EarthLink focusing on the cities and New Edge focusing on serving tier 2 and tier 3 areas.

CISPA has pointed out that after SBC acquires AT&T and Verizon acquires MCI, there will be a duopoly in the enterprise services market (see Group Blasts Verizon-MCI Merger).

But Heys sees a role for EarthLink at the periphery of the duopoly. "Although the big company market is covered by AT&T and MCI, even they need help when they get into smaller markets. At that time, they come to New Edge Networks."

But is it worth it?
EarthLink appears to have a good deal, having paid barely more than 1x revenue for New Edge Networks. But EarthLink is explicitly not shedding costs after the acquisition. In purely financial terms, a close alliance might have been cheaper than an acquisition.

On the other hand, this isn't about acquiring revenue (although revenue is nice). EarthLink is buying skills it lacks. If, as we believe, business skills are the key to the ISP future, then this acquisition is the right move. The true challenge lies ahead for EarthLink.

The company is entering several business areas it never competed in. If it can do so successfully, the company will have a bright future, but none of its plans are easy. In that context, retaining the staff of New Edge Networks is a very good move. EarthLink needs their skills.

EarthLink needs to compete in the business market in addition to continuing to compete in the residential market. EarthLink needs to execute, and to execute well. Unlike some of its competitors, it has strategic vision.

Next year, keep an eye on this company. It will do many interesting things. Some may fail and some may succeed. The one thing EarthLink will not do in 2006 is stay the same.

The ISP industry is changing. and EarthLink provides one example of how to make the change. Whether the object lesson is to be about success or failure is the drama that starts now.

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