Prodigy Losses Continue

Short-term subscriber gains are not enough to take the tiresome national ISP out of the red and into the black, but low customer turnover may save Prodigy in the long-term.

by Jim Wagner of internetnews.com [October 27, 2000]

New headquarters, its continued integration with SBC Communications, Inc. and FlashNet Communications, Inc., and shifting away from low-profit dial-up services eroded Prodigy Communications Corp.'s third quarter results announced Friday.

It's net loss for the quarter was nearly $63 million, or 90 cents a share, as the Internet service provider looks for solutions to reverse the substantial negative cash flow it's incurring.

The Internet service provider did, however, see an increase in its subscriber base, gaining about 100,000 new dial-up and 92,000 digital subscriber line subscribers in the third quarter.

Low churn
With 2.7 million overall subscribers, Prodigy would seem to be the eighth largest ISP in the nation, surpassing Excite@Home's 2.3 million customers. However, Prodigy includes in its subscriber base the 527,000 subscribers through Mexico-based incumbent local exchange carrier TelMex, a Prodigy partner.

The ISP's churn rate continues to be a bright spot for the company. It's DSL division lost only between 1.5-2 percent of its customer base, largely due to legacy SBC users. Dial-up churn rates are at about 1.4-1.9 percent.

It's the company's first full quarter under the leadership of former SBC vice president Charles Roesslein and an almost completely revamped board of directors, which now includes two members each from Telmex and SBC.

DSL desires
Charles Roesslein, Prodigy's current co-chairman, president and chief executive officer, said his company is shifting its focus to capture the lucrative DSL marketplace.

"Strong demand for high-speed Internet access is the driving force behind our DSL strategy," Roesslein said. "Our subscribers to date demonstrate that we remain the primary provider of DSL service to the residential and small business markets. Our goal for year-end is to reach approximately 500,000 owned and managed DSL subscribers."

Prodigy, with its 338,000 DSL customers garnered mainly by SBC, is by far the largest provider of high-speed DSL services in the nation. Its only competition comes from rival Covad Communications Group, which has 205,000 subscribers.

Cost of operations
According to officials, the cost to do business with dialup customers is becoming more than it is worth. Dialup access has plateaued for the moment and, as such, plans to switch gears to accommodate the DSL industry.

But its cash flow problems could erase any gains the company is making with DSL acquisitions. To roll out DSL service, the ISP is going to incur heavy losses integrating the higher network costs associated with DSL service.

Prodigy's line of credit, which stands at $54 million, is expected to last them through the end of the year and into the first quarter of 2001. After that, the ISP is banking its hopes on long-term financing from its shareholders.

Allen Craft, Prodigy executive vice president of finance and chief financial officer, said the ISP is working with SBC on a "most favored nation" basis to help ease the financial pain.

"For every DSL customer we bring in, a $75 bounty goes to SBC," Craft said. "We've made arrangements so we don't have to pay the bounty up front, but will break the cost out over three years."

Prodigy already gets breaks from SBC in the form of line sharing discounts. A DSL line costs the ISP $30 for the line and layer 3 services. And despite SBC troubles with DSL rollout, Craft is confident the ILEC can turn it around.

Subscriber plans
"We're still estimating to have 500,000 DSL lines out by the end of the year, we're very comfortable with that number," Craft said. "(The SBC) tells us they're committed to make sure that happens. They may be having problems with rolling out lines for us but they're working on it and they've made significant progress."

Prodigy acquired more than 200,000 new subscribers with its late-May acquisition of FlashNet Communications, Inc. In June, SBC bought a 43 percent ownership stake in Prodigy, moving its residential and small business Internet services to the popular bilingual ISP. SBC also moved its newest acquisition's base of operations from New York to Austin, TX.

—End