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EarthLink's Latest Earnings Underscore Need For Change

EarthLink Inc., the nation's second-largest Internet service provider, announced Tuesday a net loss of $41.3 million, or 33 cents a share, in the third quarter.

The third quarter results underscore the ISPs desire to satisfy customer demand for broadband Internet and the riches guaranteed to those who can provide said service.

Low consumer awareness of the EarthLink service, competition by other major ISPs, and a continued drop in new dial up subscribers are seen as contributing factors in the company's third quarter losses.

Garry Betty, EarthLink chief executive officer, said it's hard to get new dial up customers when companies like America Online Inc., and Microsoft Network are throwing money away to get subscribers at the retail level.

"Studies show that 40 percent of all PCs being bought are with the $400 rebate programs from Microsoft and AOL trying to sew up and capture the retail market," Betty said. "That takes away potential customers we might have otherwise gotten. They're also giving a year's free service to manufacturers who bundle their browser with the computer. We plan to stick our toes in the water with retailers in the fourth quarter, but only in areas where we can compete.

"The problem is, we aren't considered top of the line by potential customers," Betty continued. "To address that, we've hired a new ad agency to roll out a marketing campaign. We find that our conversion rate with people who try out our service is much higher than our competitors."

And although there has been a steady decrease in the costs associated with providing dial up services, there may not be much money in marketing for new subscribers. EarthLink finished the third quarter with 4.3 million subscribers, an increase of 546,000 dial up accounts. Much of that, officials said, came from the completion of its acquisition of OneMain.com in September.

But officials expect little to no marketing-driven dial up subscriber growth in the fourth quarter. As such, EarthLink is only devoting 10 percent of next quarter's $130 million marketing budget to it dial up division. Instead, the ISP plans to increase its subscriber base through buyouts of smaller ISPs.

"Right now we're wrapping up our OneMain.com integration, which should be completely integrated into the EarthLink platform by the end of the first quarter 2001, in April," Betty said. "We will continue to look at acquisition of smaller ISPs to gain dial up customers, which is the easier way to go, as the cost for acquiring subscribers keeps going down."

The lion's share of the Atlanta-based company's marketing budget will go to its digital subscriber line division, which saw 59,000 new broadband customers in the third quarter. The total of 139,000 makes EarthLink the fifth-largest DSL provider in the nation, behind SBC Communications Inc., Prodigy Communications Corp., Verizon Communications and US West.

The ISP expects the fourth quarter to show an even bigger increase in DSL subscribers, as its provider partner Covad Communications Group Inc., institutes its self-install setup, supposedly next month.

Betty reported that the nearly 25 percent of new broadband customers use the splitterless solution now will increase to 50 percent when that happens. EarthLink currently has a backlog of 50,000 customers waiting for DSL setup.

It's a whole new environment, Betty said, the experience broadband users get as opposed to dial up service. According to internal tracking, EarthLink reports an average of 40 hours a month spent online by dial up users. Active broadband users are averaging a whopping 150-200 hours every month.

"The reality is, when you have instantly available Internet access, people use it differently," Betty stated.