and general manager of the Kansas City Chiefs, to pass the word to Sprint Chairman William Esrey, another Peterson buddy, that EarthLink was looking to do a deal.
Esrey liked the idea and set the wheels in motion for a meeting between top EarthLink and Sprint execs, which took place in Sprint's Kansas City, Mo., headquarters on Halloween. Within a month, Esrey and top Sprint Internet managers were in Dayton's office finalizing negotiations, and the deal was announced Feb. 11 of this year.
"They had the scale we were looking for and the strategy and direction right in sync with where Sprint wanted to go," says David Owen, Sprint's Internet marketing director. " #91;Sprint] customers will be very happy because they'll get a better product than what we provided and equal to one we thought it would take us 12 to 18 months to get to."
Sprint will pay $4.2 million for 10 percent of EarthLink stock, extend it a three-year, low-interest $100-million credit line and become EarthLink's third access provider. Sprint will also hand off to EarthLink its 130,000 Sprint Internet Passport customers. Sprint promises to deliver another 750,000 customers over the next five years through a joint marketing program.
In exchange, Sprint also picks up 4.2 million restricted, nonvoting shares (in addition to EarthLink common shares), giving it an aggregate 30 percent stake in the ISP, as well as two seats on EarthLink's board, to be filled by Esrey and Patti Manuel, head of the $14.8 billion company's consumer long-distance division.
Once the deal closes, Sprint's 2,000-person telemarketing staff will pitch "EarthLink-Sprint" Internet access to long distance customers and prospects. Beginning in the fourth quarter, EarthLink-Sprint Internet access will be featured in Sprint TV commercials, possibly including those starring celebrity pitchwoman Candice Bergen.
Analysts expect additional subscriber revenue from the deal to kick EarthLink's operations into the black by year-end. But because EarthLink will write off an undisclosed amount of goodwill associated with assets exchanged in the pact, the company will continue to show a net loss for another two years, analysts and company officials predict. In the quarter ended March 31, EarthLink lost $6.4 million on revenue of $29.2 million, compared with a $8.4 million loss on revenue of $15.7 million in the same period last year. In 1997 EarthLink lost $29.9 million on revenue of $79.2 million, compared with a $31.1 million loss on revenue of $32.5 million in 1996.
To keep up with its growing customer base, EarthLink has invested more than $23 million in a 10,000-square-foot data center at its year-old Pasadena headquarters, which can handle the needs of up to 3 million subscribers. EarthLink's customer-support department is in perpetual hiring mode, and the department accounts for 600 of the company's 1,000 employees.
Ultimately, the big winner in the deal could be Sprint, which had been a distant third behind competitors ATT (T) and MCI in the consumer ISP business. As part of their agreement, Sprint could buy EarthLink outright at the end of 39 months, if the companies agree on a price. Sprint officials refuse to speculate on the likelihood of such an acquisition.
"It's a great scenario for Sprint," says Forrester's Delhagen. "Two or three years from now if they realize owning Internet customers is a valuable proposition - whether they make money or it's a feeder for their core [long-distance] business - that's a lot of customers for Sprint."
But some question whether Sprint is up to the challenge. "I don't think [adding 150,000 subscribers per year] is a large threshold to meet. From what they've done in #91;the last] 18 months, they have to be more serious," says Joe Bartlett, a Yankee Group (dossier) analyst.
Expect to see EarthLink announce more marketing partnerships in the coming months. EarthLink recently unveiled a marketing pact with the Discover Card unit of Morgan Stanley Dean Witter (MWD) to offer cobranded Internet access to 30
