EarthLink is interested in AOL's dial-up biz

Internet service provider EarthLink could be interested in buying AOL's dial-up business, its CEO told The Wall Street Journal in a story published Wednesday.

EarthLink CEO Rolla Huff first brought up the idea of EarthLink buying AOL and other dial-up providers during the company's quarterly conference call Tuesday.

"We believe we're best-positioned to be the consolidator in this industry," Huff said during a conference call with analysts.

The news has spurred a flurry of speculation that EarthLink is looking to buy Time Warner's AOL. Huff wouldn't comment specifically on whether his company has had talks with Time Warner. But in an interview he told The Wall Street Journal that merging AOL's dial-up business with EarthLink's would create cost savings for the company and better service for customers.

"We think it's worth aggressively pursuing," he told the newspaper.

Huff also told the Journal that any discussion with Time Warner over the fate of AOL would be affected by talks between Microsoft and Yahoo.

It's no secret that Time Warner wants to get out of the AOL dial-up business. The company was previously in discussions with Yahoo to sell AOL and take a stake in the company to help thwart Microsoft's takeover bid.

But ditching AOL's dial-up business hasn't been easy. AOL and EarthLink, which each are considered pioneers in the Internet access business, have suffered sharp subscriber declines over the past few years as more Internet users migrate to faster-speed broadband networks. With more than 90 percent of active Internet users today connecting to the Net via broadband, it's safe to say that dial-up is dying.

That said, it's been a slow death. And EarthLink executives have been quick to point out that despite being yesterday's technology, dial-up still generates a lot of cash. And even though there isn't much of a future left in dial-up, EarthLink has decided to ride it to the end.

As a result, the company has spent the past year dumping other, riskier businesses such as its citywide Wi-Fi business and its stake in the wireless mobile virtual network operator Helio. It has also shed about half its staff.

The reorganization of the company has propped its stock up about 30 percent over the past year. And EarthLink's aggressive cost-cutting has had a positive effect on earnings. For the second quarter of 2008, the company reported a profit of $52.2 million. This is compared to a loss of $16.3 million a year ago.

But these profits come as revenues fall due to subscriber losses. For the second quarter, EarthLink reported revenue dropped 21 percent to $245.6 million. The company also reported a 30 percent drop in dial-up subscribers, bringing the total to 2.2 million. And it said that it ended the quarter with 1.1 million broadband subscribers, a 9 percent decline from the previous year.

Huff is interested in acquiring dial-up customers as a way to boost revenue, he told the Journal. But even if EarthLink buys AOL's dial-up business or the dial-up business of other providers, such as United Online or MSN, the company will eventually have to face the reality that dial-up is going away. It might not happen this year or next year, but it will happen eventually. Think of cassette tapes and VHS video tapes. You might be able to find some stores that still carry them, but for the most part, the industry has moved beyond these technologies and it's obsolete.

This means that EarthLink will have to find other sources of revenue and other businesses to enter. The trouble is that EarthLink has tried this once before when it entered into the citywide Wi-Fi market and invested in Helio. But now it's abandoned those initiatives. So what's next? It's hard to say. But one thing is certain. EarthLink will likely have a tough road ahead of it as bigger, stronger players like Google also move into new Internet-based markets.

[JCPayne]

So does that mean Earthlink would buy AOL's CompUserve ISP as well?????

[JCPayne]

ELNK could always enter into ClearWire too....

[naterandrews]

Buying your way into a declining market makes no sense; not matter how small the premium paid. Yes, the technology and underlying access tech is mature but where is the value to keep customers coming back for more?

I think that these new talks may have been spurred by AOL's recent rate hike- a move that they were hoping would drive off some users. Why? Because they are an advertising company now- and you can push large Flash Ads down a narrowband pipe. AOL has maximized the value from the dial-up business and is now looking to reap one last profit gush from it as Earthlink becomes a dinosaur- unwilling to move forward to potentially more profitable and expansive areas.