EarthLink caught in Sprint merger limbo

NEW YORK--The $129 billion merger between Sprint and MCI WorldCom this week has cast a shadow over the future of Internet service provider EarthLink Networks.

EarthLink's most successful marketing agreement to date has been its relationship with Sprint, which owns about 14 percent of the company. But federal regulators now say they intend to take a close look at the Internet holdings of both MCI WorldCom and Sprint. If the combination threatens to reduce competition, regulators could force Sprint to sell some or all of its Net business.

The multibillion-dollar deal comes as EarthLink makes its own strategic moves, merging with competitor MindSpring Enterprises to form the second-largest national ISP.

Most analysts say federal regulators will make Sprint sell its lucrative Internet backbone business, much as MCI had to sell off its Internet assets to merge with WorldCom. But EarthLink's position in that review is still a wild card.

At the time of its own merger with WorldCom, MCI operated its own, mildly successful consumer Internet service. For its part, Sprint has just a small interest in EarthLink and a marketing agreement with the ISP. It's a unique relationship that EarthLink executives don't think the company will need to sever.

"I would think [Sprint's stake] would be de minimus enough that the FCC wouldn't care one way or the other," said Bill Heys, EarthLink's senior vice president of sales.

On the other side of the equation, MCI WorldCom has tried to revitalize its own consumer dial-up ISP after selling its original business to Cable & Wireless. But the service to date has had mixed success, and would not pose much threat to the dial-up industry at large, some analysts say.

"[The service] hasn't done anything. It's a non-starter," said Bruce Kasrel, an industry analyst with Forrester Research. "MCI has been a reluctant consumer marketer."

Nevertheless, recent comments from FCC chairman William Kennard indicate the commission will scrutinize all aspects of the two companies' Internet divisions

"American consumers are enjoying the lowest long distance rates in history and the lowest Internet rates in the world for one reason: competition," Kennard said earlier this week. "This merger appears to be a surrender. The parties will bear a heavy burden to show how consumers would be better off."

Sprint originally bought 28 percent of EarthLink shares in 1998, and agreed to send customers to EarthLink for ISP services. But when MindSpring and EarthLink decided to merge late last month, that stake was cut in half. Yet Sprint holds the right to boost its stake back to 28 percent at a later date if it chooses.

Heys says the relationship is still strong, as Sprint is far exceeding its customer goals. Sprint agreed to send 150,000 customers a year to EarthLink for Internet service over five years. The company hit its year goal in the first 6 months of 1999, Heys said.

The success has obviously helped cement the relationship between the two companies.

"The reason I'm not uncomfortable about this, is that even if Sprint was forced to sell its assets, it could keep the EarthLink marketing arrangement in place," Heys said.

Analysts note that if the combined WorldCom is allowed to keep its relationship with EarthLink, the ISP could become a potential takeover target for the newly created telecommunications giant.

"MCI doesn't have a very strong Internet play. I would think they'd want to keep the relationship in place, since they don't have anywhere else to send [subscribers]," Kasrel said. "It's possible that [EarthLink] could then become an acquisition target. It's even likely."