Digital Media

Internet service provider EarthLink has successfully cut its way to profitability.

The Atlanta-based company on Thursday announced it posted a yearly profit of $189.6 million in 2008 compared to a net loss of $135.1 million in 2007.

Despite the profit, the company's annual revenue fell 21 percent to $955.6 million. The company said it had expected the dip in sales as it anticipated the continued loss of dial-up and broadband subscribers. EarthLink ended 2008 with 2.8 million subscribers compared to 3 million in 2007.

EarthLink CEO Rolla Huff started making major cuts to the company's business in 2007, and many of those initiatives were finished in 2008. Top on his hit list was getting out of the citywide Wi-Fi business. EarthLink had led the charge in building Wi-Fi networks that blanketed cities, winning contracts in cities such as Anaheim, Calif., Houston, Philadelphia, and San Francisco. The company has since shut down those efforts. It also sold off its stake in the mobile virtual network operator, Helio, which has been bought by Virgin Mobile.

EarthLink also slashed its workforce by 900 employees and closed offices in Orlando, Fla.; Knoxville, Tenn.; Harrisburg, Pa.; and San Francisco. It consolidated offices in Atlanta and Pasadena, Calif.

The biggest benefit of the cuts is that EarthLink has managed to revive its balance sheet. The company now has $534 million in cash and marketable securities, which should help it stay afloat for some time.

But the cuts also present a bit of a problem for the company. It now lacks any kind of strategic long-term investments. Essentially, the company is riding out the wave of the dial-up Internet business. Huff said last quarter he hoped to consolidate the dial-up business, buying up assets like AOL's dial-up business. But when pressed about a possible acquisition of AOL assets during the EarthLink's quarterly conference call Thursday, Huff said that the company is "not thinking about it anymore."

While there are still plenty of dial-up accounts out there today generating cash for the company, that business is dying on the vine and will eventually go the way of other retired technologies, such as the VCR and the fax machine.

Broadband is clearly the future of the Internet. Cable and phone companies have already been investing heavily in their broadband networks. And wireless operators are also getting their own broadband networks ready for deployment using new 4G wireless technologies. These networks will take time to build and won't be everywhere, but President Obama's economic stimulus package, which is expected to offer money for more broadband deployments in rural areas, could help accelerate a wave of new broadband offerings for people who would otherwise be forced to use dial-up service for Internet connectivity.

All of this leaves EarthLink without a clear growth strategy. Once dial-up dies off, the company has no wireless or fixed infrastructure of its own to offer competing services. And even though cost-cutting has helped the company return to profitability, it won't help solve the company's fundamental problem, which is a lack of future strategy.

Internet service provider EarthLink has turned the corner.

On Tuesday, the company reported profits of $54.7 million, or $0.49 per share, for the third quarter of 2008, compared to a net loss of $79.4 million, or $0.65 per share, during the same quarter a year ago.

The company's revenues were actually down about 22.5 percent, compared to last year. It brought in only $230.8 million, compared to revenue of $298 million in the third quarter of 2007.

EarthLink's financial turnaround comes as a result of massive cost-cutting. The company sold off and shut down two major initiatives this year. First, it exited the citywide Wi-Fi market, leaving cities like Philadelphia with a nearly completed Wi-Fi network, and no one to run or maintain it. A group of investors eventually took over the Philadelphia network.

EarthLink also sold its stake in mobile virtual-network operator Helio. The phone company, which had been a joint venture between EarthLink and Korean cell phone operator Helio, was sold to Virgin Mobile this summer.

EarthLink is now focusing its business on providing broadband and dial-up Internet service. While the dial-up business is dying a slow death, EarthLink's executives still see it as a cash cow. Earlier this year, the company was rumored to be interested in buying AOL's dial-up business to help boost this part of its business.

CNET News senior writer Dawn Kawamoto contributed to this report.

Time Warner has taken a step closer to splitting up AOL's business, The Wall Street Journal reported Monday.

Time Warner is expected to announce Wednesday that it has completed the internal process of separating AOL's dial-up Internet access business from its advertising business, the newspaper said.

Time Warner has been talking about splitting the company into two different entities for a while now. And it's been a main focus of Time Warner Chief Executive Jeff Bewkes, who took over as CEO seven months ago. AOL has long been viewed as a problem for Time Warner, as its dial-up business declines and its advertising business struggles to compete.

Time Warner has been examining several options with respect to splitting up the company, including selling off both pieces of the business or partnering with other companies.

But separating the business hasn't been as easy as it sounds as the company tries to figure out how to divide revenue, staff, and liabilities. Earlier, Bewkes had said he expected to have the process completed by the end of the second quarter. Time Warner will announce second-quarter results on Wednesday.

Once the separation of AOL's advertising-content and dial-up businesses is concluded, it may aid potential suitors like Yahoo and Microsoft in sizing up an offer price.

Yahoo reportedly turned to Time Warner and its AOL division as a potential white knight, after Microsoft .

AOL has continued to talk with Yahoo as the on-again-off-again Yahoo-Microsoft buyout talks plodded along, and later expanded to involve a potential AOL-Microsoft deal.

In the past few weeks, the hubbub of an AOL-Yahoo, or AOL-Microsoft deal has quieted down, following a truce between Yahoo and its investor activist Carl Icahn, who was waging a proxy battle with the hope of pushing Yahoo and Microsoft to do a deal.

And in the latest AOL-Yahoo turn of events, Time Warner nixed any plans for former executive Jonathan Miller to serve on Yahoo's board, citing his no-compete clause.

EarthLink CEO Rolla Huff said last week when the company announced its second-quarter earnings that it is interested in buying AOL's dial-up business. He didn't give specifics, but he said that AOL's 8.7 million subscribers would provide a big revenue boost to the company. EarthLink currently has only 2.2 million dial-up subscribers.

Even though dial-up is a dying business, it still generates cash and a predictable revenue stream, which makes AOL's dial-up business particularly attractive to EarthLink and potentially other dial-up providers.

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.