22nd November - EarthLink dove head first into landing deals for municipal Wi-Fi projects over the past few years. Some of the company’s conquests have included contracts for Philadelphia, San Francisco, Milpitas, and New Orleans. Now, Earthlink is beginning to rethink its aggressive plan to get into the Wi-Fi business.

What has changed is that Earthlink is losing money due to customers abandoning EarthLink’s Internet dial-up service. In the third quarter, the company reported a net loss of US$79.4 million. Since the company has continued to lose money, the company’s leadership is looking for ways to stop the bleeding. The company has already made decisions to cut its headcount by 50% and to stop further investment in the joint venture it opened with SK Telecom, called Helio. Now further investment in Wi-Fi is on the chopping block.

According to Rolla Huff, Earthlink’s CEO, the company has not been able to find a business model around offering broadband through Wi-Fi that has economics that are compelling. He said in Earthlink’s third quarter conference call last month, “It’s not clear that we’re going to ultimately find a business model that will work.” As a result, the company announced it was cutting its expenses in its Wi-Fi program, which includes costs related to the companies expansion of products and “footprints” related to Wi-Fi.

It’s no wonder why EarthLink was initially all for moving into the wi-fi business. EarthLink saw it’s dial-up business slowly being eroded away as more subscribers moved over to broadband solutions. Therefore, EarthLink had to diversify its business. Earthlink knew how to be a service provider so when there was a big movement among municipalities to create wi-fi networks EarthLink saw it as a business opportunity.

The only thing I believe the EarthLink executives at the time had not considered was how to make money by offering wi-fi. It’s clear the company finally figured out that it was dumping money into a wi-fi program that didn’t clearly have the financial potential it thought it once had. So, EarthLink did what any good business would do when there is a leak in the dam. They plugged it up by killing future investment in wi-fi until they figure out how to make money at it.

Though there weren’t any definitive plans mentioned I wouldn’t be surprised to hear about EarthLink selling off all of its wi-fi assets and getting out of the wi-fi business. The sale would enable EarthLink to get some cash, which it could really use right now. I also wouldn’t be surprised if EarthLink also ultimately sells its stake in Helio, if the company believes it will make a decent profit off of it. Of course, that would mean that its current equity stake in Helio would need to quit depreciating. As of the third quarter, their equity loss in Helio made up US$41.9 million of the US$79.4 million net loss the company reported.

Based on comments by EarthLink’s executives I think the company is still trying to find its way in the new landscape that no longer includes a profitable business in offering dial-up Internet service. I think the company is focusing on what it should be doing right now which is managing costs. The next step, of course, it to work toward future revenue. It’s not clear to me where that future revenue exists right now.