Could Earthlink and United Online Still “Dial up” Big Profits?
For every industry on the planet, the business cycle is inevitable – start-up, growth/expansion, maturity and decline. Each part of the cycle is characterized by the different levels of economic prosperity and competition of the industry participants.
Some industries go through very long and drawn out cycles – the “maturity” stage could last decades and never show signs of a significant decline (as we’ve seen in the automotive sector). Others flare up and burn out quickly…one such industry is the Internet Service Providers sector. More specifically, the dial-up internet access companies.
Once upon a time these guys ruled the online world…well, at least one of them did. In the late nineties America Online was the “king of the hill” and got so big that it acquired one of the most well known media companies in the world, Time Warner (TWX). We all know how that story ended.
Fast forward to today and Time Warner is in the final stages of completely divesting its dial-up access unit. But what about the “other guys” that used to compete with AOL? Companies like EarthLink (ELNK) and United Online (UNTD), whatever came of them?
After seeing the following question on TickerHound this week:
It really got me thinking about business cycles, potential strategies these companies could take and even more importantly, potential strategies investors could take to profit from the current climate in the dial-up access market.
The Rise and Fall of Dial-up
This sector almost fizzled out as quickly as it bubbled up.
At one point in time, everybody that was on the internet was using a phone line to connect. But with the proliferation of broadband and the accompanying decrease in bandwidth and computing costs, it became fairly easy and inexpensive for the majority of web surfing Americans to make the leap from dial-up to high-speed internet access. Once that started to occur the revenues and profits of the dial-up access providers began to plummet…and so did their stock prices.
In January of 2000, United Online’s stock was at $110 per share. At its peak, EarthLink’s stock price (split adjusted) was trading over $80 per share. Today, United’s stock is trading under $12 and EarthLink is trading below $10 a share.
These companies were both multi-billion dollar stocks at one point in time – today, they’re falling rapidly into small-cap territory.
Facing Reality
Now, if a company goes through a tough period it might just take some clever managers a couple of years to turn things around…no big deal. But things are quite different here, an ENTIRE industry is crumbling and United and EarthLink are looking like the last couple of drunken people stumbling around a party that ended hours ago.
These guys have been trying everything (short of entering the adult content business) to get their mojo back.
EarthLink tried to launch a mobile phone initiative with SK Telecom (SKM), Helio, that has produced lackluster results. And its municipal Wi-Fi initiative proved to be a fat waste of time and money.
United Online tried to spin out one of its subsidiaries, Classmates.com, as a “social networking” play. But that ultimately failed because no matter how popular the “web 2.0” moniker has become, there’s no putting a silk dress on a tech-pig anymore.
So What Could They Do?
Well, there are a few answers to this question…
According to “text book” competitive strategy, there are 2 options for companies in declining industries:
- Harvest
- Divest
“Harvesting” is when a company cuts all marketing for a particular product, thus increasing profit margins. This will eventually mean cutting the product line entirely, or “Divesting.”
In any case, it’s clear that these companies need to get out of their core business or they’ll simply be forced to do so due to lack of customers.
What Have They Been Doing?
Well, EarthLink hasn’t been doing much in the way of positive maneuvers in this space. Its Helio joint-venture isn’t looking too hot at all and it has pulled the plug on much of its municipal Wi-Fi business. I really don’t see how investing in “start-up” ventures is a smart use of cash given the current environment they’re operating in.
The most meaningful thing I’ve seen from either company has been from United Online – it recently acquired FTD Group (FTD), the online flower delivery service. I don’t quite see how this fits with United’s core business but at least it's purchasing a profitable company with decent financials (and not trying to pull off a risky joint venture in mobile).
Unfortunately, neither company has taken any dramatic steps to cut back on its marketing costs. If I were a shareholder of either company I’d really need to see management drastically slash marketing budgets and start to shore up cash or distribute it back to the shareholders.
For now I’ll be content to sit on the sidelines and wait this one out.
I don’t have much faith in EarthLink at the moment but the market certainly doesn’t agree; the stock’s been in a solid uptrend for the last couple of months and I’m not one to fight the trend.
United is definitely the more promising of the two but until they make a firm decision to start harvesting cash from the dial-up business and focus more on expanding other divisions, I just wouldn’t be comfortable taking a position here either.
For now it’s just a waiting game – but one thing is clear: in the market, stocks can go from large caps to small caps and back to large caps very quickly. So keep your eyes peeled because UNTD and ELNK might see their share prices in the triple digit range again one day.
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This article has 6 comments:
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whatevah54
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1 Comment
May 20 12:02 PM-
jackooo
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277 Comments
May 20 12:33 PMI bought in '98 for $37.20 & $41.50.
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User 196316
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1 Comment
May 20 01:10 PM-
Wayne Mulligan
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12 Comments
My Website
May 20 01:55 PMYou're right, I misspoke, I was mainly directing that comment towards United but it certainly came out wrong (I think I was looking at ELNK's annual data as I wrote this blog entry). UNTD hasn't done much in reducing its SG&A, EarthLink clearly has over the last several quarters. My apologies for stating otherwise.
However, I still think that from a competitive perspective their moves have been fairly weak and haven't produced any meaningful results. It's clear both companies are trying to diversify their businesses...which one will successfully do so is the real question.
Do you think high-speed is enough to keep EarthLink in the black? Their bottom line has improved due to the cost reductions but their top-line has been getting weaker.
Thoughts?
-Wayne
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whisperonthewind
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233 Comments
May 20 10:01 PM-
BirdShooter
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1 Comment
May 22 02:24 PM