Running from dial-up access

/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true"><p>The Washington Post</p></a

The nation's two top dial-up Internet providers are jumping into different lifeboats as the broadband Internet wave threatens to sink their leaky business models. It remains unclear whether either lifeboat will float.

EarthLink Inc., the scrappy No. 2 player in Internet dial-up access, is trying to remake itself as an uber-broadband provider, buying wholesale high-speed connectivity from all kinds of network operators and reselling it under its own name.

America Online Inc., the leader in dial-up access, largely abandoned that broadband strategy last year and is counting on advertising to keep it afloat as dial-up customers defect to rivals selling faster or cheaper Internet connections. AOL is partnering with high-speed network operators, hoping to snag a sliver of their subscription revenue, while trying to remake itself in the image of ad-centric Yahoo.

"AOL is abdicating access and really wants to compete with Yahoo," said Sky Dayton, founder of EarthLink, who announced last week he is leaving as chairman to start a new wireless venture. "We think access is what we do."

Dayton will become chief executive of a new company representing EarthLink's strongest thrust yet into broadband -- a $440 million joint venture with South Korea's largest cell phone operator, SK Telecom, that plans to sell advanced mobile phone and data services in the United States this summer. Each partner will put up $220 million in cash and other assets over three years, with a goal of signing up 3 million customers by 2009.

In an interview this week, Dayton said SK-EarthLink will exploit the blurring lines between the wired and wireless Internet, offering services, for example, that integrate cell phone service with WiFi networks that beam wireless data over short distances. It also will offer "cool" multimedia services not yet available in the United States, he said, using cutting-edge handsets and behind-the-scenes technology pioneered overseas by the South Korean operator.

"In South Korea they are watching television on their cell phones, they are doing video conferencing, they are finding their friends with location-based services," Dayton said. "If you ask people in Santa Monica how they use their cell phones, they say 'I make calls' or 'I have pictures of my dog.' "

EarthLink hopes its move into the cell phone market will help it fashion a new type of communications provider. Already, EarthLink is buying broadband connections from traditional phone and cable companies, and then reselling DSL and cable Internet access as EarthLink services.

AOL started down that path, too, selling DSL service under its own name by using connections purchased from the regional phone giants. But the Dulles-based division of Time Warner Inc. discontinued that strategy last year. In November it gave all AOL DSL customers in the BellSouth territory until January to find a new broadband provider or sign up directly with BellSouth. This year it likely will make similar moves with DSL customers elsewhere, said spokeswoman Anne Bentley.

Instead, AOL is pursuing a strategy similar to Yahoo's. To reach new audiences and sell more ads, AOL is planning a revamped Web site at this summer. For the first time, it will offer a lot of content to nonmembers.

It is also partnering with network operators to offer AOL services as the default page their Internet customers see when they sign on.

In wireless, AOL has teamed up with cellular carriers to make AOL services available on their phones, for which it shares some subscription revenue. For broadband, it announced a deal this week with its sister, Time Warner Cable, involving sharing of AOL's advertising dollars and the cable firm's DSL subscription revenue.

Yahoo had a similar DSL pact with SBC Communications, and it announced another last month with Verizon Communications.

The SK-EarthLink venture is different in that it will be buying and reselling access, not just doing a joint marketing deal. As such, SK-EarthLink represents a new breed of mobile phone companies you likely will see more of this year. They're called "virtual" operators because they don't maintain the underlying connectivity but do handle all marketing, billing, customer support and -- most importantly -- the content and services that customers use.

Virtual operators tend to target niche audiences, people eager to buy fancy pocket devices so they can do on the run what they already do on the wired Internet. One early virtual operator is Virgin Mobile USA, the joint venture between Sprint and the Virgin Group that targets young people.

Disney has announced plans for a virtual mobile ESPN network aimed at sports fans.

"This is the year the virtual mobile operator is going to explode into the marketplace," predicted Jeff Kagan, a telecommunications analyst in Marietta, Ga.

What's driving companies to jump in, Kagan said, is that U.S. carriers are finishing major upgrades to their networks, allowing wireless data transmission at high speeds and making mobile Internet access -- and wireless video services -- much more feasible than in the past.

Yet Kagan and other analysts wonder how SK-EarthLink can compete with Sprint, Verizon and other carriers it will have to buy access from, when those same carriers are rolling out their own TV, music and Web-surfing services.

But Dayton said the carriers are hungry for more customers, even at wholesale rates. He added that the dial-up Internet era showed there is a huge difference between "the pipe" and what you do on top of it: "That leaves a tremendous amount of latitude for differentiation."

U.S. carriers, for example, have been slow to offer WiFi services for fear of cannibalizing their cell phone business. Dayton said SK-EarthLink doesn't see WiFi as a threat and will move aggressively on fronts carriers have chosen to ignore. Customers, for instance, might use SK-EarthLink mobile phones inside their houses (where cell signals are notoriously weak) to tap home WiFi networks for voice calling over the Internet. "Now you can make phone calls without using up your minutes," he said.

It remains to be seen whether the mobile Internet will turn out to be the lifeboat that rescues EarthLink from steady defection of its dial-up subscribers.

Leslie Walker's e-mail address is .