EarthLink Lays Off Half the Company and Focuses on Cash Flows

On August 28th EarthLink announced that it would eliminate 900 jobs and reduce operating costs across the company. Most of the affected employees, representing nearly half of the company’s workforce, will come from the company’s direct sales and marketing organizations. The restructuring begins immediately and will finish by the end of 2007. The company will close four offices and offices and substantially reduce its presence in two others. As a result, EarthLink expects to generate a positive payback within six months.

Recommended Competitor Responses

► AOL and other ISPs that offer dial-up access should expect a slight up-tick in opportunities for direct sales since EarthLink has closed down its direct sales operations. However, narrowband access providers should redouble their efforts with indirect and automated web sales.

► AT&T, Verizon, Qwest, and other DSL providers should keep up the pressure on EarthLink by maintaining their prices for DSL and point out that to use a dial-up service, customers still need a phone line which, when bundled with a DSL service may be only a few dollars more for a much faster Internet connection. ILECS should point out that they offer remote dial-up bundled with a DSL service for customers who need an Internet connection both inside and outside of the home.

► To capture EarthLink’s tenured customers who may consider EarthLink’s entry into the video market, cable companies should point out that EarthLink is only a reseller of satellite TV services and use the same marketing tactics to combat existing DIRECTV and EchoStar offers.

► Smaller ISPs should keep EarthLink in mind because despite its layoffs, EarthLink has retained its very good reputation for quality customer service and support, and it has experience when it comes to incorporating customers from other ISPs into the fold.

► Competitors should watch EarthLink’s forays into VoIP closely and prepare to expand their VoIP portfolios. EarthLink now has three voice services for its broadband customers: a free casual service that doesn't connect to the phone network, paid dialtone VoIP plans similar to Vonage, and line-powered VoIP via its EarthLink DSL and Home Phone bundle. EarthLink’s DSL and lifeline-quality voice bundle offering powered by Covad’s network is price competitive for as low as $49.95 a month, and could prove worrisome for rivals.

Recommended End User/Customer Responses

► Existing customers should understand that EarthLink plans to maintain or improve customer service to its existing customer base and this action pertains only to acquiring new customers. Customers should understand that if they use dial-up services, they are buying these services from a business that is shrinking regardless of the company they select and that switching to another dial access ISP may or may nor improve service levels.

► Potential customers should understand that EarthLink isn’t going to make buying their service any easier since the company is axing its direct sales and marketing staff, but that EarthLink is also not in immediate jeopardy of shutting its doors entirely.

► All EarthLink customers should see if they have anything to gain by buying other services like voice, DSL, or satellite TV from EarthLink provided they are happy with EarthLink’s service levels. However, customers also understand that ILECs and cable companies offer great bargains on bundled packages and that even a double play that includes voice and broadband access may be only a few dollars more than using an existing phone line to gain dial access to the Internet.

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RealNetworks and MTV Networks Join Forces to Create a New Online Music Service to Battle Apple

On August 21st RealNetworks and VIACOM’s MTV Networks announced a new joint venture to create a new sole digital online music service called Rhapsody America. It will be accessible through PCs, portable music players and mobile phones. The new service will leverage Verizon Wireless as its exclusive mobile platform to distribute its digital music to the cell phone. MTV Networks’ existing URGE music service will be phased out and URGE customers will be immediately given access to the Rhapsody online music service.

Recommended Competitor Responses

► Apple will continue to hold off any notable competition for its share of digital music content by offering customers the alternative of a subscription model with a superior portable music player. Apple does need to work on its weakness compared to rivals, offering users fewer online opportunities for music discovery. Subscription-based services allow customers to “try” new music without having to actually buy it. Apple limits customers to 30 second samples of songs.

► Apple should quickly create similar deals to the one with EMI for its iTunes Plus service with independent labels and the other major record labels including Universal Music Group, Sony BMG Music Entertainment, and Warner Music Group. As the online music market leader, Apple should use its influence to persuade the majority of the music industry to follow its plan for fewer restrictions on digital content with a successful device-driven business model that helps reduce online piracy.

► Yahoo! Music Unlimited should emphasize the fact it has more downloads per dollar than iTunes, which charges $0.99 to $1.29 per song, whereas the Yahoo! Music Unlimited subscription-based model allows users to download as many songs as they like and to keep the songs they want for $0.79 apiece. Yahoo! Music Unlimited is priced at $5.99 a month for one year, or $8.99 on a month-to-month basis.

► AOL clearly made the right move by dropping its AOL Music Now service in favor of a partnership with Napster since MTV Networks is now following suit with a similar deal with Rhapsody. It was practical for AOL to stop trying to build up its smaller music service and instead partner with Napster. AOL should continue to leverage its new relationship with Napster to expose these customers to AOL’s free music services that generate additional online ad revenues.

Recommended End User/Customer Responses

► Existing URGE music subscribers should take advantage of Rhapsody’s invitation of free access to its subscription music service since its look and feel will be carried over into the new Rhapsody America service that is replacing URGE.

► V CAST Music subscribers should be aware that songs they purchased through Verizon Wireless will over time become available to them on their PC through a Rhapsody account. The new Rhapsody America service coming soon will also allow transfer of subscription music from a Rhapsody account to a Verizon Wireless mobile phone.

► Consumers happy with using Apple devices and iTunes as well as users of other monthly subscription music services like Yahoo! Music Unlimited should stay with their existing service for now. Rhapsody America has not released any pricing information or details on unique features that would create an exodus from rival services. The compelling feature that could be powerful enough to make someone switch once Rhapsody America launched is for Verizon Wireless V CAST customers to have access to more music features from Rhapsody and MTV Networks.

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