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8/28/2007
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EarthLink To Restructure, Close Offices, Lay Off 900

Faced with declining revenue from its core Internet-access business, EarthLink has made several attempts to diversify without much success.

Essentially conceding defeat in its ambitious attempt to recast itself as a broadband service provider over multiple technologies, EarthLink said Tuesday it is restructuring and eliminating 900 jobs, about half of its workforce. As part of a cost-reduction plan, the company will close four of its offices and reduce its presence in two other locations. These changes will begin immediately, the company said in a statement.

"These changes get our cost structure in line, but there is much more to do," said EarthLink CEO Rolla P. Huff, who took over the company on June 25.

Faced with declining revenue from its core Internet-access business as many different forms of inexpensive high-speed Web access proliferated in recent years, EarthLink has made several attempts to diversify, including launching a costly effort to build municipal wireless networks and a joint venture with South Korean wireless giant SK Telecom to create an alternative mobile device and service provider called Helio. Neither of these ventures has reached break-even status.

The company said today it is restating its revenue and loss projections for 2007. In the third quarter, EarthLink expects to lose between $33 million and $43 million on revenue of $290 million to $300 million. For the full year, the company predicts it will generate revenue of up to $1.2 billion and lose between $79 million and $109 million.

EarthLink "will no longer add new subscribers that do not yield a positive lifetime value for our shareholders," the company said, adding that it "expects to realize fewer migrations from narrowband to broadband."

Left unclear is the fate of EarthLink's ambitious muni-wireless unit, which has built out Wi-Fi networks in large cities such as Anaheim, Calif., and Philadelphia, and has been in negotiations with other cities, including Houston and Pasadena, Calif. EarthLink said in April that it was "reviewing" its municipal wireless business and would not bid on future projects until it had determined whether such networks could be built and run profitably.

Most observers now believe that EarthLink will seek a buyer for its existing Wi-Fi business. Two possibilites are Sprint Nextel, the No. 3 U.S. wireless carrier, and Clearwire, a well-funded startup. Both Sprint and Clearwire are building out high-speed mobile WiMax networks, and they recently announced they would collaborate and avoid competition in each other's designated territories.

"People have already been asking, 'Is this the end of muni Wi-Fi?' " says Ron Sege, CEO of Tropos Networks, the equipment supplier on many of EarthLink's citywide projects, "and my answer is categorically not. In fact this is the end of the beginning of the mobile Internet. The progress we've made at Tropos is only going to accelerate growth in the future, and in some respects we're probably getting to a more healthy market with EarthLink's exit."

The fate of Helio also is unsettled. Just last month EarthLink and SK Telecom said they had each approved an additional funding of $30 million with the possibility of another $40 million in the future. The startup offers the innovative Ocean mobile device along with cellular and Wi-Fi service.

EarthLink's share price, which has dropped 44% in the last 20 months, jumped almost 8% on today's news. EarthLink will host a conference at 9 a.m. EDT on Wednesday to provide details on the restructuring.

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