Earthlink and Sprint to Join Online Services

Breaking from a pack of struggling Internet service providers, Earthlink Network Inc. and Sprint Corp. agreed Tuesday to combine their online access businesses in a bold bid for the lead in linking consumers to the Net.

As part of the agreement, to be officially announced today, Pasadena-based Earthlink would get all 130,000 of Sprint’s existing subscribers, boosting its total customer base to more than 600,000. Only AT&T;, with about 970,000 subscribers, has more among pure Internet service providers, which does not include online services such as America Online.

But more important, Earthlink would get a needed cash infusion, plus the marketing muscle of Westwood, Kan.-based Sprint, a nationally recognized company that can now promote the Earthlink Sprint service, as it is to be called, to its 15 million long-distance customers.

In return for $24 million in cash and a $100-million line of credit, Sprint would take a 30% stake in Earthlink and get two seats on the company’s board of directors, including one for Sprint Chairman William T. Esrey. Sprint also has an option to buy a controlling interest in Earthlink, or the entire company, if certain conditions are met over the next five years.

Analysts said the deal shores up Earthlink’s financial weaknesses, and enables Sprint to forgo the enormous expense required to build its flagging Internet service.

“Earthlink has been great on ideas, great on marketing, but short on cash,” said Allen Weiner, an analyst at Dataquest in San Jose. “Here’s some cash, here’s some clout. It helps propel them to the top tier of Internet service providers in the country.”

Indeed, Earthlink and Sprint executives said their goal is to move quickly past AT&T; and compete more directly with AOL, whose 10 million U.S. subscribers make it by far the largest consumer connection to the Internet.

“There’s a huge opportunity to put together our best assets and really challenge the No. 1 player, AOL,” said Sky Dayton, founder and chairman of Earthlink. “We have the opportunity to grow to millions of customers.”

In fact, the agreement calls for Sprint to deliver a minimum of 150,000 new subscribers a year for the next five years.

Executives from Earthlink and Sprint said their cause was helped tremendously by AOL’s decision Monday to raise its monthly subscription fees by $2 to $21.95, a move that makes AOL more expensive than every other major player.

Dayton said Earthlink’s subscription department fielded a burst of calls from disgruntled AOL customers Tuesday.

But for all their bravado, the deal between Earthlink and Sprint is also one of necessity, because both companies have fundamental weaknesses.

Sprint, for all its success in long- distance, has proved inept at marketing its Internet service, analysts said. The deal allows Sprint to bow out of a competition it was losing badly.

For its part, Earthlink has grown faster than any other Internet service provider in recent years, but has often come perilously close to running out of cash, and still hasn’t turned a profit.

By joining forces, the two cover their weaknesses and fortify their strengths. Sprint would promote the new service in its national advertisements and in its in-store displays at Radio Shack, and by offering discounts and bundled services to its long-distance and wireless customers.

Earthlink would manage relationships with customers, something it has done deftly, and a job the company said will probably require it to add dozens of new positions in coming months. Earthlink would also have favored access to Sprint’s vast data network, which carries much of the Internet’s traffic.

Earthlink shareholders could also benefit because the deal calls for Sprint to initiate a tender offer for 1.25 million Earthlink shares at $45 per share, substantially higher than the stock has been fetching in recent weeks.

Earthlink shares surged $4.63 to close at $38.63 on Nasdaq; Sprint shares rose 50 cents to close at $58.63 on the New York Stock Exchange.

Earthlink shares rose largely on investor enthusiasm about its sign-up plan targeting America Online customers.