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No happy ending for Earthlink’s Fairy Tale
By Larry Hendrick | August 29, 2007
Today I am predicting that the City of Houston will soon be $5 million dollars richer!
Earthlink is in the process of making key decisions on the company’s strategy for remaining in business. Yesterday they announced half their employees would get a pink slip before the end of the year, and they will close many of their remote offices.
There are three questions in front of Earthlink that must be answered.
- Will they continue in the Municipal WiFi business?
- Will they proceed with their current contracts?
- Will they default and move in another direction?
Project Scope
Let’s look at a few facts to see if we can speculate on what Earthlink is thinking.
- The Houston WiFi project covers 640 square miles
- The estimated cost of the project is $50 million dollars
- The City of Houston will
subsidizepay Earthlink $500,000/year as anchor tenant - Earthlink was to begin the project several months ago
- The contract calls for completion by 2009
- Earthlink has not signed the contract with Centerpoint Energy for utility pole access
- The penalty for Earthlink’s failure to meet the contract is $5 million dollars
- Earthlink’s President says “no profit in the foreseeable future” with Muni WiFi
The scope of this project is unmatched anywhere in the United States, and the price tag is huge. However, looking at other WiFi projects, the $50 million dollar price tag is probably low. Every other city WiFi project has ultimately required the installation of twice as many access points as originally planned, but I don’t want to focus on that aspect—$50 Million is still a lot. A more accurate price tag is $100 million dollars, but what’s a few million among friends.
Experience indicates the project will lose money for a number of years, lacking the revenue to cover operating expenses, even by Enron modern bookkeeping methods of depreciation and finance.
Not a Money Maker
The amount of the annual losses and for how long are debatable, but Earthlink could show an operating loss of several million dollars each year, for five years. (I personally think the numbers will be much higher.) The $500,000 from the City won’t cover 25% of the annual losses, and the city is only required to participate for five years.
At the end of five years, Earthlink is out a minimum of $50 million for installation plus $10 million for operations, leaving stockholders in a continuing state of hysteria. The company is already losing almost a quarter million dial-up customers each year and the quarterly financial reports are printed in red.
Municipal WiFi isn’t the savior Earthlink executives were praying for, and if they want to keep their jobs, they will need to rethink the company’s direction.
My Prediction
Earthlink will weigh their $50 million dollar investment (minimum) and huge operating losses against a $5 million dollar breach-of-contract penalty, and choose to abandon the project. They will pay the penalty to the City of Houston, rather than risk losing the company.
Topics: WiFi |