Two posts over the weekend discussed Earthlink. Dial Up Fading Away, Earthlink Speculates was yesterdays. It followed The Earthlink that Rolla Huff Inherited.
Faced with a declining dial up business, Earthlink decided it needed a new growth strategy. Venture capital firms are in the profession of funding speculative new companies. If you assume very few bad ideas get funding and you further assume most start-ups fail, this means that venture capitalists, despite being the experts at selecting and nurturing new ideas, are nearly often unsuccessful. They know this. The reason the VC model works is that they will get multiple at bats–that is, they only need to be successful one in ten times to have a respectable batting average.
Earthink wasn’t in the profession of funding speculative new companies. And they didn’t have the luxury of 10 at bats to get a hit.
Worse, their job was harder than a Venture Capitalists. For a new venture to be meaningful enough to thwart the declining dial up business, the new venture would have to be hugely successful very quickly. This means they didn’t have time to build up a large funnel of good deals to choose from. They didn’t have time to start small and nurture the ones that looked promising. They didn’t have the luxury of weeding out the ones that weren’t going as planned. They needed a big success and they needed it quickly.
In yesterday’s post, I offered that I would be skeptical that Earthlink did all it could to squeeze cash out of its dial up business. My skepticism is rooted in the focus they placed in finding a thriving business that would replace its declining dial up business.
With this as a backdrop, what did they invest in?
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Dan,
Sorry for singling out the Baby Boomers in my last comment, but I’ve seen many bad ideas come from a lack of real market knowledge and/or real business building understanding. The truth is that this is an affliction that strikes all ages, so I feel badly for attributing that to one age sector. However, I think the state of the art around business innovation has accelerated recently and I don’t see enough adoption (rapid prototyping, discarding traditional top-down SWAGging, getting close to the customer, IIR’s (intrapreneur-in-residence), etc…). I have the joy of working in an organization that pursued new business initiatives in both Muni WiFi and MVNOs, both clearly doomed models from any rational observer. (Oops, am I giving away your cliff-hanger?). Usually the baby boomers I work with employ a “gun-slinger” approach (shoot first, ask questions later). Typically they’re more interested in improving their political power through budget acquisition which accompanies new initiatives. But I generalize, and I’ve already tread through the perils of that. Finding the exceptions should be the message of the day.
In my opinion, Earthlink’s dilemma was that their strategic migration paths both had substantial issues at the time. What was available at the time with similar ARPUs was consumer internet data services, which have exploded during this time. But going from a dial-up provider to the data services model is a huge stretch (hello AOL?). Additionally, the acquisition prices of these companies have always seemed outsized relative to their opportunity. Earthlink’s other choice was to go into VoIP services, but Vonage has demonstrated the risk in that opportunity (although expectations in the market were high at the time).
But I’m curious to read your take on the situation.
I agree with your comment in its entirity, particularly “Earthlink’s dilemma was that their strategic migration paths both had substantial issues at the time. What was available at the time with similar ARPUs was consumer internet data services, which have exploded during this time. But going from a dial-up provider to the data services model is a huge stretch (hello AOL?).”
They had a real dilemma with a lot at stake. Would they accept that they were boxed in a corner and go into hard harvest mode? Or would they take shareholder’s money and roll the dice? In hindsight, we know the answer. My quesiton is: “if faced with an analogous situation in the future, would bearonbusiness readers recognize it and respond differently?”