EarthLink announced Monday that it will buy low-cost computer vendor PeoplePC for about US$10 million, but the giant Internet service provider (ISP) left open the possibility that the deal could swell to $14.3 million.
EarthLink is targeting “the value segment of the ISP market,” company CEO Garry Betty said in a statement.
San Francisco-based PeoplePC has made a business of selling inexpensive PCs bundled with Internet access. According to the company’s initial business model, customers would buy three-year memberships that included a PC, Internet access and membership in PeoplePC’s buyers club.
The ultra-low-end market is fertile ground for EarthLink, which has aggressively pursued segments that can help line its coffers. Betty indicated that EarthLink can handle business more efficiently and be more profitable in a space where PeoplePC was beginning to lose its luster.
Indeed, the deal could not have come at a better time for PeoplePC, which said in documents filed recently with the U.S. Securities and Exchange Commission that available funds might “not be sufficient to fund operations for the remainder of 2002.”
At the end of December 2001, the company had about $22 million in cash and equivalents, but by March 31, 2002, that figure had dropped to $11 million, according to filings.
PeoplePC made its mark when it changed its business model to one of providing computers to the employees of large companies. The firm landed contracts with such giants as Delta Air Lines and Ford Motor Company.
AOL and other ISPs have launched similar initiatives. Last fall, for example, AOL inked a deal with General Motors (GM) and DaimlerChrysler to provide interactive TV service to the automakers’ 300,000 employees.
Such deals are potential revenue-generators for ISPs. They also underscore the notion that Internet access is “a must-have utility for the mass consumer market,” Merrill Lynch analyst Henry Blodget told the E-Commerce Times in an earlier interview.
Hurt by Dot-Com Fallout
PeoplePC had begun its march toward an IPO when the dot-com market fell apart. The IPO was delayed, and the offering price was cut significantly. PeoplePC still managed to raise $85 million when it eventually went public in August 2000, but the company had to fight plunging share prices and a sluggish economy.
While its coffers have been nearly empty in the recent past, PeoplePC saw its first-quarter earnings increase over year-ago results. First-quarter 2002 revenue totaled $48 million, up from $37 million reported in the first quarter of 2001. Net loss for the quarter was $8.8 million, much better than the $36 million recorded a year ago.
For its part, EarthLink, which already has 4.9 million subscribers, will gain about 60,000 monthly subscribers and another 500,000 that have prepaid memberships.
This is not the first time EarthLink has moved to purchase a troubled company in an effort to make inroads into a particular market segment. Late last year, the company announced its intention to buy OmniSky at fire-sale prices as the wireless firm teetered on the brink of bankruptcy.
While EarthLink is far from the market leader in the ISP space — that title belongs to AOL with its 33 million-plus subscribers, followed by MSN — it has seen financial growth in a market where others have faltered.
In the first quarter of 2002, EarthLink reported revenue of $333.4 million, up 13 percent from the first quarter of 2001. Rival AOL, on the other hand, logged a first-quarter net loss of $54.2 billion, the largest such loss ever recorded.