In A Squeeze At Mind Spring

With giants muscling into Net access, even indies that offer better service will have to spend more to compete

Charles Brewer knows a good thing when he sees it. Take three-legged dogs, for instance. The CEO of MindSpring Enterprises Inc. had grown used to his girlfriend's three-legged Rottweiler, Henri, tagging along with him to the Atlanta-based Internet service provider he started five years ago. So when the couple broke up--and he lost his visitation rights to Henri--Brewer adopted another three-legged Rottweiler, Louie. Today, Louie has his own well-worn easy chair in Brewer's cramped office, and between phone calls and meetings, gets a biscuit or a pat.

Brewer shows the same dogged devotion to his customers. Inspired by his own problems getting online six years ago, Brewer has made customer service his mantra at MindSpring. It's a strategy that has enabled him to compete quite ably in the shadow of the Goliath of the industry, America Online Inc., which boasts more than 19 million subscribers. By encouraging his customer reps to spend as much time as necessary to make the caller happy, MindSpring has grown from a desk in Brewer's studio apartment to become the nation's fifth-largest ISP, with more than 1.2 million subscribers. "We've been able to compete because we please customers better," says Brewer, noting that 30% of new customers join based on a friend's recommendation.

FREEBIES. But a host of new competitive threats is raising thorny questions about the viability of the dozen or so large independent ISPs like MindSpring. PC makers Dell Computer Corp. and Gateway Inc. are locking up potential subscribers by bundling discounted Internet access with new PCs. On the low end, upstarts such as NetZero Inc. and are offering cut-rate or even free access to those willing to wade through ads on their way to the Web. At the same time, cable and phone companies are starting to aggressively roll out high-speed Web access at a discounted price to customers of their other services.

Some analysts question whether the second-tier independents can survive. "The game is going to change dramatically," predicts Harry Fenik, vice-president for analysis at Zona Research Inc. in Redwood City, Calif. He believes the best prospect for these ISPs is that they'll be acquired by larger rivals, like AT&T or Microsoft Corp., that are looking to add customers. "The best day for these ISPs is the day the check is in the mail," says Fenik.

If the buyout offer doesn't come, what then? Analysts say the independents' best strategy is to develop valuable new services like hosting high-powered E-commerce. Just providing consumer Web access won't be enough. Investors are skeptical as well: MindSpring's stock has tumbled 58% since April, and the stocks of other publicly traded ISPs, such as Prodigy Communications, EarthLink Network, and, are down 52% to 64%.

Independent ISPs insist the threats are overblown. They say there always will be demand for Net access from companies that deliver it with strong customer service at a reasonable price. And they dismiss the notion that newcomers like Dell, Gateway, and other PC makers that just jumped into Net access can match them customer rep-for-rep. "It's like me saying I'm going to sell PCs from a Taiwanese manufacturer and do as good a job as they do," says Charles G. Betty, chief executive of EarthLink, which boasts 2,100 customer-service agents for its 1.4 million customers.

The independents also argue that without the high overhead of giants like AT&T, Microsoft, or the cable companies, they will always be able to compete aggressively. Typically, they charge consumers about $19.95 a month--a couple of bucks cheaper than AOL and AT&T. MindSpring's Brewer prides himself on the company's lean-and-mean culture: His desk came from a friend's attic, and the armchair in his office was a freebie left over after a garage sale.

GROWING PAINS. Still, Brewer is having a hard time keeping his costs low and growing rapidly at the same time. Mindspring has spent $310 million acquiring Sprynet, Netcom, and more than 40 other ISPs to achieve the scale it needs to compete with the big boys. But the Netcom deal meant reporting losses in each of the past two quarters--ending an impressive streak of five profitable quarters in an industry where profits are in short supply.

And even though MindSpring's $150 cost for acquiring a new customer is lower than the $400 that some ISPs spend, it still has trouble matching PC makers' low outlay. Campbell Angus, president of, a Dallas-based PC maker that recently started bundling Internet service in the Dallas and Boston markets, says his only cost is the $50 commission he pays retailers for each new account they sell. "I think it would be very difficult for them to compete with that," says Angus.

Acquisitions have brought other problems, too. Customer churn, while still lower than the industry average of about 8% per month, edged up to nearly 5% per month in the first half from 3.3% last year. And technical difficulties with Netcom's E-mail service caused average wait times for callers seeking help to surge to seven minutes in July--more than twice the average for the first half. Brewer says the Netcom woes are behind him, and he has doubled the number of employees in call centers this year to handle the increased support calls.

But that's an added expense--and it's clear that independent ISPs are going to have to open their wallets even wider to stay in the game. For one thing, they're investing to push into higher-margin businesses. MindSpring, for instance, provides dedicated lines for 3,000 business customers and hosts the Web operations of 55,000 customers.

Another big-ticket item for the independents: aggressive marketing. EarthLink recently began giving away an $89 digital video camera to anyone who signs up for 90 days of service. On Labor Day, MindSpring unveiled its first-ever TV advertising campaign--the latest piece of a $90 million marketing campaign that is double last year's budget, virtually assuring that MindSpring will continue to lose money.

GUMP-TION. The quirky TV spots, which will air in as many as 26 cities during prime time, feature a Forrest Gump-like character sitting on a park bench with his dog, chatting up passersby about MindSpring's virtues. "I love you," the protagonist tells one stranger. "MindSpring says that to me all the time. Not with those words, exactly, but that's what they're feeling."

But even memorable ads may not be enough to turn even an ISP as large as MindSpring--without the war chest of an AT&T or a Microsoft--into a household name. "MindSpring is starting a little late, and my fear is that they're going to have to increase spending just to stay even," says FAC/Equities analyst Jeff Sadler.

If so, MindSpring may be left hobbling along in the ISP market's second tier until one of the big players snaps it up.

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