Wired for growth

It’s been more than a year-and-a-half since Garry Betty has seen a pop-up ad on his computer screen. It’s been more than six months since he’s received a single piece of spam in his e-mail in-box.

But the CEO of $1.4 billion EarthLink Inc., the nation’s third-largest Internet Service Provider, hasn’t stopped surfing the Web or writing e-mails. Betty’s just been using two new features of his company’s Internet software that block these nuisances.

“The two things people do most on the Internet right now are e-mail and surfing the Web,” says Betty. “The things they hate the most, which are not surprising, are spam and pop-up ads. Our stuff really does work.”

While EarthLink doesn’t claim the market share of AOL or Microsoft’s MSN Internet service, it does differentiate itself in the highly competitive market by offering value-added features such as user controls and filters. And those differences are starting to pay dividends.

EarthLink, which celebrates its first decade in business this month, has been profitable since 2002, has more than 5 million subscribers and more than $460 million in the bank, and is set to take more subscribers away from its top rivals in its next decade by being an innovator instead of a follower.

“We really did beat the odds,” Betty says. “And all the people who said we would never be successful and never create a successful business model have been proven wrong. We’re still proving that on a day-in and day-out basis.”

Find the money

Charles Betty, who goes by the name Garry, had worked for several high-tech firms before a group of his friends told him to invest in a growing Internet company called EarthLink.

Betty had been CEO of Digital Communications Associates Inc., where he brought the company out of a two-year slump, built revenue to $242 million and sold three of its underperforming divisions.

Before that, he served as senior vice president of sales, marketing and international operations at Hayes Microcomputer Products, best known as the first company to put modems in virtually every computer.

Betty’s career began, however, at IBM, where he worked in purchasing, materials management, corporate contracts, product management and management of subcontracted manufacturing operations.

“Having been at IBM when the PC was announced, I saw (that unit) grow from 23 people to 10,000 in two years,” Betty recalls. “Then, later, having had a chance to be with Hayes during its heyday growing from $6 million to $180 million in three years, nothing is more fun than to be part of a company that’s on the early end of a sea change.”

That same feeling hit Betty when he visited EarthLink founder Sky Dayton in December 1995.

Dayton, who was the company’s 23-year-old CEO at the time, had built EarthLink out of sheer frustration with the busy signals, poor customer service and the technical complexity of Internet service. In response, he simply bought 10 modems and opened his own ISP out of a tiny Los Angeles office.

When Dayton met with Betty, EarthLink was growing at 10 percent to 15 percent a week, but spending just as rapidly to keep up with the growth.

“It was an amazing company,” Betty says. “It was probably functionally bankrupt. In the service business, you have costs you incur upfront to acquire customers. You have capital expenditures that you need to incur prior to begin providing services, and because you’re growing so fast, you have inefficiencies when all your systems aren’t necessarily set up for scale.”

Betty signed on in January 1996. He brought a business and a financial discipline to the growing firm that it desperately needed and quickly rose to CEO. But, more important, he was an excellent salesman and was able to land investors in the late 1990s, when every tech company was looking for financing.

“My principle concern was raising money, implementing business systems, elimination of waste and creating an infrastructure that would allow us to be a lot bigger company,” Betty says. “I only focused on those four or five things that were absolutely critical to the company’s development, and other things had to take a backseat.”

Under his guidance and thanks to a flat-rate dial-up fee that it launched in late 1995, EarthLink grew from 30,000 subscribers to 350,000 in 1996, then from 350,000 to nearly 1 million the following year.

“A packaged-rate software product, access numbers that they actually didn’t get busies on and a support organization that they could call and get help when they needed it was a big deal back in 1996,” Betty says.

Yet even with all this growth, AOL was by far the king, and EarthLink still battled with similarly sized competitors like PSINet, Netcom and Atlanta-based MindSpring. Consolidation was inevitable.

Joining forces

“It was amazing the similarities,” Betty says of EarthLink and MindSpring, which created the second-largest ISP when they merged in February 2000.

MindSpring’s Charles Brewer and Earthlink’s Dayton founded their companies within 90 days of each other. They landed their first customers at the same time, and their companies were built on the premise of better service and support than AOL offered, but they were on two different coasts — Dayton in Pasadena, Calif., and Brewer in Atlanta.

“It was very obvious to both of our companies that we would be better off trying to compete against the likes of AOL together than trying to do it apart,” Betty says. “The reality that two companies should be together was so strong (that) what really became points of negotiation was what was the company going to be called, who was going to run the combined companies, where the headquarters were going to be and what were the relative roles for the rest of management.”

Despite the synergies, it wasn’t an overnight success. EarthLink and MindSpring might have been a merger of equals, but the two companies had disparate systems. They needed to converge to a single e-mail platform, a common authentication platform and a billing system, and EarthLink needed to move its headquarters to Atlanta. In total, the back-end synchronization took about year and a half, Betty estimates.

“Putting two companies together as a merger of equals is probably the hardest thing that you can do,” Betty says. “You basically have to recreate how you do business.”

The next decade

With the merger activity subsiding, Betty has been in the forefront in the fight against spam. In July 2002, EarthLink won a $25 million judgment against a Tennessee man who used stolen credit cards and passwords to create e-mail accounts to send unsolicited e-mail. K.C. Smith reportedly generated more than 1 billion unsolicited e-mails and profited $3 million from the activity.

In May 2003, EarthLink won a $16 million judgment against a Buffalo man who sent more than 825 million illegal e-mails through a ring of accomplices.

“Back in ’96, no one had even heard of spam,” Betty says. “Now, it’s front and center. The biggest thing people hate is spam.”

But it’s not just customer demand that is driving this campaign against spam. It’s costing ISPs a lot of money. In July, Betty testified before the U.S. Congress that unsolicited e-mail comprises half of EarthLink’s server traffic, costs the company more than $10 million a year and is responsible for more than $10 billion in lost business productivity nationwide.

“Spam costs virtually nothing to send,” Betty told the U.S. House Subcommittee on Telecommunications and the Internet. “Instead, the costs of spam are borne by ISPs which must handle this junk e-mail and by consumers who get their in-boxes filled with it.”

EarthLink released its spamBlocker software in May as a free feature to use with its Internet software. This followed the release of a similar feature, which blocks pop-up ads from appearing on the user’s screen. Several months later, AOL followed suit and copied similar versions of these features for its software.

“It’s paying dividends,” Betty says. “Our premium narrowband loss is declining. We continue to have a great deal of success in the broadband space despite a very competitive environment. We provided guidance for (the fourth quarter of its fiscal year) of 175,000 net customer growth. It’s the strongest organic growth quarter we’ve had in almost three years.”

Nonetheless, challenges remain.

Aside from AOL and MSN, Betty must contend with growing rival NetZero and Juno Online, which merged in 2001 under the parent company name United Online. While NetZero and Juno Online boast the same number of subscribers as Earthlink, about half of those customers use only free Internet access.

EarthLink must also battle phone and cable companies, which are gaining a strong foothold with residential broadband Internet access by bundling it with other services.

“I hope we’re a whole lot bigger, a lot more diversified,” Betty says of EarthLink’s next decade. “You’ll see us offer a much broader range of products and services to consumers.”

How to reach: EarthLink Inc., (404) 815-0770 or www.earthlink.net