Two of the country's largest providers of Internet access, EarthLink Network Inc. and MindSpring Enterprises Inc., said yesterday that they will merge through a stock swap valued at $2.3 billion. The combined company, which will be called EarthLink, will rank second in number of subscribers behind America Online Inc.
The decision by EarthLink of Pasadena, Calif., and MindSpring of Atlanta to combine underscores how commanding AOL's position has become, with 18 million subscribers and another 2 million in its CompuServe subsidiary. The new EarthLink will have about 3 million subscribers, ahead of AT&T Corp.'s current base of 2.5 million and Microsoft MSN's 1.8 million.
"I think it's serious competition," Bethesda Internet analyst Gary Arlen said of the new company. But he added: "In sheer numbers they are very far behind."
Arlen said he expects EarthLink to differentiate itself by trying to offer high-quality customer service, which he said has been a strength of the two companies that are merging.
"There hasn't been a number two for a long time," said Charles Brewer, MindSpring's founder, chairman and chief executive, who will become chairman of the combined company. "Most customers don't know there's a viable other choice."
The merger comes as Internet service providers face increasing pressure on prices, with some companies now offering discounted or free access, in hopes of building enough of a customer base to become profitable by selling advertising. But Brewer said EarthLink will continue to offer unlimited Internet access at or around $19.95 a month.
He said the new company will be better positioned to build name recognition. "We can accomplish a lot more with a single brand going forward," Brewer said. "Size is important."
MindSpring and EarthLink, each founded about five years ago, have prided themselves on delivering fast, no-frills access, even publicly poking fun at the comprehensive content offerings of AOL. In the meantime, AOL has grown from a technologically challenged proprietary service to a blue-chip stock and a world-class media empire. Web gateways such as Yahoo are now generally thought to be AOL's prime competition.
America Online officials said they recognized the new company as competition but said AOL provides a very different kind of service. AOL President Bob Pittman called the merger "consistent with what we're seeing" and said "the market is consolidating."
If the MindSpring-EarthLink deal receives required regulatory and shareholder approval, it is expected to become final in early 2000. EarthLink's president and chief executive, Garry Betty, will be chief executive of the combined company, which will be based in Atlanta. Mike McQuary, MindSpring's president and chief operating officer, will be president. Betty, McQuary and EarthLink founder and chairman Sky Dayton will be directors.
MindSpring stockholders will receive one share of the new company's stock for each of their shares, and EarthLink stockholders will receive 1.615 shares in exchange for each of their shares.
CAPTION: MindSpring founder Charles Brewer, left, and EarthLink president Garry Betty at a New York news conference where the deal was announced.