From the January 1998 issue of Entrepreneur

The internet is an enticing but treacherous business arena--for every company that has prospered, hundreds have been mauled in a fast-moving, continuously changing marketplace. Basic access is a case in point: Just five years ago, the giant online access providers were Prodigy and CompuServe. Now Prodigy is struggling for survival as it fights against bruising newcomers such as America Online (AOL) and Microsoft Network, while CompuServe has been gobbled up by AOL.

But in the midst of this warfare, one company founded three years ago by a 23-year-old has kept humming along and today ranks as the nation's third largest Internet Service Provider (ISP), with upwards of 350,000 members.

"We keep our eye on the customer. That's where our focus is, and it's the key to our success," says Sky Dayton, who, at 26 years old, presides as chair of Pasadena, California-based EarthLink Network Inc. "We deliver the service customers need to have a satisfying Net experience."

Does EarthLink deliver? In just a few years, its membership has grown tenfold. What's more, PC Magazine just touted it "Editors' Choice" in the magazine's September ranking of national ISPs and online services.

Read on for more of Dayton's recipe for succeeding against giants, his insights into why the Net's popularity will keep mushrooming, and his prescription for businesses that want to prosper on the Net.

Entrepreneur:With ever-larger companies staking out turf on the Internet--AT&T, the Baby Bells, Sprint--is there a future for small ISPs?

Sky Dayton: As the market begins to mature, there will probably be two tiers of ISPs: very small and very large. A mature ISP industry may eventually look like the mature retail industry, where thousands of small, local retailers coexist with a few behemoths like Wal-Mart. In this example, EarthLink is already in the Wal-Mart category.

There are now about 4,500 small ISPs in the United States, almost all with fewer than 10,000 customers. Many want to get out of the dial-up access business to focus on providing other services, and we are offering to buy their customers. That's good for the small ISP and good for us.

Entrepreneur:The problem you face, however, is you're competing against heavily capitalized giants like AT&T. How can you survive?

Dayton: The most important capital we have is our management team. The expertise we have in deploying and running complex Internet services surpasses that of most traditional long-distance telephone companies. Telephone companies' expertise in [telephony technologies] does not translate well to interactive services delivered to personal computers.

Also, we have been very careful about how we invest in capital equipment. We chose, for example, to lease Internet backbones [communications wiring and modems] from other companies that concentrate solely on building and maintaining backbones. If we had built our own backbone in 1994, we would have spent about $1,500 per modem. Leasing leaves us free to invest capital in places where we know we can be best-of-breed, such as our customer service.

Our entire company stays close to the customer. We have 800 employees, more than 400 of whom are directly involved with member support. We answer 200,000 calls each month. The support is free and available to all our members via an 800 number. This makes a big difference in members' overall experience.

Entrepreneur:Still, aren't companies such as AT&T seemingly unconcerned about the short-range profitability of their Internet access businesses--which makes them tough to beat for companies like EarthLink and others that are trying to get their share of the market?

Dayton: I'm sure Dell and Gateway were asked the same question in the '80s when AT&T announced its intention to dominate the personal computer market. And I'm sure their response was the same as mine will be now.

Providing Internet service is different from providing telephone service. The technical support, technical infrastructure and user experience are all totally different. With intense competition spawned by recent deregulation, AT&T's core telephone business is about to be under siege. If they take their eye off the ball, their traditional business will be stolen from under their nose.

Less than 20 percent of the U.S. population is on the Internet today. Most of the other 80 percent will become connected in the next 10 years--a job so big, no one company could hope to dominate it. I spend more of my time looking at how to grow into this untapped market than I do thinking about competing against telephone companies.

Entrepreneur:You've always been an entrepreneur. You started your first business--a coffee shop--at 18. What draws you to entrepreneurship?

Dayton: I like to create my own game, I guess. At about 10, a friend and I wrote a business plan to build a candy store. Unfortunately, our funding committee--our parents--shot down the deal. We had to wait about nine years to start our first business, Cafe Mocha.

Entrepreneur:So what prompted you to found EarthLink in 1994, when the Internet still seemed a speculative, insubstantial place to many?

Dayton: In late 1993, I heard about the Internet and decided to get connected. It took me a week to find an Internet provider and then another 80 hours of hell with my computer to get connected. The whole thing was incredibly frustrating.

But once I was connected, I knew the Internet was the world's next mass communications medium. So I set out to make it easier to connect to and use with EarthLink. I wrote a business plan and, through friends, was introduced to two founding board members who provided "angel" funding for EarthLink. That got us started. Afterwards, we raised more money in private placements, and in early 1997, our initial public offering (IPO) raised $26 million.

Entrepreneur:Will the Internet become a mass medium?

Dayton: The Internet is the next mass medium. There is a common belief that it will replace telephones, books, fax machines and television. This idea is only partially correct. The Internet will combine all those things on an open, global computer network. In the future, your phone and fax will connect to your computer, then to the Internet. Your computer will become your television. The Internet will become the communications platform for the Information Age.

Entrepreneur:What's behind the Net's mushrooming popularity?

Dayton: A fundamental shift in the way and the amount people communicate. In the past 50 years, we've evolved into a TV society. Cloistered in its home, the average American family, by some accounts, watches seven hours of television every day. This is lost time, lost communication, lost production, which drags down our standard of living.

The Internet has already begun to cause the first decline in viewership in TV history. People want to talk back. They're tired of having their world spoon-fed to them on "Dateline NBC" and "Melrose Place." The Internet is all the entertainment of television with a big feedback button. People want to communicate with each other more. The Internet enables this communication in a way never seen before.

Entrepreneur:Will users' loyalties be to Web sites (i.e., content or "channels") or access providers?

Dayton: I'm not fond of mantras such as "content is king" or its rival, "distribution is king." In the new communications paradigm, there is abundant content and distribution. Distribution is open to anyone interested in producing content. The traditional barriers of time and space between creator and consumer are almost totally obliterated.

If anything, this means the consumer will be king. The Internet will spawn a new age of consumer choice. Producers and marketers will have direct access to the consumer for the first time, and they will constantly hone their products and services to exactly match consumer needs.

Entrepreneur:Can anyone make money providing flat-rate, unlimited access?

Dayton: Absolutely. It's a matter of focus and execution. In fact, it costs far less than [the monthly user charge of] $19.95 for EarthLink to deliver its service. We have increased our revenue while decreasing our net loss every quarter since the third quarter of 1996.

Why haven't others been successful with flat-rate service? I think it's less about the business model and more about management. We have been able to manage explosive growth while providing great service to our members. Our executives have hundreds of years of cumulative experience in the computer and telecommunications industries. Their experience is the backbone that supports our business.

Entrepreneur:AOL, the industry leader, has had recurring problems with technology glitches and unsatisfactory customer service. How can you grow while avoiding these pitfalls?

Dayton: AOL's problems have to do with its lack of focus. It is both an access provider, like EarthLink, and a content provider, like Yahoo! or The Wall Street Journal. While it made sense to be both an access and content provider in the early days of the online business, it doesn't make sense today. AOL is focused on two very different businesses. As a result, it's not best-of-breed in either.

Entrepreneur:Does every business need a Web site?

Dayton: To do business today, a company must be on the Internet. A company should have an e-mail address, which it can use to correspond with customers, suppliers and staff, and a Web site, which can be as simple as an electronic brochure or as complex as an online catalog and ordering system.

The Internet is within the reach of any business today. All it needs is a computer, a modem and a connection to a service like EarthLink.

Entrepreneur:How can businesses ease new users onto the Net? Many people still haven't even figured out how to send and retrieve e-mail.

Dayton: The amount of value someone gets out of the Net is in direct proportion to how well he or she is educated about it. We go to great lengths to bring new users up to a level of competency on the Net. We even have a group of support representatives called the Guardian Angels. They make proactive support calls to members we think might be stuck. If a member hasn't used our service within a month of signing up, for example, a Guardian Angel will contact him or her and find out what we can do to help make the Internet understandable and useful.

Entrepreneur:Has your age been a hindrance in building such a big business so fast?

Dayton: On our [IPO] road show, I was with our bankers at a restaurant, and I got carded. It was very amusing.

Other than that, and some trouble renting cars, I haven't had any problems with age. I didn't when I was 19 opening Cafe Mocha, and I don't today.

Contact Source

EarthLink Network Inc., (800) 395-8425, http://www.earthlink.net