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ComputerWire: IT Industry Intelligence

EarthLink Inc is making a play into the business-to-business white-label internet access market and the budget consumer market, snapping up smaller rival PeoplePC Inc for the bargain-basement price of about $10m.

PeoplePC's niche is providing a PC-and-internet bundle, both directly to consumers and to consumers and employees via a number of affiliates such as Ford Motor Co, Vivendi Universal SA, the American Automobile Association and the US Veterans of Foreign Wars (VFW) association.

By aggregating the purchasing power of its about 500,000 subscribers, the company says it can provide users with a internet-ready PC, unlimited dialup, and tech support for about $25 per month. Users sign up for three-year contracts. EarthLink is expected to take over both segments of PeoplePC's business model.

"Historically, EarthLink has played in the premium end of the market," PeoplePC CFO Nick Grouf told ComputerWire. "This gives them the opportunity to create a value product and really compete in the value side of the market." He added that EarthLink now also has the opportunity to pursue the white-label access market.

The purchase price is set at $10m in cash, but could go as high as $14.3m if certain unspecified commitments are met. Even adding on $35m in service liabilities, the total price tag is still shy even of PeoplePC's first funding round back in 1999, which came to $65m, reflecting current economic realities.

In PeoplePC's last reported quarter, for the three months to March 30, it lost $8.8m, compared to a loss of $36.2m a year ago, on revenue that was up 28% at $48m. The firm had current assets of $18.8m on its balance sheet, down $12m sequentially. EarthLink will pay $0.017 to $0.024 per share, representing a new low for the Nasdaq Small Cap-listed firm.

The fourth quarter will be a crucial one for the PeoplePC business, when the first wave of subscribers to sign up in 1999 will have their contracts come up for "refresh". Back in 1999, the users were given a 366MHz Celeron-based PC, and this October they will be given the opportunity to continue to subscribe, upgrading to a 1.xGHz machine.

Some analysts, including Credit Suisse First Boston, which came out with a research note yesterday, estimate that churn will be significant. PeoplePC's Grouf refused to speculate on the level of expected churn, but said a recent survey of subscribers had 88% expressing their interest in "refreshing".

The acquisition, which comes in the form of a tender offer to PeoplePC shareholders, will also mean EarthLink gets its hands on PeoplePC's technology platform, which appears to be essentially a suite of customizable portal and network management software used when providing internet services via its partners.

© ComputerWire.

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