Sky Dayton's newest next big thing (again)
By Jason Ankeny

Mar 1, 2005 12:04 PM

The physical distance separating Los Angeles from Seoul, South Korea, is 5956 miles, but in many respects the two cities exist light years apart. For all its glitz and glamour, L.A. is a technological backwater in comparison to Seoul, the capital of South Korea and arguably the wireless capital of the world.

Although home to roughly 400,000 Wi-Fi subscribers and about 20% of all the hot spots in the world, Seoul is most of all a city where state-of-the-art mobile handsets reign supreme. By most accounts, South Korea is at least one or two years ahead of the U.S. in the arena of advanced mobile services. For South Koreans, wireless phones are not just a means for interpersonal communications but also devices for watching television, downloading music and conducting credit card transactions via applications that make their Western counterparts seem positively primitive by comparison.

Think of it this way: Where Los Angelenos limit their wireless use almost exclusively to voice services, making and receiving calls to discuss the films they're producing and the music they're recording, tens of millions of South Koreans are regularly consuming those same movies and songs over mobile devices. The difference between the two cultures is as vast as the disparity between black-and-white and Technicolor.

That wireless divide does not sit well with Sky Dayton.  “Why should U.S. consumers have to wait a year and a half to two years to get the kinds of innovations that are available in places like Korea today?” asks Dayton, the 33-year-old wunderkind who in 1995 founded pioneering ISP EarthLink and in 2001 repeated the trick with hot spot aggregator Boingo Wireless, one of the first and most successful entrants into the Wi-Fi market. “The idea of a multifaceted wireless experience is something U.S. consumers want.”

Delivering that multifaceted experience is the raison d'etre behind Dayton's newest endeavor: mobile virtual network operator (MVNO) SK-EarthLink, a $440 million joint venture uniting Korea's leading wireless operator, SK Telecom, with EarthLink, now the fourth-largest ISP in the U.S. SK-Earthlink, which is expected to go live in the third quarter of 2005, is the latest and most promising contestant in an American MVNO sector suddenly teeming with competitors — ranging from convenience chain 7-Eleven to cable sports giant ESPN. What sets SK-EarthLink apart is not only Dayton's track record but also a business model with something different — a little bit of Seoul, if you will.

“SK-EarthLink is a first among MVNOs: It's the first postpaid, high-end, data-oriented MVNO,” said Dayton, who is the new company's CEO. “MVNOs to date have traditionally been about prepaid services and reaching a lower ARPU type of customer. But there are opportunities made available by the emergence of 3G and Wi-Fi and the increasing sophistication of mobile devices to deliver a completely different kind of wireless experience.”

A 3-minute video presentation on SK-EarthLink's Web site neatly sums up what the fledgling company is about: A camera crew roams the streets of Los Angeles and Seoul, comparing and contrasting the wireless behaviors of their respective populations. In Seoul, subscribers download movies, compete in multiplayer gaming and track the whereabouts of their friends. On the other hand, “people in Los Angeles use their phones for a lot of things — for calling, for receiving calls, for…uh…” says the video's unnamed host, sputtering to a halt. He finally shouts in mock exasperation, “It doesn't have to be this way!”

Dayton's answer to the problem is both dauntingly complex and surprisingly simple: He's importing the SK Telecom model to the U.S. — all of it.

“We're taking the handsets and systems that drive those services lock, stock and barrel out of Korea and bringing them to the United States,” he said. “We're taking advantage of these emerging wireless networks that are coming down the road.”

When Dayton resigned his post as Boingo CEO in November 2004, few expected him to remain idle for long. Resurfacing in the MVNO market makes perfect sense.  “Sky has a lot of experience at MVNO-type businesses,” said Dave Hagan, Dayton's successor as Boingo CEO. “EarthLink didn't own a network and Boingo doesn't own the network, so it's certainly a natural extension of what he's done in the past.”  Not to mention the timing is right.

“We're at the crossroads of a number of major trends,” Dayton said. “The first is Moore's Law, which continues to march ahead, which means that a phone today has as much computing power as a PC did a few years ago. The second trend is the emergence of broadband wireless, and the third trend is that the Internet is becoming pervasive — it's a fundamental lifeline for people. But the idea of the Internet running over a wire is sort of odd — why do you have to be near a wire to be connected? The Internet should just be in the air. It should be all around you, like oxygen. All of this sets the stage for SK-EarthLink.”

To be sure, the U.S. MVNO sector is thriving. In February, Virgin Mobile USA, the nation's largest MVNO, announced its subscriber base had exceeded the 3 million mark, giving the company a 1.7% share of the entire U.S. wireless market less than three years after it launched on Sprint's network. In addition to the aforementioned 7-Eleven and ESPN, Disney (the sports network's parent company) and Time Warner are reportedly close to launching branded MVNO services of their own, and other players from both inside and outside of the traditional telecommunications space are circling the market as well. But Dayton argues that MVNOs do not represent a threat to wireless network operators — if anything, they're a boon to their businesses.

“In the wireless space we have these tremendous capital investments, and since it all comes down to utilization, the carriers are looking at MVNOs for ways to reach new aspects of the market — to find new customers in places they themselves may not be able to reach efficiently,” Dayton said. “Obviously, that was the story behind Sprint's support of Virgin, which really set up the MVNO industry in this country. I think that was a brilliant move on Sprint's part — it gave them access to markets they weren't getting access to and made them much more efficient. Overall, it's a trend toward specialization, and that's something we've always tried to capitalize on. We know what we do well, we know what we don't do well.”

Knowing what other people do well is where SK Telecom fits into the equation — and with 18 million subscribers, $7.9 billion in revenue in 2003 and an astounding 52% market share, SK does very well indeed.  “SK is the largest operator in Korea, but it is probably recognized around the world as the most advanced wireless carrier,” Dayton said. “They were the first to launch EV-DO, and they've been pushing the envelope in wireless for years.”

But SK may have pushed too far, at least at home, and now the company is looking to overseas expansion to continue its growth.

“It's no secret in Korea that SK Telecom is dominant in its market, so much so that Korean regulators are driving some pretty onerous regulations, including number portability, which is basically one way to allow competitors to take away from SK,” said Andrew Cole, vice president and wireless practice leader with management consulting firm A.T. Kearney, which advised both EarthLink and SK Telecom in the months leading to their MVNO announcement. “From that, you might infer that international growth is going to be very important to SK, and I think this is a very smart way to enter a market for a low risk. You're not buying AT&T Wireless or a piece of it — you are coming in as an MVNO, which is low risk and high value. It's a very smart move.”

Bear in mind that EarthLink is no slouch, either. Now entering its second decade, the Atlanta-based ISP serves more than 5 million customers, about 30,000 of which also subscribe to its existing wireless e-mail, cellular data and Wi-Fi services. The company is also renowned for its customer service, an area where wireless carriers have failed miserably. According to J.D. Power and Associates' 2004 Internet Service Provider Residential Customer Satisfaction Study, EarthLink ranked highest in customer satisfaction among dial-up and high-speed ISPs alike.

“When you see two large, successful companies coming together because they think there is that much of an opportunity for a private-label MVNO, it speaks to the overall opportunity in the market,” said Matt Johnson, CEO of mobile virtual network enabler Visage Mobile. “EarthLink is an incredibly strong brand with a great service history — customers love the service they get from EarthLink — so they have that to build off. Put together EarthLink's marketing prowess with the data expertise of SK, and you've got a pretty powerful combination.”

What that combination portends is a customer-friendly MVNO with the promise to deliver integrated Wi-Fi and third-generation cellular services enabling both data and voice through a single handset. Although Dayton is holding his cards close to his vest, he admits the possibilities of convergence intrigue him greatly.

“Some people believe Wi-Fi was an end-run on 3G, but that was never my belief,” he said. “Wi-Fi offers incredibly high bandwidth at an incredibly low cost over a short range. Once you get out of a hot spot, 3G is a better network, but when you're at home or in a densely populated area, Wi-Fi is often the better option. Neither one is a complete solution on its own. So the question becomes, How do you put them together?”

Between SK Telecom, EarthLink and Boingo Wireless, where Dayton remains both chairman and the largest individual shareholder, the puzzle pieces fit neatly into place. The hardware won't be a problem: SK is already well-known for its innovative handsets. The carrier is a member of the SK Group, a multinational assemblage of manufacturing and service providing companies that includes sister firm SK Teletech, a maker of next-generation devices boasting advances ranging from hard drives to 5 megapixel cameras to satellite television broadcast receivers.

You can also check the Wi-Fi network off the to-do list. Although no official announcement has been made, SK-EarthLink will almost inevitably name Boingo its Wi-Fi partner — in its four years of existence, the company has knit together a global roaming system enabling subscribers to connect to the wireless Internet in more than 15,000 hot spots in about 40 countries.

The biggest question mark is the 3G component. At press time, SK-EarthLink still had not officially named its network partner, although the smart money is on Verizon Wireless. At CTIA Wireless 2004, Verizon and SK Telecom — both CDMA-based operators — announced a strategic partnership to assist each other in deploying EV-DO architecture and 3G multimedia services. And earlier this year, Verizon launched its Vcast EV-DO consumer service in 32 metropolitan U.S. markets, delivering subscribers the kinds of video downloads, Web browsing and enhanced multimedia services that are also central to SK-EarthLink's mobile data vision.

Dayton would not comment on SK-EarthLink's network partner or its convergence plans, although Boingo's Hagan suggests the latter is a virtual lock.

“I think SK-EarthLink is going to be the first one to execute a [convergence] strategy — they're going to converge 3G with Wi-Fi, and then there will be other MVNOs that will roll out that same kind of strategy,” Hagan said. “You might ask the question, ‘Why MVNOs first?’ It's because of the nature of the MVNO — they're customer-centric and not network-centric, so whatever the customer wants and whatever the best way to deliver it, it makes sense to do it that way. If you're a large network operator, you may not be quite as open with what's the best way to deliver that service to the customer. The technology for convergence exists — what it takes is operators that want to execute a strategy that makes sense using this technology, and I think MVNOs will be the ones leading the parade.”

Another question mark hovering over SK-EarthLink is its target subscriber demographic. Although Dayton declined to discuss specifics, he said he is focusing beyond the young, credit-challenged consumers emblematic of the stereotypical MVNO customer.

“There isn't necessarily a correlation between age and postpaid or prepaid,” Dayton said. “The prepaid MVNOs that are out there target a certain kind of young, hip customer, but the reality is that over half of their customers don't fit that profile. From an age perspective, they're all over the map — the key theme is they want to pay less. They primarily rely on voice, and that is very different from the type of customer we're targeting.”

What SK-EarthLink is looking for instead is the kind of well-heeled, tech-savvy early adopters that buoyed both EarthLink and Boingo in their respective infancies. Maybe even those very same customers, in fact. “One of the arrows in our quiver is that there are 5.4 million existing EarthLink customers who are what I would call technologically sophisticated and who themselves are pushing the envelope all the time,” Dayton said.

That's what's most important to Dayton: Pushing the envelope. The expression itself may seem trite, but it's the underlying theme connecting nearly everything he does. What's happening now isn't nearly as important as what's happening next.

“Ten years ago, when I was starting EarthLink, people would ask ‘What will you be able to do with the Internet someday?’ When you try to imagine the types of things you can do, it's really hard,” Dayton said. “It's almost like trying to predict what people would do with electricity at the point it was discovered. All we can do is set the stage.”