EarthLink the Wireless Operator Stock? (ELNK, GOOG)

A San Francisco city panel has identified EarthLink Inc. and Google as the best candidates to blanket the city with free wireless Internet service. The two companies can now enter final contract negotiations with the San Francisco, and will likely spend about $15 million to cover the city in WiFi gear. Basic 300 kb/s service will probably be ad supported and free to end-users; faster, ad-free service will likely cost about $20 per month.

The news will likely make no difference to Google's stock (GOOG) price, but may have a profound impact on EarthLink's (ELNK) over time. EarthLink, lacking its own last-mile infrastructure, has struggled to compete with DSL and cable modem service while steadily losing dial-up customers. But with a few deals like the San Francisco contract would transform the carrier into a "WiFi carrier". The key will be the length of time the cities grant exclusivity to their chosen providers.

Here's the key excerpt from the AP report:

The recommendation, completing a six-week review, allows the city to begin negotiations with Google and EarthLink, Inc., which decided to team together earlier this year after initially bidding against each other. The companies will pay to build the entire network, which is expected to cost at least $15 million.

EarthLink envisions charging roughly $20 per month for the ability to surf the Web at speeds four to five times faster than Google's free service, expected to be financed with a heavy dose of ads.

Om Malik comments:

...Google has asserted that Earthlink will simply be a carrier for their ad-subsidized, 300 kilobits per second service. Now the two can enter into contract negotiations directly with Executive Director Vein and the DTIS for a 8-10 year lease to be the sole provider, with Earthlink administering the accounts. While it won’t cost The City a dime from their budget, customers will pay approximately $20 a month for ad-free a megabit per second service...

...So Earthlink and Google walk away with wireless riches, and perhaps a license to print money in San Francisco.

EarthLink's stock is up almost 4% at the time of writing. The deal isn't done yet; privacy issues must still be resolved, and final negotiations still have to happen. But it's hard to see anything other than positive catalysts for Earthlink's stock in the near future.

Related:

1. EarthLink's most recent conference call transcript
2. Google's most recent conference call transcript
3. More opinion and analysis of ELNK
4. More opinion and analysis of GOOG