Earthlink shaken by AOL merger.

Imagine your biggest competitor one day snapping up one of your most important distributors. Suddenly, you're left figuring out how to get out your product.

That, in a nutshell, is what's happening to EarthLink Network Inc. in the wake of America Online Inc.'s $4.2 billion deal to buy Netscape Communications Corp.

EarthLink is one of numerous Internet-related businesses in the L.A. area likely to feel the effects of the mega-merger. For some with close connections to AOL, whether through e-commerce or some other partnership, it could represent a windfall. But for others, it could turn into a nightmare - or at least require significant strategy shifts.

Pasadena-based EarthLink is one of those companies.

As an Internet service provider that connects customers to the World Wide Web, EarthLink has had a close relationship with Netscape. Once connected, the user needs a browser - software that lets him navigate throughout the Web. To lure customers with a full Internet package. EarthLink has been bundling copies of the Netscape browser with its own software - 20 million copies this year alone.

EarthLink has furthered its relationship with Netscape by having a link to Netscape's business-oriented home page appear on the EarthLink "start page." As one of the first images a user sees when logging on, the link has driven significant traffic to the Netscape's Netcenter.

But as one of AOL's prime competitors, EarthLink is ready to sever those Netscape ties.

"Why would we want to work with AOL?" asked EarthLink spokeswoman Kirsten Kappos. "We believed that Netscape is a good product, which is why we worked with them. But as Sky (Dayton, EarthLink's CEO) put it, the romance with Netscape is over. We'll likely stop using it now and shift exclusively to Microsoft."

EarthLink already distributes roughly 20 million copies of Microsoft Corp.'s browser, Internet Explorer, each year. That presumably would be used to replace the existing association with Netscape.

"This merger suddenly puts EarthLink in an interesting position," said Barry Parr, director of Internet strategies for International Data Corp. "It will have to choose among the lesser of two evils: working (more intensively) with Microsoft or working with AOL."

According to EarthLink, Microsoft is the lesser evil.

But with AOL quickly evolving into an even mightier presence on the Web, the very viability of EarthLink may be challenged. Analysts have been predicting an industry shakeout, in which smaller Internet service providers get squeezed out. The AOL-Netscape merger has been interpreted by some as the first step in that direction, and pundits are quickly guessing at which the next companies to merge will be.

EarthLink stock was especially volatile last week, closing on Nov. 25 at $52.36, amid various rumblings about what the deal might mean.

"Let's put it this way: Size does matter," said Eric Brown, senior Internet analyst for Forrester Research Inc.

For its part, AOL is being circumspect about the EarthLink situation.

"EarthLink will obviously have to reexamine their relationship with Netscape, but we value (EarthLink) as an ISP," said AOL spokesman David Eisner. "A very large percentage of Netcenter visitors come from ISPs, so we value the traffic that comes from them. We hope that EarthLink will rethink its attitude."

Easy for them to say. Already the world's largest Internet access provider

with 14 million subscribers, Dulles, Va.-based AOL will now have Netscape's respected Web browser software and popular business-oriented Netcenter Web site. That means the novice-friendly company will now have access to more technically savvy and business-oriented Internet users, thus increasing its market share.

"AOL may have been laughed at before from a technical standpoint, but no one has laughed at them from a business one," Brown said. "About two-thirds of all (U.S.) Internet users visited sites by AOL and Netscape last month, and the same percentage used software from one of those two companies to get there. From an advertising perspective, 35 percent of all online advertising revenue came from Netcenter and AOL.com alone. AOL is the industry gorilla."

EarthLink's Kappos said that while the industry is going through a natural maturation process, any consolidation would be contained at the top.

"There is absolutely room for us in the industry," she said. "There will always be room for smaller companies in this business. That's been the model for other types of media."

As proof of EarthLink's long-term viability, Kappos pointed out that more than 50 percent of its 815,000 subscribers are former AOL customers looking for what industry observers characterize as a more sophisticated Internet service provider. The company has been running a "Get Out of AOL Free" program for years to entice new subscribers.

Only last week, EarthLink beat out AOL in a deal with CompUSA Inc. in which the computer retailer will promote EarthLink as the store's official ISP, and sell its services through the chain's hardware, software, Web site and catalogs.

As EarthLink scrambled to strategize last week, other L.A.-area companies enthusiastically embraced the news.

One such company is Culver City-based Entertainment Asylum, a wholly owned AOL subsidiary. that creates an extensive entertainment news site. The new-media production company runs three discrete sites - its own Web site, a site on AOL's proprietary system, and a scaled-down version on AOL.com's entertainment center.

"This is absolutely a good thing," said Karin Mihkels, the company's director of marketing. "It is too soon to tell how it will exactly affect Entertainment Asylum, but I can say that AOL has made some very smart moves."

RealSelect Inc., a Westlake Village-based company that runs one of the nation's largest online real estate listing services, also could be well-served by the deal. Last March, the company inked a $14 million deal with AOL to be its featured residential listing site promoted under AOL's real estate section. It later announced a deal of similar scope with Netscape through the Excite Inc. portal.

Since RealSelect already has a relationship with both companies, the firm's Chairman and Chief Executive Stuart Wolff said that it is difficult to draw early conclusions on how the company might benefit from the merger. Wolff did say, however, that his team is already in the process of rethinking its business plan.

"We're feeling pretty good today, which is more than I can say for some other companies," Wolff said.

Unemployment in L.A.

Countywide joblessness nears pre-recession levels...

...But vast disparities remain.

Tightest Job Markets

City                     Unemployment

Hermosa Beach                1.6%
Manhattan Beach              2.0
Rancho Palos Verdes          2.0
Sierra Madre                 2.1
La Habra Heights             2.1

Loosest Job Markets

City                     Unemployment

Florence-Graham (L.A.)      14.4%
Willowbrook (L.A.)          12.6
Compton                     12.5
East Compton                12.1
Belt Gardens                11.7

Source: California Employment Development Department