Cheap at the price

Earthlink's founder, Sky Dayton, explains why spending $7.5 million for the domain name was a smart deal.

By Damien Cave
September 18, 2000 11:30PM (UTC)
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Sky Dayton founded his first company before he was old enough to drink. Next, after having chosen technology instead of college in 1988, the Greenwich Village youth turned California surfer founded Earthlink, now the nation's second largest Internet service provider.

Earthlink is valued at $1.4 billion, so one can assume Dayton is now a very rich man. But the 29-year-old isn't ready for a break quite yet. Even as he continues to be chairman of the board at Earthlink, Dayton is also setting off a stream of new businesses at eCompanies, the Santa Monica incubator that he and former Disney executive Jake Winebaum founded in June 1999.


Dayton says he spends most of his time at his new venture, and one can understand why. The incubator has already founded about a dozen start-ups including -- which Dayton calls, with perhaps just a touch of over-the-top extravagance, "the Yahoo of business." Last month, eCompanies announced the creation of a wireless division in partnership with Sprint PCS, the cellphone service provider.

Still, so far, eCompanies looks more like a Rumplestiltskin than Warren Buffet. is best known for paying $7.5 million for its domain name -- hardly something to be proud of -- and none of eCompanies' other investments seem poised for break-out, Earthlink-like success. Dayton himself may be best known in certain sectors of the Web for his affiliation with the Church of Scientology -- and Earthlink's most recent headlines have focused on its entanglement with the FBI's plan to place its Carnivore surveillance software on the Earthlink network.

Dayton was reluctant to talk about Scientology. But he has no problems being optimistic about eCompanies and was also more than willing to discuss Earthlink's run-in with the FBI.


Earthlink spent some time in court trying to keep the FBI from installing Carnivore on its network. What was the problem?

Earthlink felt that the Carnivore process was burning down the house to get the nails. It was too excessive. We had always cooperated with law enforcement officials when they asked us to and it worked pretty well. We wanted that process to continue. When we got an order from a judge then we'd comply. But Carnivore went further. The FBI essentially said we want to set up an office inside your data center, and "oh, we're not going to go through things without getting a search warrant." The network is a very complex thing, where small changes can have dramatic effects. And any time you introduce something new to the backbone -- which is essentially what Carnivore does -- there is a chance that you'll run into problems. So we just wanted them to show us a search warrant and then we'd help.

Are you satisfied with the deal you ended up making with the FBI?


Not necessarily, but it's beyond Earthlink at this point. It's one of those things where we were on the frontier. We have to do what they want whether we like it or not. But clearly the FBI made a mistake choosing the name Carnivore. From a public relations perspective, it was a disaster waiting to happen.

Right now, you're spending most of your time with eCompanies. The latest announcement is the creation of a wireless division. That's a pretty crowded marketplace -- what is going to make your company stand out?


Wireless has been an interest of mine for a long time but it's just reached critical mass in the last 12 months. Wireless is really exploding. It feels like 1995 all over again, when the wire-line Internet first took off. And something I saw -- a story that was going to repeat itself -- was that everyone was going to assume that it was the existing companies that were going to come in and port their offerings to wireless and dominate. In 1996, everyone expected the Bell companies would kill the ISPs and that the media companies like Time-Warner were going to kill the Yahoos and Lycos' of the world. That didn't come to pass because at the end of the day, it came down to a dedicated Internet focus to create something that was fundamentally different than the business that the incumbents were in. Smart, gritty entrepreneurs rolled up their sleeves and the consumers chose the Internet-centric brands over the old-line brand. That's why Earthlink is larger than all of the Bell companies combined, larger than AT&T, larger than everyone except AOL.

I think the same thing is happening in wireless where a lot of people think it's going to be the Yahoos of the world who will rule. I disagree. I think it's going to be entirely new companies that are focused 100 percent on wireless that will dominate. They can move faster, with better service because they're companies that are built from the ground up for the medium. Plus, the number of people connected to wireless Internet services will far surpass those who come online through their PCs. It's an easier learning curve, so there will be more people connected. It will be one of the easiest on-ramps; it's a lot easier to use a 12-digit keypad than to buy a computer and figure out how to get online.

Actually, when I used the Wireless Web phones I had a difficult time with them. That may just be because I'm used to the PC, but this seems to be one of the major hurdles to widespread use and there are others, like modem speed.


We are a backwater here in the United States, compared to Europe and Asia, which is why a lot of our focus will be there. But here, I would come to the same conclusion -- it's slow, it's hard to use. But wireless is not a replacement for the wire-line Internet. It's merely another form of it. It's got things that it's good at and things that it's not good at. You're not going to do a complex photo-sharing application on a wireless phone. But things that are time sensitive or location sensitive are perfect for wireless in a way that wire-line services can't provide.

Are these the areas you're pursuing?

Well, we're looking at a lot of areas. And we're already building companies in some of them. One of the things that is most exciting to me is location-based services. Again, this is where you know the position of the person, so the kinds of things you can enable are services that never existed before.


Imagine sitting in a movie theater and before the movie starts, dialing your phone and asking which of your friends are in the theater. Or think of the things you can do with collaborative filtering and wireless, location-based services. They could be the basis of all kinds of things -- like new car-pooling applications. Chances are, you're going somewhere where someone you know is going too, or at least someone you know knows. A connection can be made through whatever degrees of separation that you program. You can get people together in three-dimensional space that could have never been done before the wireless Internet.

I noticed that with the companies you've already founded, there's a pretty even split between business-to-business sites and consumer sites. Is this how you expect the wireless push to break down?

We don't have any real criteria there. B2B or B2C is sort of after the fact.

Do you have numeric goals in terms of how many companies you want to found in the next year, for example?


We don't have any specific goals. We'll take it as slow or fast as the opportunity allows. Right now, we're assembling a lot of the infrastructure. It's early. We have this great partnership with Sprint, and they give us access to some very important resources that we need early on to build these businesses.

Like what, besides the $15 million investment?

Access to technology and to their research and development. They tell us, for example, what people are doing with their phones, wouldn't it be great if there were these applications. Then we have the chance to go build them.

Let's talk about A lot of people were shocked to discover how much you paid for the domain name. What were you thinking?


Well, we think the opportunity is huge. The company is doing really, really well. In fact, we've just won a $61 million round of funding from the titans of business media -- Pearson, Cahners, Primedia and McGraw-Hill. But we paid that much because we wanted to make sure we had the highest-order brand. And the service -- I don't know if you've used it -- but it's pretty damn good.

I have used it and from what I can tell, it's a business portal, which some people would say is an outdated, dead business model. Is it profitable yet? When do you think it will be?

Well, it's in the very early stages of getting going. Profitability is not the question right now. Yahoo has provided a great model on the consumer side of what you can do if you aggregate a lot of activity and provide people with a great, easy resource. And this is business-class information, hand built from the ground up by directory professionals in each of the areas, like airlines and health and technology. It's all backed by a great editorial staff, led by Peter Gumbel, the former Los Angeles bureau chief of the Wall Street Journal.

People like Mary Meeker have called the Yahoo of business and the financial model of Yahoo provides a very relevant model for


How many users do you have?

We haven't released that.

How exactly does the incubation process work?

Most other incubators are there to provide a service to an existing entrepreneur, an existing start-up. Then there's the eCompanies model -- which is very different -- which is to actually start the companies ourselves. Pretty much all of the ideas we have are generated internally, by me, Jake and the entrepreneurs that work with us. That's different. It positions us at the point of the greatest value creation. We own 100 percent of the business from the beginning. It doesn't get much better than that.

Isn't there also a seven-step program involved? How does it work?

The first step is the founding of the business -- the original spark of an idea. It usually comes with a founder. But what we've been doing is coming up with the idea, start the business, then one of our executives or an entrepreneur in residence will jump in and scope it out. The next step is finance, where we set up the company's legal infrastructure, put some money in a bank account and get it set up so that it can go to the next step, which is recruiting. Then it's creative, when we build the product, the Web site, or if it's a wireless application, the screens.

Technology is the next step. That's where we'll do all the backend engineering. Business development, and then marketing are the last discipline. That's where we brand the company.

The seven disciplines are staffed at eCompanies by second-generation professionals, so Maryjo Bos, for example, is our vice president of people. She's one of the top recruiters in the Internet space. Sangam Pant is our chief technology officer. He was head of engineering at Lycos. So all these guys have done really well elsewhere. And it's not so much a linear process; but we do all of them at once. The idea is to get really great support from people that have made all the mistakes before.

Since you're not based in Silicon Valley, has it been hard to assemble the teams that staff all your start-ups?

No. It's been great because its not the frothy, overblown market of the Bay Area. You can actually recruit talent at relatively sane compensation packages. You can find real estate, and we're near the ocean so we can go surfing and rollerblading down the boardwalk. It's a healthier environment to build businesses. We're also one of the only games in town. And it's the second largest in the United States. It's good place to be.

Damien Cave

Damien Cave is an associate editor at Rolling Stone and a contributing writer at Salon.

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