By Tara Seals

THE IMPORTANCE OF THE small and medium business market has reached critical stage as ISP EarthLink Inc. demonstrated when it decided to buy privately held VPN supplier New Edge Networks.

New Edge Networks is a tremendous growth platform for EarthLink to compete in the rapidly expanding SME networking market, said Bill Heys, president of EarthLinks value and small-to-medium enterprises business unit, when the companies announced the acquisition.

Analysts see it as another way EarthLink is diversifying beyond its dialup Internet business as it sees a technological future that will not accommodate such a waning niche.

EarthLink is making a concerted effort to diversify itself and has been fairly ambitious in its approach. Part of that effort is to diversify revenues away from the consumer market and get into the SMB market, says Josh Holbrook, a senior analyst for research firm Yankee Group.

The ISP already has begun diversifying; it operates divisions focused on wireless, VPNs and highspeed Internet, and has entered into a joint venture with South Korea Telecom to launch an MVNO. EarthLink is a well-heeled company with the resources to expand, Holbrook says. I think they recognize, and rightfully, that their position in that dialup space is only going to shrink.

Taking on New Edge to penetrate the SMB market makes sense, Holbrook adds, because that is where New Edge has trained all its efforts.

EarthLink has agreed to pay approximately $144 million for New Edge. While it will acquire 100 percent of the company, New Edges customers, sales partners and employees likely will see few changes. New Edge says it intends to honor the terms and conditions in all agreements with referral and sales agents, resellers and wholesalers. Commissions also will remain status quo. If anything, New Edge will have new access to corporate and financial resources for better network reliability, more exciting products and better responsiveness, a company spokesperson told PHONE+ when the acquisition was announced in December.

New Edge will be a wholly owned subsidiary within EarthLinks Value and SME group. It will continue operating under its name (the official branding will be New Edge Networks An EarthLink Company), retain its own OSS systems and remain in its Vancouver, Wash., headquarters. Also, there are no plans to close any New Edge locations, reduce headcount or eliminate members of the executive team. Dan Moffat will keep his position as New Edges president.

Holbrook says to effectively reach SMBs, however, the companies must, at some point, become more closely linked. To operate as separate companies really doesnt serve the purpose, he says. Ultimately, the two companies will have to become more closely aligned.

New Edge agents and resellers initially will not be able to offer EarthLink products and services. The companies do plan, though, to eventually blend their portfolios including voice, data, protection and security tools for solutions providers.