Simply NetZero 

NetZero may no longer be the "defender of the free world" as it moves to a paid subscriber model, but that doesn't mean it's given up its plucky underdog status in the superleague of ISPs.
 

by Patricia Fusco  Managing Editor ISP-Planet  [August 29, 2001]

Earlier this week, NetZero released its fiscal fourth-quarter results citing the slowdown in advertising spending as the reason behind its widening losses. NetZero's net loss for the quarter widened to $42.1 million, up from $26.9 million for the same period a year ago. 

The sharp deterioration in the advertising market has hit many Web services and media companies below the belt—right around where the wallet usually resides. NetZero's advertising and commerce revenues were better than halved, down from $18.5 million last year to $7.8 this year. The only way to survive these seemingly bottomless revenue shortfalls is to cut costs while raising new revenue. Of course, that's much easier said, than done. 

Three-step program 
First, NetZero cut its staff by 26 percent earlier this month and slimmed down to 270 total employees. But just cutting staff won't cut it for NetZero. The California-based company next sold its RocketCash subsidiary for an undisclosed amount of cold cash to an unnamed buyer. NetZero has been oddly recalcitrant about releasing who bought the teen-appeal payment service. But then, that's the way the buyer wants it to be. 

Finally, NetZero said it would begin giving users less free time online in October—10 hours of free Internet access each month, rather than 40 hours a month. 

Meet the new NetZero—a lean, mean, pure-play ISP machine. The ISP that built its name by providing free Internet access says it is going back to the basics to do what ISPs do best—connect customers to the Internet. Only this time, it's going to make them pay. 

Mark R. Goldston, NetZero chairman, president and chief executive officer, said its aggressive moves over the past two quarters are designed to meet the demands of a rapidly changing environment. 

"We are proud of the progress we've made in such a short time, particularly in adding more than 200,000 paying subscribers to our NetZero Platinum service less than four months after its launch," Goldston said. "As we look ahead to our merger with Juno Online Services to form the new United Online, we see valuable opportunities to leverage the strengths of both these franchises to create a major force in the market for billable Internet access services." 

Brand new day 
Peter Delgrosso, NetZero's Public Relations Manager, echoed Goldston's sentiments. Delgrosso says NetZero just wants to be the best-darned ISP on the planet. 

"We have one of the highest connectivity rates in the industry," Delgrosso said. "We have excellent sales and marketing people in place and we have longer-term contracts with top telcos in place. At $9.95 a month, we offer a compelling service offing, compared to AOL's $23.90 a month." 

What sounds like a view of the world through rose-colored glasses is actually a pretty accurate synopsis of where NetZero is today. The company does have solid contracts with Genuity, Sprint, and Level3 for connectivity and transport services. 

Additionally, NetZero just received top honors for its connectivity rates from an independent benchmarking firm. And yes, saving nearly $15 a month on Internet services is definitely a market advantage for NetZero. 

It's also a pricing advantage for Juno Online services, which will be a United Online subsidiary when the two former rivals complete their merger later this year. 

Delgrosso said NetZero's single focus right now is to complete its accounting and systems integration with Juno as soon as possible. 

"We've been focusing on integrating back office functions with Juno since about mid-June," Delgrosso explained. "There have been a lot of technical issues to overcome—different platforms to integrate—but we still expect that our merger will close by early winter." 

Technical issues, indeed—Juno serves some 15 million users with everything from free basic e-mail and Internet access, to fee-based Juno Web premium services and Juno Express broadband access. 

Just try and bring 15 million non-NT users onto your Microsoft-based connectivity business and make sure you bill them for the right program on the right day for the right amount—let alone keep local dialup numbers current and provide smiling, happy customer service and technical support. 

Right now, Juno Express DSL is the only broadband service that is slated to be part of United Online's total service mix. Remember, Juno has a deal with Time Warner for shared cable access as part of its pact with American Online. But Delgrosso says that high-speed services are not going to be a big part of NetZero's future in the near term. 

"We're 'wait-and-see' when it comes to new technologies," Delgrosso said. "Broadband is on the horizon, but not essential to our business plan. As is v.92 adoption. What customers really want is reliable access to the Internet. That's what we intend to focus on for now." 

Customer-buildup 
Approximately 3.4 million active users accessed NetZero's service during 2000, including 210,000 billable subscribers. Billable subscribers grew by 180 percent during the quarter and represented 6 percent of total active users in June up from 2 percent in March 2001 when the company had 3.9 million active users. 

Delgrosso says NetZero has its house in order and is ready to grow a paying subscriber base, especially at the expense of AOL and other Top ISPs. 

"Sure AOL is the dominant player," Delgrosso acknowledged. "But we think NetZero offers an attractive price point that is a great alternative for AOL users, as well as MSN and EarthLink." 

Two of the three leading U.S. ISPs have raised their prices already this year. AOL, which raised its monthly fee to $23.95, has been the most expensive ISP for two years. EarthLink followed suit and raised the monthly price of its basic, unlimited dialup service to $21.95 from $19.95 in July. Of course, EarthLink also launched its "Get Out of AOL Free" marketing campaign at about the same time. 

Not to be outdone, MSN launched a $50 million national advertising campaign and price promotion to lure AOL users its way in May. More recently, Microsoft moved to test the loyalty of AOL's users. When AOL hiked its prices by 9 percent, MSN's prices stayed flat, and the Microsoft ISP offered three months of free service to new customers. So far, AOL claims the price hike hasn't hurt it. 

Now, NetZero intends to leverage its $9.95 a month service fees against the big-three providers. Challenging America Online is no small feat. Can anybody slay this giant along with its Herculean sidekicks—MSN and EarthLink? 

Co-rival front 
Let's face facts, NetZero can't rival AOL or MSN's GoTo alliance for content, and it's too expensive a venture to consider. Or is it? Dig deeply into the annals of dot-com mergers and acquisitions and you will find Simpli.com at NetZero's roots. As a matter of fact, Delgrosso said that much of NetZero's ZeroPort technology originated from Simpli.com's search applications. 

NetZero still has quite a few of Simpli.com's original developers working on its advertising technology and research systems. The company could feasibly re-prioritize Simpli.com's mission and transform it from an introspective program to an extrospective targeted search application. NetZero could fill the chasm that is its dearth of Web content quickly, if it wanted to go head-to-head with the Web portals of AOL and MSN. But Delgrosso said that content is not an issue for NetZero right now. 

"We're smarter, more creative, and quick. NetZero can make changes on the cheap and turn in a new direction on a dime. We'll be using guerilla-marketing tactics against AOL, MSN, and EarthLink," Delgrosso said. "NetZero, Juno, and United Online will acquire new users organically. Sure, inorganic options remain. But we're focusing on acquiring new users, not completing an ISP rollup." 

Done dirt-cheap 
Acquiring new users takes pretty big bucks. Where is NetZero going to find the dough to rival AOL and MSN icons on personal computer monitors around the country? EarthLink has spent millions marketing its "real Internet" service, while NetZero did not renew its "NetZero at the Half" NBA contract. 

Industry experts estimate that the cost of acquiring new dialup subscribers in the U.S. is about $105 per user. Let's look toward recent history to put a price tag on new user acquisition tabs by the top ISPs, just to get a feel for what NetZero will be up against in terms of market dollars spent: 

• AOL added about 1.2 million users from the first quarter to the second quarter of this year. To do so, AOL spent $126 million, at least according to our take on the equation. 
• EarthLink added about 100,000 new uses during the same time frame, spending approximately $10.5 million along the way. 
• As discussed earlier, MSN spent $50 million on its anti-AOL campaign alone. Even though MSN appears to have added 1.5 million new users to its fold since April, 1.2 million of these "new users" represent WebTV subscribers—MSN revised its accounting methods at the time. So we know MSN spent at least $166 to acquire each of its 300,000 new subscribers in the second quarter of this year. 

Simple. Be the best-darned ISP in on the planet. 
 
 

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	[Feb. 8, 2001]	NetZero Exceeds Loss Forecasts, Rolls Out Pay Service
	[May 8, 2000]	NetZero Cannot Survive
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