United Online's Recipe For Success

Mix together one part contract deal and one part rosy revenue guidance and what do you get? An ISP that's doing a lot better than Wall Street or a host of pundits expected.

by Jim Wagner of internetnews.com [April 10, 2002]

United Online, the relatively new face of free Internet service providers (ISPs) Juno and NetZero, continues to make leaps and bounds in its transition from free services provider to a more conventional model.

On Monday, the company announced a three-year, multi-million dollar deal with Level 3 Communications to beef up its POP presence around the country.

The news, coupled with last week's announcement it would beat Wall Street expectations for the quarter—analysts expected a per share pro forma loss of about 14 cents, United officials announced it would be no more than three cents—points to the ISP's success in transitioning free users to its premium services and signing new customers to the paid service in the first place.

Mark Goldston, United Online chairman, chief executive officer, and president, said the addition of more than 100,000 paying customers this quarter, as well as pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA) profits of $3 million, is an important milestone for the company.

"We believe these results reflect the potential for this company in the value-priced Internet access market, a segment that we feel offers major opportunities for growth," he said.

The news isn't unqualified success, to be sure. Pro forma net loss is financial-ese for net loss before amortization, restructuring, and merger-related charges. Pro forma EBITDA profits means the net profits before they are taken away by the aforementioned ITDA.

United Online expects a "real" net loss of roughly 23 cents per share at the end of the March quarter.

Essentially, the pro forma numbers put the best face on some pretty hefty charges, but it's still good news for a company many had written off and the result of the ISP's successful measures in getting its free users to pay $9.95 a month for Internet connectivity.

The deal with Level 3 confirms that success. A free ISP would cram as many users as possible onto a single POP server to save money. Users who wanted to avoid busy signals and getting "bumped" off the network would be better served signing up for a premium service with guaranteed service.

But by spending millions for more access numbers in hundreds of cities throughout the U.S., United obviously expects even more paying customers to come online in the near future. Both Juno and NetZero have a list of free service POP numbers and premium service POP numbers. It's expected the new Level 3 access numbers won't go to beef up the free accounts.

Conventional ISPs have taken a certain amount of glee in the demise of the free service model, where fly-by-night providers offered free Internet access in exchange for a constant barrage of advertising.

While free service helped fee-based ISPs by drawing away some of the most difficult customers, a crowd of Web surfers who viewed connectivity as a commodity, it made raising prices tricky. A price hike generally prompted a temporary exodus to the free ISPs. Since service is generally shoddier at free ISPs, most would return, but the support costs involved in adding and removing members was onerous.

The model essentially died with the expiration of such companies as Spinway and ZipLink. Most sunk merely to become a footnote in the history of the Internet while others were assimilated by other free ISPs. In the case of Spinway, K Mart bought up its customer base before, ironically enough, scaling back the service for a cheaper alternative.

NetZero and Juno, the two largest free ISPs in the nation, were facing a similar fate before deciding to join forces. Nominally the bitterest of rivals (the two had lawsuits filed against the other for ad banner technology similarities), they finalized their merger last year and executives announced a push to get free users to pay up.

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