Qualcomm Steps Into Cyberspace With NetZero
Qualcomm Inc., the wireless technology giant best known for its digital phone network, entered the Internet service provider business Monday, purchasing a 10% stake in NetZero for $144 million.
The deal positions Westlake Village-based NetZero to be the first Internet service provider to test and deploy Qualcomm’s wireless High Data Rate, or HDR, technology. When it becomes available within the next two years, HDR could allow mobile Web surfers to access the Internet everywhere that mobile phones work, and at speeds faster than those currently offered by cable modems and digital subscriber line hookups.
In the meantime, San Diego-based Qualcomm plans to market NetZero’s free Internet service to the 19 million users of its Eudora electronic mail management software. That would help NetZero gain on rivals America Online and EarthLink Network. Eudora also will become the preferred e-mail program for NetZero’s more than 3 million customers, roughly half of whom are active users. (AOL has 22 million members; EarthLink has 3.5 million customers.)
The deal also boosts NetZero’s cash reserves to about $280 million--enough to keep the company afloat until it becomes profitable regardless of what happens in the fickle capital markets, analysts said.
Qualcomm’s investment values NetZero at $12.50 per share, a 51% premium over its $8.28 closing price Thursday. Although NetZero hit an all-time low of $5 last week, analysts said the deal is still a bargain considering that NetZero was trading at $23.88 six weeks ago. After going public in September at $16, NetZero reached an all-time high of $40 on Dec. 21.
In Nasdaq trading Monday, NetZero shares rose $3.16, or 38%, to $11.44. Qualcomm shares dropped $9.88, or 9%, to $99.63, the first sub-$100 close on a split-adjusted basis since Dec. 10.
NetZero executives believe that standard dial-up access will continue to dominate its business for the next five to seven years, but analysts said it was critical for the company to find a way to provide high-speed access to its customers.
“You don’t really want to be seen as someone who offers Internet access through your desktop and then, once you’re on the move, you have to resort to using someone else’s service,” said Youssef Squali, an Internet analyst with ING Barings in New York.
Paul Noglows, an Internet analyst with Chase H&Q;, said NetZero’s goal is “to be the leading provider of universal Internet access, not just on the PC but also on [personal digital assistants], cell phones and laptops. It’s not by chance that AOL and Yahoo are pursuing an ‘everywhere’ strategy. You basically need to be where the customer is at any given time.”
Qualcomm’s HDR technology probably won’t be ready until the end of 2001. In the meantime, NetZero will probably offer high-speed Internet access via cable and phone networks, NetZero Chief Executive Mark Goldston said. Though it will come with the targeted ads that allow the company to offer dial-up access for free, the high-speed service probably will be offered with a monthly fee, albeit a reduced one, he said.
Talks between the two companies were initiated five months ago by a Qualcomm board member who is friendly with Goldston. Initially the partnership was focused on Eudora, which comes in a freeware version and a full-featured version called Eudora Pro that customers can buy for $50, or get for free if they accept ads. As Qualcomm and NetZero got to know each other better, they began forging a deeper alliance that included the HDR technology.
Qualcomm developed the HDR technology so that mobile customers could make high-speed Internet connections without hogging the limited capacity of the wireless networks. Qualcomm has a few HDR systems in technical trials.
For Qualcomm, the investment is not a huge one, considering the company’s stockpile of about $2 billion in cash. Qualcomm will benefit by extending its signature wireless technology--known as code division multiple access, or CDMA--to the Internet. Qualcomm sold its phone-making business in December to Kyocera and now generates most of its revenue by selling specialty CDMA chips and collecting millions of dollars a year in royalties from licensing its CDMA technology.
For NetZero, the cash infusion proves to investors that the company has long-term staying power and that its stock is undervalued, analysts said.
