United Online Blossoms in No-Frills ISP Market

Selling dial-up Internet access may seem like a dying business, as waves of Web surfers defect from leading Internet service providers America Online, MSN and EarthLink.

But there’s a vibrant dial-up market blossoming below the industry leaders as computer users flock to no-frills access for less than $10 per month.

The growth has inspired dozens of ISPs to elbow into the bargain market, some charging less than $5 a month. But no company is benefiting more from the trend than United Online Inc.

United, based in Westlake Village, is attracting new customers almost as quickly as AOL is losing them. It is the owner of bargain-priced ISPs NetZero, Juno and BlueLight and has added 840,000 subscribers in the year ended in June -- while AOL’s U.S. service has decreased by 1.2 million customers.

Meanwhile, EarthLink lost 201,000 dial-up subscribers and MSN shed about 100,000.

With 2.55 million subscribers, United Online still lags the industry heavyweights.

America Online has nearly 10 times as many U.S. subscribers. And EarthLink has 4.87 million subscribers, about 3.9 million of them dial-up customers.

MSN, which like AOL doesn’t break down dial-up and broadband, had 8.6 million subscribers for the same period ended June 30.

United Online’s growth produced a $21-million profit during the first half of this year and ignited a hot stock that has mushroomed 16-fold since the September 2001 marriage between NetZero and Juno that created the company. On Friday, shares of United Online closed up 31 cents at $34.29 on Nasdaq.

Management predicts the boom will continue, with another 400,000 to 600,000 subscribers joining one of its discount ISP plans next year.

“We want to serve the masses in a way that makes them happy and keeps us profitable,” said Mark Goldston, United Online’s chief executive.

He’s not after the defectors of major dial-up providers who are migrating to broadband service. Instead, United Online is wooing AOL, MSN and EarthLink customers who want to trim their expenses without giving up unlimited Internet access.

The bargain ISP market appears poised for further growth as more low-income households buy their first computers and connect to the Internet.

An estimated 16.1 million households with Internet access -- about one-fourth of the market -- earn less than $35,000, according to IDC, a technology research firm. By 2006, IDC projects 29.1 million Internet households, or about one-third the market, will have annual incomes less than $35,000.

With that price-conscious market in mind, United Online is trying to build the Internet’s version of Southwest Airlines Inc. -- a frugal business with a decent, low-price service that pressures rivals.

United Online’s bare-bones approach still turns off plenty of people.

Those who dislike NetZero and Juno complain of obnoxious ads, frequent disconnections and customer service headaches. Unlike the premium services, United Online charges its customers $1.95 per minute to talk to customer service representatives.

United Online’s success has vindicated Goldston, who came to NetZero in 1999 determined to create a free ISP supported by streaming ads.

The concept flopped, resulting in $312 million in losses during NetZero’s first three years. To survive the dot-com shakeout, Goldston orchestrated a merger between NetZero and former rival Juno.

Investors were so turned off by the combination that the stocks of NetZero and Juno both fell below $1 per share.

“We were seen as two skunks trying to breed a mink,” Goldston recalls.

Goldston saw the deal through and reduced expenses by laying off about half the workforce, leaving United Online with 460 employees today. He also began to emphasize the low-priced subscription service while continuing to offer a limited amount of free access.

United Online still has about as many nonpaying users as subscribers, but the company no longer spends much supporting the free service, just $12.6 million in the company’s most recent fiscal year ended in June.

Meanwhile, United Online collected $248 million from its subscribers in its last fiscal year, up from $6.7 million two years ago.

Because United Online initially was built to support a free Internet service, a big chunk of the fees is falling to the company’s bottom line.

It’s a business that Goldston predicts his rivals won’t be able to copy: “To do it, they would have to blow their companies up, which they are more than welcome to do.”