NetZero-ing In on Small Spenders
At the offices of United Online Inc. in Woodland Hills, they’re still basking in the glow of having scored on AOL.
“They’re trying to compete with us in a segment that they used to call a fool’s errand,” Mark R. Goldston, the beefy 49-year-old who has run the low-cost Internet access provider since joining its predecessor in 1999, says with a chuckle.
The cause of all the jollity is a recent TV campaign for United’s NetZero service that took a bead on a couple of extremely annoying America Online commercials. You might know them: One featured a young mother bursting into an AOL board meeting, blithely handing her infant to an executive and demanding better service from atop the table.
NetZero’s version features an identical mom in an identical boardroom -- except that when she issues her demands, she’s told to join NetZero to get them.
If the campaign sounds a little pointed, that’s because AOL has lately become one of United Online’s direct rivals. Once the owner of a secure revenue stream based on millions of dial-up Internet accounts with users paying as much as $23.90 a month, AOL is being squeezed by customer defections to costlier but faster broadband services, as well as to companies like United, which offers dial-up access as low as $9.95.
AOL’s response has been the launch of a $10 service that the Time Warner Inc. unit calls Netscape. (EarthLink Inc., another major dial-up provider, has also introduced a “value-priced “ service.)
Goldston professes to be largely unconcerned about this invasion of his space. “I’d prefer they not be there,” he says, “but the value market is going to expand.”
He speaks in a rapid-fire cadence perfected through years of salesmanship and investment road shows; ask him a simple question, and he’ll take off like an F-16 on afterburners. His main pitch is that NetZero serves one of the last remaining growth markets in Internet access: low-income families who won’t spend more than $20 a month for dial-up access, much less $40 for a high-speed broadband connection.
Research surveys forecast that 15 million such households will come online in the next three years. Goldston aims to snare at least 3 million of them. He figures the market will last another 15 years, or until wireless becomes ubiquitous.
United is already the nation’s largest value provider, boasting some of the healthiest profit margins and highest customer ratings in the online industry. The company claims about 3.2 million subscribers paying $9.95 for conventional dial-up service or $14.95 for an enhanced version employing software and networking tricks to speed up certain downloads.
For all that, its subscriber growth rate recently slowed with a loud screech, causing hand-wringing on Wall Street and forcing Goldston to pare year-end subscriber projections to 3.35 million or less. He attributes the trend to the aggressive competition from AOL and EarthLink, along with a resurgence of travel that has kept people offline.
Still, he has heeded investors’ calls to diversify. Last month, United paid $100 million to buy Classmates Online, the owner of a Web service that helps people reconnect with old school, military and work chums. Goldston plans to use Classmates’ base of 38 million registrants (of whom 1.4 million pay a monthly fee) to market NetZero and other services.
Goldston joined the Internet business after 27 years in consumer marketing at such companies as Revlon and Reebok. In the 1990s, he founded his own firm specializing in turnarounds.
When he joined the fledgling NetZero, he was looking forward to finally running a business with bright prospects. The company was built on the assumption that people would willingly submit to relentless online advertising in return for free Internet access. The model said ad revenue would be sufficient to cover the cost of the connectivity, and then some.
In 2000 this notion had the power of Holy Writ. NetZero shares had topped $100 after a 1999 initial public offering. Scores of providers were offering people ad-supported free access under brands including Kmart and “The Simpsons.” None made money, but the craze continued right up to the moment when the Internet bubble burst. Online advertising evaporated with a puff.
Suddenly, Goldston found himself in another turnaround situation. He decided NetZero’s survival depended on its offering paid access, albeit at a cut rate. In mid-2001, with the company’s shares plummeting, NetZero merged with its main competitor in the free-access market, Juno Online, to jointly pursue the new model.
The deal provoked horselaughs in the market. It was hard enough to make money with a fully priced service; how could they hope to succeed in the bargain basement?
“We looked like two skunks trying to breed a mink,” Goldston recalls.
But the company turned profitable six months later, with 1.2 million paying subscribers. The low overhead left over from NetZero’s free-access days gave it a huge cost advantage over
rivals AOL, Microsoft Corp.’s MSN and EarthLink. Another boon was the commoditization of Internet access: Whatever path one chose, the destination was the same Internet that everyone else reached.
The only competitive factors were speed and price, just as they are today. Goldston maintains that he can match rivals such as AOL in the first category and hold them off in the second. He says he’s helped by the fact that United is the only company in the sector that isn’t distracted by dreams of offering broadband service.
“Dial-up is a far better business than anyone envisioned in the halcyon days when we were a hot IPO,” he says. “And we’re the only company in the business that really wants to be in it.”
Golden State appears every Monday and Thursday. You
can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.
