- The Washington Times - Thursday, July 27, 2000

WESTLAKE VILLAGE, Calif. NetZero Inc. has attracted more than 4 million registered users in less than two years by offering free Internet access to anyone willing to surrender personal information and submit to a constant barrage of on-screen ads.

By that yardstick, the company follows only America Online's 23 million in sheer user numbers.

But NetZero is under attack by scores of imitators, and investor skepticism has pushed down its share price more than 80 percent. Serious questions are being raised about businesses predicated on giving away Internet access alone.

So what is NetZero doing? It's morphing.

In all, more than 100 free Internet service providers are in business, most backed by well-known companies that want to lure customers to Web sites or build brand loyalty.

Kmart, for example, has BlueLight.com, created in a partnership with Yahoo. Others include the Web portals Lycos and AltaVista, the on-line trading company Ameritrade, Seventeen magazine and Ace Hardware.

At the same time, a shakeout has begun among independent free-access providers.

Worldspy.com and Freewwweb LLC shut down this month after running out of money. Both referred users several hundred thousand, at least to Juno Online Services, an ISP hybrid that offers both free and paid Internet access.

"The free ISPs that rely solely on advertising are not going to survive," said Steven Harris, an analyst with International Data Corp. "I think some of them are definitely heading toward oblivion, and some of them are going to evolve into a new system."

The first free ISPs appeared in 1996, born on the theory that the Internet could operate much like commercial television, with ad sales generating enough revenue to cover costs and turn a profit.

But high telecommunications costs and weak ad sales forced pioneers such as Hypernet and Freeride out of business. NetZero was founded in 1998, after telecom costs began to drop and advertisers began warming to the World Wide Web.

Since going public last year, NetZero has lost $49.3 million on revenue of $29.1 million. From a high of $40 in December, its stock closed at $5.81 yesterday on the Nasdaq Composite Index.

So it's shifting gears, starting new ventures to supplement ad revenue.

A marketing research division sells general, anonymous data about user browsing habits to advertisers. In April, cellular technology developer Qualcomm Inc. paid $144 million for a 10 percent stake in NetZero, giving the company more than $200 million in cash.

For the longer term, NetZero and Qualcomm are developing a fee-based wireless service aimed at laptops and handheld devices.

NetZero also has counterattacked newcomers such as Kmart, partnering with companies that want to create their own free ISP.

The biggest customer so far is General Motors, which signed a four-year, $100 million deal for the ISP and an e-commerce link on NetZero's ad bar.

With the new ventures, NetZero remains committed to its free dial-up service, said Mark Goldston, NetZero's chairman and chief executive.

"We're seeing more and more mass market, powerhouse audiences come to NetZero," Mr. Goldston, a former chief marketing officer at Reebok, said in an interview. "Our revenues are up, our targeted advertising is working and our telecommunications costs are going down."

A big obstacle, though, is how many registered users regularly log on.

Although No. 2 in terms of registered users, NetZero ranked 14th, with 1.8 million unique users individual users who logged on at least once per month in ratings by PC Data.

Mr. Goldston claims he is not disturbed by the perception that NetZero users are low-budget consumers less likely to respond to on-line advertising.

Those same bargain-hunting consumers will bring mass-market advertisers to the Internet the way they brought them to television, he argues.

Mr. Goldston is making his case through aggressive marketing, including a three-year deal to sponsor the halftime show of televised National Basketball Association games.

Less than 10 percent of U.S. Internet users log on through a cost-free access subscriber. Over the next three years, the market will grow to between 15 percent to 20 percent of users, forecasts Youssef Squali, an analyst with ING Barings in New York.

NetZero, he believes, will be among two or three major players to dominate the space.

Juno, which like NetZero has strong brand recognition, is another likely candidate, he said.

"Consolidation is where the business is going. Two years out while you may still have smaller mom and pop shops with a few hundred thousand customers, they will basically be stuck in the middle," Mr. Squali predicted.

Meanwhile, the so-called retail-sponsored private labels like General Motors should comprise about 70 percent of the free ISP market by 2003, compared with 30 percent at present, said Dylan Brooks, an analyst with Jupiter Communications.

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