In Flat Market, ISP Says "We're Not Dead Yet"

SAN FRANCISCO (09/08/2000) - It's hard to remember now, but just a couple of years ago, being an Internet service provider was an unproven, intriguing new business model.

"Back in 1996, I couldn't even find someone who knew how to get us started," says Charles Ardai, CEO of Juno. "The idea was still foreign to most people."

The intervening years have taken dial-up Internet service providers like Juno on a wild ride. The for-fee dial-up business has been slammed by Wall Street as free ISPs such as NetZero have entered the market. America Online dominates the market, having surpassed 24 million customers last week. Behind AOL is a dogfight between No. 2 EarthLink, Juno and The free ISPs continue to attract millions of customers while trying to prove themselves viable for the long term.

That means that anyone without sufficient cash reserves is looking for a way to sell out. A number of longtime providers have lost interest in the space: according to Telecommunications Reports, AT&T WorldNet lost 32 percent of its subscriber base in the past 3 months, dropping it out of the top tier of dial-up Internet service providers.

Meanwhile Juno, like a Monty Python knight,is not dead yet. Ardai is in the midst of yet another in a long line of transformations, striking deals with anyone he can, turning Juno into a ubiquitous ISP, available at any price and on any bandwidth. Juno's persistence is a case study in hanging in against the odds in the volatile Internet Economy.

Wall Street money manager David Shaw, head of D.E. Shaw & Co., asked his longtime aide Ardai in 1995 to look for Net investments. Ardai came up with Juno, and soon after decided to head up the new venture himself.

Juno launched its basic service, providing dial-up Internet e-mail for free, in 1996. Within eight months the fledgling provider had 1 million subscribers. Two years later Ardai had a full-fledged Internet service, and by 1999 the company had begun testing broadband and wireless versions of its service and had moved toward offering dial-up Internet access for free. The company even has a deal with Hughes Electronics for satellite service. It's safe to say no other ISP has the same number of ways to offer Internet access, from free dial-up to DSL to satellite.

But as Ardai built out his services, the ISP business fell on hard times. The once-hot sector came to be seen as a commodity by investors, and many mom-and-pop ISPs bailed on the market altogether. After going public in May of 1999 and trading as high as $87, Juno's stock price now loiters in the single digits. Nevertheless, Ardai decided to fight rather than flee. In the last two years he has eked out a business by being impossible to pin down.

"We're on the verge of an Internet mutation," he says. "The way people use the Net is going to explode - we're talking about about Internet connectivity across devices we haven't even thought of. Who better than Juno to bridge those?"

Indeed, among ISP executives it's an article of faith: The market has bottomed out, and recovery is on the way. "Right now, our stock is so undervalued, the market will take notice," says Garry Betty, CEO of EarthLink. "Once people realize that the free ISPs won't take all of our business, and they look at our bottom line, it'll turn around."

Hopes for a turnaround also focus on broadband. The arrival of high-speed Net connections could open up whole new revenue models built around video-on-demand and other high-speed offerings.

But so far, cable companies are reluctant to let ISPs get access to their high speed cable networks. Without regulatory relief the cable companies can hold ISPs to punitive contracts just for the privilege of offering Net access to cable customers. The same is true to a lesser extent for DSL and wireless networks.

That means carving out a broadband business has been slow going. Juno has deals with Covad for DSL, with Metricom for wireless and with a handful of cable partners. The company grabbed headlines in June by striking deals to offer its service on cable boxes through the cable companies' networks. Despite the cable companies' intransigence, Ardai has sneaked into a few trial deployments. "We just cold-called them, and they let us in," says Ardai.

Juno has also refused to play the inflated-numbers game. It's hard to tell how many subscribers top ISPs have, because many of them give away Net access and don't distinguish between active and inactive users. NetZero can claim more than 4 million subscribers, but only half of those log on with any regularity. Because Juno doesn't pump up its subscriber numbers it tends to be underestimated by many in the industry. Though Ardai could claim 11.1 million registered users, many of those are holdovers from the free e-mail service days. Juno's active users total 3.4 million. Of those, only 730,000 pay for the service, averaging $9.95 a month.

Ardai's task is to build subscription levels without burning precious cash reserves. In a depressed market, ISPs have had to find new ways to lure subscribers. At the height of market valuations, ISPs were often spending $400 for each customer acquired - or as much as $700 per subscriber when acquiring another ISP. With stock prices bottoming out, those numbers don't compute. "When we go into a deal, we make it clear that we're not talking in terms of dollars, but just shares," says Ardai. "When we offer 20 shares per subscriber, people recognize that those 20 shares won't have the same dollar value they once did, but they're betting on the upside."

Juno has also taken to luring subscribers from failed ISPs and compensating the defunct company's officials with stock. Each time a subscriber from Freewwweb, WorldSpy or another ISP that Juno has struck a deal with switches to Juno, that company gets some Juno stock. Ardai says he expects maybe a quarter of those companies' users to make the switch.

Though Juno is publicly traded, it still runs much like a startup, burning through cash at dangerous rates. The company pulled in $29.6 million last quarter - $18.4 from subscribers, the rest from advertising and other services. The company lost $40 million over that period - clearly an unsustainable trajectory. Ardai has promised to slash Juno's burn rate by more than half in the coming quarters. One distinct advantage: Unlike a startup, Juno has $85 million in cash reserves.

The company's all-things-to-all-customers business model also makes it a hard acquisition target. None of the traditional ISPs would likely want to buy up Juno's subscribers with their hodgepodge of free and paying arrangements. Ardai says he'd consider selling if the price is right, but so far, no one seems particularly interested.

For now, Ardai, who just turned 30, is happy piloting Juno into full-fledged maturity. The landscape has shifted around his 4-year-old company, but Ardai will adapt as he's done before.

"One of the benefits of being an old-timer in this business is that I've seen this all before," he says. And with that wisdom has come new confidence - or dogged refusal to pack it in. "With all the new high-bandwidth fiber being laid, we'll just do the same things we did before, but better, faster and smarter. And who's better positioned to take advantage than people like us who've been doing this for years?"

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