NetZero's New Tack

SAN FRANCISCO (04/27/2000) - Qualcomm's investment in free Internet-access company NetZero.com on Monday wasn't just a big boost to NetZero, it was a boon to the free Net-access movement in general. So far, free access has been relegated to dialup accounts, but NetZero, thanks to Qualcomm, is trying to push into wireless and broadband, as well.

The $144 million from Qualcomm is a financial cushion for NetZero, which incurred heavy advertising costs associated with building the company's brand.

CEO Mark Goldston says the company already had two years of cash on hand, mostly from the company's IPO last year, but that the new investment gives the company an additional $280 million in liquidity, which ought to last five years. As for when he expects the company to be profitable, Goldston offers no timetable, saying only, "If we're not profitable in five years, then we're in big trouble."

The Qualcomm investment also sets the stage for some interesting mutations of NetZero's business model. Goldston says Qualcomm already had been working on a re-engineered version of its popular Eudora software, which NetZero will begin using in the next generation of its software. More interestingly, NetZero will use its relationship with Qualcomm to build wireless versions of its software, allowing NetZero customers to get e-mail, Net access and other services on cell phones or other handheld Net-access devices.

Additionally, NetZero is interested in taking advantage of Qualcomm's emerging high-data-rate technology, which uses cell phone transmitters to send Web content to wireless computers at broadband speeds. The technology makes it possible for people to get Web access on wireless connections at speeds equivalent to digital subscriber line or other types of broadband. But Goldston, who took the reins at NetZero in March 1999, faces a major challenge in combating the perception that few of the company's 3 million registered users actually use the service.

"It looks great to have 3 million subscribers, but once advertisers find out those people don't actually use the service, they'll go find someone else," says Adam Portnoy, CEO of Surfree.com, a direct competitor. Portnoy tried a modified version of free Internet access but wound up selling out to Eisa, an ISP based in Dallas. NetZero says it's not down for the count yet, pointing out that more than 50 percent of its users have been active during the past 30 days - only a few percentage points behind industry averages.

And as for selling its targeted ads, the company says its ad-banner slots have been sold out for some time and that, in fact, demand is far outpacing available slots. Fierce competition is another big problem for NetZero. While the company has been focused on building its brand, competitors like 1stUp.com have been signing distribution agreements for their free Net services.

1stUp, which powers free Internet access for Excite.com, AltaVista.com and others, says 3.5 million people have downloaded its software through its partners. Goldston and company are now in a position to fight back, launching a new unit called Custom Branding, which will build partnerships similar to 1stUp's with both online and offline companies.

"We'll still have the NetZero brand on that service, and I think the most important thing is the brand," Goldston says. "But we also have to figure out new and interesting ways to deliver it to people."