Tech Talk—Free Internet Service Provider Installs Links to Cut Loss

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According to its ad campaign, NetZero Inc. is one of the “defenders of the free world,” but getting a free lunch at the ISP is becoming increasingly tricky.

Beginning late last month, users of the ISP were greeted by a new, browser-less page when they logged on. The page, called “Best of the Net,” contains links to an array of sites in various news and information categories, but not the familiar browser that users had found when they logged on before. To get to the Internet and to a browser, the user must now click on one of the Best of the Net links or conduct a keyword search.

“We did this totally for our users,” said NetZero CEO Mark Goldston. “Our whole business model is to provide access to the Net for free under an ad-supported model. And we make it easy.”

NetZero struck pay-for-performance deals with the businesses that placed links on the Best of the Net page, and some of the businesses paid for placement.

“We get paid for taking you to those sites, which is why we can pay your telecom bill,” Goldston said.

NetZero isn’t forcing users to visit the sites, according to Goldston, but is instead “strongly suggesting that this is the best that the Net has to offer.”

It is too early to tell how users will take to the new page, but NetZero’s overall population of registered users has been steadily climbing.

Through Dec. 31, some 7.7 million users were registered for free Internet access, of which 3.9 million used the service in the month of December, according to NetZero. Goldston said the number is today as high as 8.4 million registered users.

In addition to the new page, NetZero, like other free-access providers, has sought to curb heavy users of its Internet service. The company has now capped usage at 40 hours a month (NetZero says its average user spends about 15 hours online). It is charging $9.95 a month for those who exceed 40 hours.

Later this month, NetZero will also offer a $9.95-a-month service for unlimited, bannerless access. Goldston is optimistic about this new revenue stream, which could help compensate for dwindling ad revenues, he said.

“They’re trying to bring revenue and cost curves closer together, and they’re doing that efficiently,” said Pacific Crest Securities analyst Jeff Goverman. “It’s not as a result of something they did, it’s something that’s been done to them. The revenue line kicked down, and they’re reacting in a positive fashion.”

Positive or not, investors are still wary of NetZero’s advertising- and commerce-supported ISP model. The stock has dropped into the under-a-buck category, down from a high of $27 last March. Last week it was hovering at about 80 cents a share.

Maybe that skepticism has something to do with NetZero’s mounting losses. The company reported a net loss of $43.3 million (38 cents a share) for the fourth quarter ended Dec. 31, compared to a net loss of $24.5 million (27 cents a share) in the like year-earlier quarter.

Net Zero’s fourth-quarter revenues were $16 million, up from $12.2 million in the like year-earlier quarter.

Goldston insisted that his company has a “heavily loaded cash balance sheet” with $182 million in cash and no long-term debt as of Dec. 31.

The stock is in the dumpster, Goldston said, because “the market is in a ridiculously irrational state right now.”


World Leaders in Cyberspace

Last week, Russian President Vladimir V. Putin entered cyberspace for the first time during a 40-minute live chat on the Net. A week before, former Soviet President Mikhail Gorbachev beat him to the punch when he launched his digital library.

That international policymakers and think tanks are increasingly leveraging the Web to broadcast ideas and policy papers is good news for Tree Media, a small Santa Monica Web development company that designed and produced the Gorbachev site.

Tree Media, headed by journalist Leila Conner Petersen, is focused on taking content from “mindtrusts” online. Whether it’s the vast content from Gorbachev’s library or policy papers culled from world leaders for the “Caspian Sea Discourse” Web site, the mission of Tree Media is to make world issues widely accessible.

Consumer demand for the Caspian Sea Discourse or for a site on water issues in the Middle East another Tree Media-produced project is trivial compared to, say, a fan site for Ricky Martin. But the demand from policy wonks is strong enough to support Tree Media’s business model, Petersen said.

“I call it a policy vertical, a site that becomes a live library for world issues,” she said. “That’s where we’re headed.”

Getting there hasn’t been easy. But by staying small and thrifty and by bringing in some bread-and-butter clients with deep pockets like The Walt Disney Co.’s Miramax Films and the Pentagon Tree Media is weathering the Internet winter.

The private company has been profitable since it was founded in 1998, according to Petersen. Last year, revenues of $1 million came from a diverse portfolio of clients that included a mix of nonprofit customers like the Gorbachev Foundation, the Council on Foreign Relations and others, like Miramax.

Tree Media doesn’t have a marketing team, and the company has been growing on word of mouth only.

“We’ve been flying below the radar,” Petersen said. “We can go as we are or possibly accelerate. We’re finally sending out our business plan and looking for potential investors.”

Staff reporter Hans Ibold can be reached by phone at (323) 549-5225 ext. 230 or at [email protected].

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