VERY NEGATIVE ARTICLE ON nzro FROM INDIVIDUAL INVESTOR.COM
Analyst Bullpenÿÿÿÿÿÿÿÿÿ Analysis Archive
Net Zero's Free Service is Showing Signs of Weakness ÿÿTODAYÿÿI. I. ÿ A N A L Y S I SÿÿÿÿÿÿÿÿÿScreening for Companies with High DebtÿÿÿÿÿÿÿÿÿMICROCAP JOURNAL: Goodrich Petroleum and VerilinkÿÿÿÿÿÿÿÿÿCMGI Solidifies Position in Internet Advertising SpaceÿÿÿÿÿÿÿÿÿUPDATE: Corel's Surge Seems OverdoneÿÿÿÿÿÿÿÿÿFord Resolves Labor Issues, Inks a Deal with Microsoft, and Restructures its Brazilian OperationsÿÿÿÿÿÿÿÿÿVeritas: Justifying a Triple-Digit MultipleÿÿÿÿÿÿÿÿÿAssisted Living Stocks Could Use Some Help ThemselvesÿÿÿÿÿÿÿÿÿUPDATE: Liposome Takes it on the LipÿÿÿÿÿÿÿÿÿApple Computer: A Chip Off the Old PCÿÿÿÿÿÿÿÿÿWhy eBay is oKayÿÿÿÿÿÿÿÿÿBID & ASK: Why I am a BlockheadÿÿÿÿC O M M E N T A R YÿÿÿÿÿÿÿÿÿTechnical Analysis Moves to the Fore as Market WeakensÿÿÿÿÿÿÿDID YOU MISS A DAY?ÿÿLast 7 Days Archived
------------------------------------------------------------------------
<Picture>http://www.individualinvestor.com
By Craig Schneider 9/23/99
NetZero Inc. (NASDAQ: NZRO - Quotes, News, Boards) will probably be one of the hottest initial public offerings (IPOs) of the week. But if you can tune out the market's buzz and think long-term, you may hear a sound more resembling a 'thud.'
NetZero will price 10 million shares after the close on Thursday for between $9 and $11 a pop, and they will begin trading Friday on the NASDAQ under the ticker symbol NZRO, with Goldman Sachs (NYSE: GS - Quotes, News, Boards) as the lead underwriter.
The concept seems great at first glance. Customers get free Internet access, saving themselves about $250 a year, and NetZero gets to display a permanent advertising banner on your computer screen. It collects ad revenue and demographics data on its customers and then tracks their online buying habits.
<Picture>Like this Article?
Companies that want to target specific customer profiles pay for the ad space.
You would think that being a free Internet service provider, or ISP, has distinct advantages at a time when roughly two-thirds of the U.S. is still off-line. But you wouldn't know it by NetZero's numbers.
Between the October 1998 launch of the service and June 30, 1999, approximately 1.2 million users registered for its service, the company notes in a Securities and Exchange Commission filing. However, it adds that only 613,000 of them accessed NetZero's service in June.
Why the discrepancy? Seasonality is always an issue, but NetZero also notes in its filing that some people who come to its site to download the free browser don't use it as a primary ISP. Other users, looking for novelty, have met with unreliable software and limited support.
If NetZero can't keep its user base clicking, you can bet the advertisers won't come knocking. That's a cold, hard reality considering that for the year ended June 30, 1999, approximately 27% of the company's revenue came from a co-branding agreement with LookSmart Ltd. (NASDAQ: LOOK - Quotes, News, Boards), a category-based Internet portal. The deal expires in April.
Another 26% came from Internet advertising provider, AdSmart, from a contract that expires in February.
'That's enough to make me a little worried right there,' says Pat Dorsey, a Morningstar analyst. With half of its revenue from just two sources, you better believe that renewing those contracts is a big deal.
The advertising business on the Web is tough for everybody, tougher for a newcomer. With a few exceptions, ad rates are declining because of the increasing availability of banner space. As ad rates in the industry decline, NetZero has to lower rates for its advertising clients to remain competitive with the other ISPs and ad-based sites.
NetZero faces competition from America Online (NYSE: AOL - Quotes, News, Boards) and Microsoft Corp.'s (NASDAQ: MSFT - Quotes, News, Boards) The Microsoft Network, as well as EarthLink Network (NASDAQ: ELNK - Quotes, News, Boards), MindSpring Enterprises (NASDAQ: MSPG - Quotes, News, Boards) and numerous regional and long-distance telecommunication providers.
What's more, NetZero is at risk from the growth of LookSmart and AdSmart. As its clients grow, the two will theoretically be more 'in the driver's seat' when it comes to dictating the terms of a contract.
'As a stand-alone, we're not placing tremendous faith in the longevity of this business,' says Emily Meehan of The Yankee Group, a Boston technology research firm. Dorsey agrees: 'How many advertisers really want to hit cheapskates?'
Sure, NetZero has a chance to really build a user base, but it will be expensive. Meehan argues that it needs to target the two-thirds of the U.S. market that are not already online. NetZero has primarily focused on word-of-mouth advertising.
Promotions including mass-CD mailings (like that of America Online) are being considered, according to the company.
But it may not even pay considering that Meehan's vision of the future doesn't include NetZero's model. 'The next generation ISP is free access as part of a larger service or suite of services, not just plain vanilla for a flat fee,' she says.
For example, an online brokerage could give its customers free Internet access if they trade a certain amount each month. Rather than providing the Internet access through an infrastructure it owns, the on-line brokerage could arrange to outsource the service through a third party.
But business relationships of this sort may not be an option for NetZero unless it modifies its strategy. The company's goal is to build brand recognition, and being an outsourced provider of Internet access would work against that.
Still, the company is building some partnerships. Compaq Computer (NYSE: CPQ - Quotes, News, Boards) has agreed for one year to put NetZero's software into its Presario computers, but Dell Computer (NYSE: DELL - Quotes, News, Boards) plans to offer free access deals using its own branded Dell.net service. Microsoft has expressed interest in the free ISP idea as well. Those well-heeled competitors can swamp a start-up like NetZero on the first lap of a long-distance race.
Unlike some other Internet start-ups, NetZero does have some tangible revenue. For the year ended June 30, the company had sales of $4.6 million.
However, like most Internet high-fliers, NetZero is burning through cash at an accelerating rate. According to its SEC filing, the company's total operating expenses grew from $847,000 in the December 1998 quarter to $1.9 million in the March quarter to $4.6 million in the June quarter. Expense figures for the September quarter will not be available until after the IPO.
It also had $24 million in cash, giving it some breathing room before the money runs out. But given the accelerating expenses, the company does need a successful IPO and new string of advertising contracts to keep its bank account healthy.
Bottom Line:
Given the flurry of competitors eyeing variations of NetZero's model and the unproven nature of the company's core strategy, the company's long-term prospects are cloudy at best. The customers of this on-line service may be getting a free ride, but investors can expect to pay dearly if they aren't careful. |
