NZRO --
Free of charge
IPO Snapshot 09/20/1999 1:30 PM
By Kelly Black
Company: NetZero Inc.
Expected symbol: NZRO
Expected price range: $9-$11 a share
Shares offered: 10 million
Post-offering shares: 102.9 million
Lead underwriter: Goldman Sachs
Internet address: www.netzero.com
Free browsers, free e-mail, free real-time stock quotes - and now free Internet access. With the arrival of the hotly anticipated initial public offering of NetZero, expected to debut this Friday, the U.S. marketplace for free access to the Web is just beginning to blossom. NetZero is clearly the leader in this new market, boasting over a million subscribers. In fact, according to Forrester Research, NetZero is now the ninth-largest Internet service provider in the country, an impressive claim for a company that's only been around since October 1998.
Zip, zero, zilch, nada
Never underestimate the power of free stuff. Netscape learned that lesson the hard way when Microsoft (MSFT) introduced its Internet Explorer browser to consumers at no cost. NetZero already realizes it. Access that otherwise costs the Web surfer an average of $20 per month, NetZero provides for free.
NetZero likens itself to network television, and just like TV, NetZero's free service is made possible by advertiser support. In exchange for e-mail and unlimited Internet access, users must submit personal demographic information and put up with ever-present advertising. Instead of commercials, NetZero utilizes the ZeroPort, a window slightly larger than your typical banner ad. Advertisements rotate in the window at intervals of 20 to 40 seconds, and they are ever pervasive.
In an age when Web surfers bebop from site to site at a brisk clip, a guaranteed 30-second ad hovering atop the clutter of windows is an advertiser's dream come true. Though advertisers love this approach, the Web surfer may not. Regardless of whether you're surfing online or checking your e-mail, the ZeroPort is omnipresent. But malicious cyberhackers are already having a field day with this minor inconvenience. Software programs are cropping up that disable the ZeroPort ad window and thus hamper NetZero's ability to deliver ads to the user. Because advertising is the sole revenue stream for NetZero, this issue will continue to be an uphill battle.
Birds of a feather
The best testimony to NetZero's potential success is perhaps the company it keeps. NetZero is among the first companies launched with funding from idealab! Capital Partners, the venture capital arm of the Internet incubator idealab!, founded by entrepreneur extraordinaire Bill Gross. With its IPO, NetZero will become the fourth company that idealab has nurtured to a public offering.
TicketMaster Online-CitySearch (TMCS) was hatched first, bursting into the stock market last December with a remarkable 187% first-day gain. The next idealab-backed venture to fly from the nest was eToys (ETYS), whose May IPO rocketed 282% on its first day of trading. Even amid the summer IPO slowdown, GoTo.com (GOTO) posted gains of 50% in June when it became the third firm that idealab pushed through to a public offering. By early July, GoTo.com had ballooned to a stock price of nearly 70, well above its initial pricing of $15 a share.
Idealab is certainly hoping to duplicate those returns with NetZero. Idealab and its affiliates will own nearly 28% of NetZero after the offering, holding just under 29 million shares. If the shares are priced at $10 each, the value of the $8.4 million stake held by Idealab and its affiliates will swell to a stately $240 million.
Trouble in paradise
All that glitters is not gold however, as NetZero is discovering the hard way. The free ISP's income statements are awash in red ink. For the quarter ended in June, NetZero lost nearly $7.5 million on revenue of $4 million. Of that revenue, nearly half was attributable to exclusive content deals with LookSmart (LOOK) and AdSmart. Despite NetZero's advertising-based business model, the company has had difficulties acquiring more lucrative targeted advertisers based on individual user profiles. The majority of the company's ad revenue thus far has been generated through non-targeted banners.
With the release of ZeroPort just a month ago, the company is ramping up its efforts to acquire even more sponsorships and targeted advertisers. In addition to banner sales, NetZero now also sells additional advertising on a host of buttons, and marquee space on the ZeroPort ad window. While all this brings greater ad-generating opportunities, it may be at the expense of the user, who is being bombarded with even more ads.
Growing competition
In the past, this business model has proved to be less than effective. A number of early competitors have been unable to make a go of it, quickly running out of money. Under the tutelage of idealab, NetZero has never lacked outside funding, having received $46 million in venture financing for the year to date. But with the impending NetZero IPO legitimizing the market for free Internet access, competition is coming out of the woodwork.
Perhaps the biggest threat to NetZero is CMGI's (CMGI) Altavista service. Altavista's FreeAccess acts in much the same way as NetZero, with a maneuverable floating window of banner ads and various buttons. Altavista's product is only one-eighth the download size, a measly 600kb, compared with NetZero's 4.5Mb. It's an important factor because the key means to acquire both software products is via download. Another difference is that Altavista requires users to periodically interact with the ad bar, monitored via a "health meter," which decreases over time without ad clicks. If the user fails to interact with the system, they are disconnected from the Internet.
NetZero provides nationwide service with local dial-up numbers in over 600 cities. Other start-ups, such as freei.net and Tritium, only offer coverage to a smattering of metropolitan markets. Free access doesn't do much good when you must pay long-distance telephone fees to connect.
In the United Kingdom, free access is already a booming business, with hundreds of competitors. The UK's No. 1 free ISP is Freeserve plc (FREE), which went public in July. Boasting over 1.5 million subscribers, Freeserve has given America Online's (AOL) UK unit a run for its money. The upstart has pushed AOL out of the top slot in a matter of months and has forced the 800-pound gorilla to consider offering free access of its own just to compete. However, Freeserve has only achieved modest success among investors. After a promising debut, the company's share price has fallen within 10% of its initial offering price.
The road ahead
It's a vicious cycle NetZero is entering. With the infusion of IPO cash, the company plans to spend between $25 million and $50 million to attract more users. As the user base expands, the infrastructure will need to support the added burden without loss of performance. Users will recall AOL's troubles that coincided with that company's explosive growth just a few years ago.
While beggars can't be choosers, competition in the field is growing furiously. It won't be long before users have a broad selection of free ISPs to choose from. With NetZero's highly publicized IPO, subscriber growth is expected to mushroom. As more users log on, congestion will be a key issue for the company to address, and it will be interesting to see if NetZero becomes a victim of its own success.
Idealab already has a reputation for backing some of the most exciting e-companies to hit Wall Street, but those companies also have a reputation for substantial offerings. With a float of 10 million shares, NetZero will be one of the largest hatchlings to date. That may not be well received by seasoned investors, who are accustomed to the wild volatility that surrounds Internet companies with lesser floats. Nevertheless, the company's share price should soar initially on investor enthusiasm over the incubator's latest innovation.
This week's IPOs - Expected Tuesday
Rampart Capital Corp. and Hi-Q Wason are expected to price Tuesday. The companies, both of which were expected to price last week, were described in the Sept. 13 IPO Snapshot column.
Interactive Intelligence (proposed symbol ININ) plans to kick the week off with a bang. The company develops software that provides companies with an all-in-one call center solution, managing phone calls, e-mails, faxes and Internet chats. It plans to offer 2.6 million shares between $11 and $13, with Merrill Lynch as the lead underwriter.
Expected Wednesday
Web surfers visiting Cybergold's (proposed symbol CGLD) Web site have the chance to earn some of their own cybergold via the company's incentives marketing program, similar to MyPoints.com (MYPT). Pair this with GeoCities-esque free homepages and community-based message boards and chat, and you have Cybergold's "Earn & Spend Community." The company plans to offer five million shares priced between $7 and $9.
Kana Communications (proposed symbol KANA) develops software to help companies manage their e-mail. Over 150 leading companies utilize Kana's software, including Priceline.com (PCLN), eBay (EBAY), Lycos (LCOS) and Datek Online. The e-mail services company plans to offer 3.3 million shares priced between $11 and $13. The lead underwriter will be Goldman Sachs, with e-broker Wit Capital acting as one of the secondary underwriters.
Businesses use Broadbase Software's (proposed symbol BBSW) products to analyze valuable customer information in order to help target customers, personalize marketing campaigns and increase sales productivity. The B2B company plans to offer four million shares priced at $10 to $12.
Expected Thursday
Not just another e-mail services provider, yesmail.com (proposed symbol YESM) is actually a permission-based direct marketing company. Over five million subscribers have said "yes" to have various targeted offers and promotions sent to them at their existing e-mail addresses. The company plans to offer 3.4 million shares priced between $10 and $12, down from an original price range of $11 to $13.
Similar to Kana, eGain Communications (proposed symbol EGAN) provides software to help businesses manage their voluminous incoming and outgoing e-mail communications. Founded in 1997 by the co-founders of WhoWhere?, an Internet directory acquired by Lycos, this B2B company will offer five million shares priced between $9 and $11.
Ashford.com (proposed symbol ASFD) wants to be the place online for the discriminating shopper. The company sells luxury goods via its Web site, such as watches, fine writing instruments, sunglasses and fragrances, with plans to extend into other premium marketplaces. Founded in 1998, the luxury retailer plans to offer 6.3 million shares priced between $11 and $13, with Goldman Sachs as the lead underwriter.
Similar to Broadbase Software, E.piphany (proposed symbol EPNY) develops analytical software that gives businesses insight into their customers' habits, allowing them to personalize a consumer's shopping experience. The software company plans to offer 4.15 million shares priced between $9 and $11, up from an original offering size of four million shares.
AirGate PCS (proposed symbol PCSA) will be the exclusive Sprint PCS (PCS) affiliate offering regional wireless services in much of South Carolina, North Carolina and eastern Georgia. Operating under Sprint's national network, the company hopes the affiliation will propel it to the lead in its industry. The wireless services company will offer 6.3 million shares priced at $14 to $16.
A true non-Internet IPO, Jore (proposed symbol JORE) makes power tool accessories and hand tools, such as a reversible drill and driver and screw guides. Sears Roebuck (S) and Black & Decker (BDK) account for the majority of the company's sales. The family-owned business plans to offer four million shares priced between $9 and $11, up from an initial plan to offer 3.8 million shares.
Trintech Group PLC (proposed symbol TTPAY) provides a host of secure electronic payment services, enabling the safe transfer of funds between consumers, businesses and financial institutions. The Ireland-based company plans to offer 5.8 million shares in a price range of $10 to $12.
Expected Friday
FreeShop.com (proposed symbol FSHP) is a bargain hunter's paradise, cataloging thousands of free items available online. From trial offers to samples to information, the company has over 20 categories for Web surfers to comb through, and generates revenues from advertising and performance-based fees from its clients. Federated Department Stores' (FD) Fingerhut unit owns 44% of the company. The offering is set at 3.2 million shares, with an expected price range of $9 to $11.
Rather than using traditional direct marketing services, Webstakes.com (proposed symbol IWIN) uses the appeal of sweepstakes and prizes to garner subscriber information. Over 1.3 million consumers have registered with the company in the hopes of winning a prize, providing data that can then be used by the company's clients to target marketing campaigns. The sweepstakes company plans to offer 3.5 million shares priced between $13 and $15.
Medscape (proposed symbol MSCP) provides medical information to the more than 1 million people working in the health care industry via a Web site. CBS (CBS) has recently acquired a 35% stake in the firm. The company plans to offer 6.6 million shares in a downwardly revised price range of $7 to $9 after delaying an offering in mid-August.
A subsidiary of Brooktrout (BRKT), Interspeed (proposed symbol ISPD) delivers broadband data access for businesses using high-speed DSL access. The offering amount is set at 3.5 million shares, with a price range of $10 to $12.
Keynote Systems (proposed symbol KEYN) is perhaps best known amongst the investment community for its Web Broker Trading Index. The company is the world's leading supplier of Internet performance measurement. Its worldwide network monitors such activities as the speed of downloading Web pages and performing e-commerce transactions. It plans to offer four million shares at a price range of $10 to $12.
Working on the premise that "people hate Web wait," Alteon WebSystems (proposed symbol ATON) focuses on delivering Web speed for e-businesses through the manufacture and marketing of high-performance Ethernet Web switches and server adapters. Sun Microsystems (SUNW) accounts for over 40% of the company's sales. The company plans to offer three million shares priced between $14 and $16.
Bluestone Software (proposed symbol BLSW) makes Java-enabled server software that allows companies to organize information internally and better conduct their business over the Web. The company plans to offer four million shares in a price range of $11 to $13.
Calico Commerce (proposed symbol CLIC) provides e-commerce software and services to businesses online to help their customers make online purchases of more complex products. Customer input is then assessed to direct consumers to the appropriate product. The offering amount is set at 3.9 million shares priced between $12 and $14.
Perfumania.com (proposed symbol PF) is the online arm of parent company Perfumania (PRFM). It was launched this year. After the IPO, Perfumania will own 67% of its subsidiary. The company plans to debut on the American Stock Exchange, with 3.5 million shares at a price range of $7 to $9.
Also expected sometime this week is Hat World, whose retail business is all about baseball caps. Its more than 70 mall stores and its online marketplace carry an extensive selection of officially licensed hats of all professional and college sports teams. The retailer plans to offer a modest 1.1 million shares priced between $7 and $9.
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