RealTime IT News

NetZero Picking Through the Bones

NetZero wasted little time swooping in to pick through the bones of its chief rival FreeInternet.com, after the privately-held no-cost ISP filed for Chapter 11 bankruptcy protection. Pending approval by a bankruptcy court, FreeI users will be moved over to NetZero's free Web access while maintaining their existing e-mail addresses. The deal is a continuing trend toward consolidation in the free Internet access space, but this latest land-grab is hardly what you'd call an encouraging sign for the future prospects of the industry at large.

Mid-April marked the beginning of the current market turbulence and not-so-coincidentally, marked the beginning of the end for FreeI. The company filed for a massive $170 million IPO just two weeks ahead of the Nasdaq's slow leak. While terms of the offering were never made public, it would have undoubtedly mirrored NetZero's $160 million IPO in which the start-up saddled retail investors with 10 million shares priced at $16 a pop last year. Since then, the free ISP's business model has fallen out of favor with investors who've sent shares of NetZero to its 52-week low near 2-1/2 from a high of $40.

By all accounts, FreeI was a comparable me-too competitor that narrowly missed its window to feast at the new issues trough. In August of 1999, the company scored its first round of funding from Menlo Park-based Sequoia Capital, in which the VC firm swapped $10 million in cash in exchange for 10 million shares. Three months later, online music provider MP3.com followed suit with an investment of its own. Shortly thereafter, FreeI landed a mezzanine round of funding that valued the company at a staggering $1 billion on paper.

At the turn of the new millennium, the newcomer was jockeying alongside its publicly-traded rival NetZero as the largest privately-held free ISP, boasting well over 2 million users. With NetZero attracting roughly 3 million users, while commanding a $1.5 billion market cap on Wall Street, the road to a moonshot IPO for FreeI looked all but assured. But come April, investors were openly questioning the frothy valuation and long-term viability awarded to a company that earned just $12 million on losses twice that amount.

Cracks were starting to show in the once-sexy business model of free Internet access supported almost entirely on ad sales. In FreeI's initial SEC filing, the company admitted that of its more than 2 million subscribers, only half had used the service within the last 30 days. That suggested a trend that subscribers were likely using the service largely as a secondary ISP or weren't entirely satisfied with FreeI. Another key concern was whether advertisers would even consider buying banner ads on a service geared toward cheapskate consumers. The answers to prospective investors' questions weren't adding up, and it was clear that FreeI's IPO prospects had become leakier than a wet paper bag.

FreeI waited until the eleventh hour to withdraw its IPO plans, filing just a week later for bankruptcy protection. That's a troubling thought when you consider that the start-up was so eager to line its pockets with investors' money despite the fact that the coffers had already long since run dry. There's little doubt that FreeI had likely approached NetZero about an acquisition months ago, but the publicly-traded company wisely chose to remain patient, waiting for bargain basement valuations. In this deal, NetZero swings for the fences, boosting its user base dramatically and eliminating its chief rival, all at dirt cheap prices. FreeI and its investors, on the other hand, fall victim to poor timing and a sour market. Put the two together, and I guess you can say this deal is, well, a net zero.

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