NetZero Rolls Out Pay Service, Exceeds Loss Forecasts

NetZero Inc., self-styled “Defenders of the Free World” Wednesday followed in the footsteps of arch-rival Juno Online Services and gave up on only providing free Internet access services with the introduction of its new premium service, NZ Platinum. At the same time, the company revealed that in the quarter ended Dec. 31, 2000, it racked up a loss three cents per share greater than what analysts were expecting.

NZ Platinum subscribers will pay $9.95 per month to get the NetZero service without the advertising banners present on its free service. However, NetZero said it would still utilize other advertising and commerce channels like NZTV, LaZerMail and a soon-to-be-launched “Best of the Net” start page to monetize NZ Platinum subscribers. NetZero plans to launch the new service by the end of the March 2001 quarter.

“The NZ Platinum Service was developed when research by NetZero’s CyberTarget division indicated that a meaningful portion of our user base would be interested in a pay version of our Internet service without banner advertisements,” said Mark R. Goldston, chairman and chief executive officer of NetZero.

“A vast majority of NetZero users came from pay ISP services — in fact, many may still have a pay service in addition to their NetZero free account. It is our belief that the compelling nature of the ‘NetZero Platinum’ offering should prove highly attractive to the individuals who are seeking a great economic value in a high-quality ISP without persistent banner ads.”

The company will continue to offer its free service, which was recently modified to allow only 40 hours per month of free service. Users of the free service who need to use more than 40 hours in a given month can pay $9.95 for NetZero Professional, which offers unlimited access. At the end of the month, those users revert to free service.

Additionally, the company has taken the strange step of implementing programs seeking to limit the number of people who can download their free software on a daily basis. It also raised the price of CD-ROMs with the NetZero software to $9.95. The company said the programs are intended to help manage operating costs and regulate network capacity.

“The programs we have announced reflect our commitment to offer a tremendous value to consumers while expanding our revenue model to accommodate this rapidly changing market,” Goldman said. “In light of the challenging advertising environment, we have acted quickly to develop innovative ways to generate revenues while minimizing costs.”

The new service was unveiled in conjunction with the company’s fiscal second quarter financial results, which saw the company’s pro forma net loss (before stock-based charges, amortization of intangible assets and net interest income) climb to $33.5 million, up from a net loss of $24.4 million in the same quarter last year. On a share-per-share basis, the loss equates to 29 cents per share. Analysts were anticipating a loss of 26 cents per share.

“Given the continued weakness in online ad spending, NetZero faced many of the same challenges that impacted other advertising players in the December quarter,” said Charles S. Hilliard, chief financial officer of NetZero. “This, in combination with significantly accelerated user growth, resulted in a widening of our gross loss margin versus the September 2000 quarter. It is important to note, however, that effective management of our telecommunications network helped reduce the company’s cost of revenue per hour by 12 percent over the same period. We also demonstrated success with other cost containment efforts, including maintaining an employee base of less than 400 people despite the spike in user growth.”

However, the company did report strong user growth, with about 3.9 million users accessing its services in December, up 70 percent from the 2.3 million which accessed services in September. The company is now reporting 7.7 million registered u

sers — of which 51 percent are monthly active users — as of December 2000.

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