United Online’s Recipe For Success

United Online , the relatively new face of free Internet
service providers (ISPs) Juno and NetZero, continues to make leaps and
bounds in its transition from free services provider to a more conventional
model.

On Monday, the company announced a three-year, multi-million dollar
deal with Level 3 Communications to beef up its POP
presence around the country.

The news, coupled with last week’s announcement it would beat Wall Street
expectations for the quarter — analysts expected a per share pro forma
loss of about 14 cents, United officials announced it would be no more than
three cents — points to the ISP’s success in transitioning free users to
its premium services and signing new customers to the paid service in the
first place.

Mark Goldston, United Online chairman, chief executive officer and
president, said the addition of more than 100,000 paying customers this
quarter, as well as pro forma earnings before interest, taxes, depreciation
and amortization (EBITDA) profits of $3 million, is an important milestone
for the company.

“We believe these results reflect the potential for this company in the
value-priced Internet access market, a segment that we feel offers major
opportunities for growth,” he said.

The news isn’t unqualified success, to be sure. Pro forma net loss is
financial-ese for net loss before amortization, restructuring and
merger-related charges. Pro forma EBITDA profits means the net profits
before they are taken away by the aforementioned ITDA.

United Online expects a “real” net loss of roughly 23 cents per share at
the end of the March quarter.

Essentially, the pro forma numbers put the best face on some pretty hefty
charges, but it’s still good news for a company many had written off and
the result of the ISP’s successful measures in getting its free users to
pay $9.95 a month for Internet connectivity.

The deal with Level 3 confirms that success. A free ISP wouldn’t care how
many dial up users shared a POP server, as long as it saved them
money. Users who wanted to avoid busy signals and getting “bumped” off the
network would be better off served signing up for a premium service with
guaranteed service.

But by spending millions for more access numbers in hundreds of cities
throughout the U.S., United obviously expects even more paying customers to
come online in the near future.

Both Juno and NetZero have a list of free service POP numbers and premium
service POP numbers. It’s expected the new Level 3 access numbers won’t go
to beef up the free accounts.

Conventional ISPs have taken a certain amount of glee in the demise of the
free service model, where fly-by-night providers offered free Internet
access in exchange for a constant barrage of advertising.

While free service freed conventional ISPs from catering to a crowd of Web
surfers who viewed connectivity as a commodity, it made raising prices
tricky. A price hike generally prompted a temporary exodus to the free
ISPs. Since service is generally shoddier at free ISPs most would return,
but the supports costs involved in adding and removing members was onerous.

The model essentially died with the expiration of such companies as Spinway
and ZipLink. Most sunk merely to become a footnote in the history of the
Internet while others were assimilated by other free ISPs. In the case of
Spinway, K Mart bought up
its customer base before, ironically enough, scaling back the service
for a cheaper alternative.

NetZero and Juno, the two largest free ISPs in the nation, were facing a
similar fate before deciding to join forces. Nominally the bitterest of
rivals (the two had lawsuits
filed against the other for ad banner technology similarities), they
finalized their merger last year and executives announced a push to get free users to
pay up.

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