E-Mailbag Monday: AOL, NetZero, InterNAP

I would like to know your thoughts on Microsoft allowing their users to
access the Internet for free and how this is going to affect America Online
who has its access revenues as a major part of its business plan?

The street.com had an article called “Why Wallstreet Is Dead Wrong About AOL”
on 8/20/99. Just would like to know what u think about the future of AOL?
I would think that since AOL is the most user friendly ISP that the people
who are not online yet (the people who are afraid of technology) would turn to
AOL thus giving them more potential users?
–confused AOL investor

Reply: Actually, I would say theStreet.com article is, well, dead
wrong. Many people consider
AOL (AOL)
to be, in fact, the Net — as the brand is so strong in people’s minds.
This does not go away; rather, it gets bigger and bigger and bigger.
That’s why Microsoft is so scared (and when Microsoft gets scared, it
wants to give the stuff away).

The numbers are incredible: AOL recently announced that it has over 18
million paying members. In the past 12 months alone, AOL has signed-up
over 5 million members.

The company has also positioned itself as the hotbed for e-commerce. In
all, 10 million members are shopping on AOL. What’s more, shopping is
supposed to be much easier with the new [email protected] service (which will be
part of AOL 5.0).

As for free access, AOL will deal with this. For example, AOL is offering
free ISP services in the UK (marketed through the retailer Woolworth
stores).

True,
Microsoft (MSFT)
is a definite threat — but always seems to come-up short when dealing
with AOL. Look at instant messaging. AOL has dominated this.

Besides, with the Justice Department case, it will not be easy for
Microsoft to get aggressive with AOL.

Free, Free, Free

Hi, I was wondering what’s your opinion of the upcoming NetZero, Inc. IPO
underwritten by Goldman Sachs? Thanks.

Reply: This is similar to the question above, as NetZero is an
Internet Service Provider (ISP) that gives away its access.
But, of course, there’s a catch: There is a window called the ZeroPort,
which always appears on your screen delivering ad messages.

Basically, as the old saying goes for many people: “if it’s free, it’s for
me.” The growth has been breathtaking. Between October 1998 and June 30,
1999, the company grew its customer base to 1.17 million users. In June,
613,000 users accessed the service, with 830 million ad impressions.

The problem with Net advertising is targeting the right prospective
customers. With NetZero, users must input their demographic information,
thus making the advertising much more effective.

The company is the brainchild of Bill Gross, who runs a Net incubator
called Idealab! He has taken such companies public as eToys,
Ticketmaster-CitySearch Online and GoTo.com.

I suspect that the user base will continue to grow strong — attracting
customers who are price sensitive and do not really care about the value
added services of AOL. But NetZero may make an interesting purchase for
AOL, perhaps creating two tiers of services: free and premium.

In terms of customer bases, NetZero is tantamount to both
Earthlink Networks (ELNK)
and
Mindspring (MSPG)
— with market capitalizations of $1.5 billion and $1.9 billion,
respectively.
NetZero will fall within these valuation parameters, as can be seen in the
chart below (assuming the IPO is priced at the top of the range):














































































NetZero

NZRO

pro forma IPO

 
   

Shares offered

10.00

Price target/actual

$11.00

Proceeds

$110.00

Shares out

102.8

   

IPO market cap

$1,130.80

less working cap

$126.00

less LTD

3.5

Enterprise value

$1,004.80

1999 Revenues

$4.60

1999 Losses

$15.20

Annualized rev.

$12.00

   

NetZero

 

Revenue multiple

94

Rev. multiple
enterprise

84


This IPO Will Not Be Napping

I’ve noticed that Internap Network Services recently filed an S-1
registration statement. The company provides symmetrical routing to its
customers over the internet. Why is this important, and can you comment on
the Company’s short-term prospects in the market long-term viability as a
company. Thanks.

–Thomas J. Cuccia

Reply: Some of the hottest IPOs have been in the infrastructure
space, which is the same category for InterNAP. The company develops
technology that allows for fast and reliable Net connectivity for mission
critical applications. The amount of traffic on the Web is growing at a
feverish rate, which means a need for enabling technologies to help things
along.
So far, the company has about 130 customers, which include Amazon.com,
WebTV, Fidelity Investments and even NASDAQ.

I expect the IPO to do quite well. The lead underwriter is Morgan Stanley
Dean Witter and the proposed ticker symbol is INAP.


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