N2H2 Learns IPO Market Isn’t Kids’ Play

N2H2 wants to be known as the Internet guardian and portal for K-12
students in schools across North America and worldwide.

But it also wants to expand into the corporate and home markets. And it
plans to introduce an alternate subscription-service revenue model that
would bring commercials and advertising into the schools in return for
lower fees, a potentially controversial move.

Oh, one more thing: It’s betting much of its future on a relatively new
student Web portal called “Searchopolis.”

That’s a lot of strategy balls to be juggling for a company seeking
public investors, and inevitable questions about N2H2’s rapidly evolving
revenue plans may have held down (NTWO) shares in their debut Friday. The
stock opened at $12.63, slightly below the $13 offer price for the 4.5
million shares set by underwriter CIBC World Markets and U.S. Bancorp
Piper Jaffray.

Founded in 1995 by two Seattle parents concerned about inappropriate
content on the Internet, N2H2 claims its “Bess” filtering service is the
market leader in North American schools. While that may be so, the
company’s decision to offer schools lower (or no) subscription fees in
return for exposing students to ads indicates concerns about pricing
pressures in the competitive Internet filtering software market.

And sales growth does show signs of slowing. Last year’s $3.1 million in
revenues was 175% over ’97 sales, but revenue for the six months ended
March 31 — $2.6 million – was only 101% above the figure for the same
year-ago period.

Another nagging concern: N2H2 has some litigation hanging over its head.
In late June, Spyglass filed a patent infringement lawsuit seeking
treble damages. One month earlier, NextGen Development sued N2H2,
alleging misuse of proprietary information.

To continue growing, N2H2 must convince parents and school officials
that it has the best solutions for providing K-12 students with safe
Internet passage, and that featuring ads on its network won’t undermine
educational efforts.

And then the company must convince investors that in can accelerate its growth rate.

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