NetZero, Juno plan merger to form ISP giant

Free ISPs (Internet service providers) NetZero Inc. and Juno Online Services Inc. announced plans Thursday to merge, creating what they said would be the U.S.'s second-largest ISP after America Online.

The combined company would have more than 7 million active users based on figures for March 2001, the companies said in a statement. However, of that figure only one million are paying subscribers, while the other 6 million use free Internet services offered by the two firms.

NetZero and Juno would become wholly owned subsidiaries of the newly formed company, to be called United Online Inc. The combined company would continue to offer free access under the NetZero brand, while paying services would be offered under the Juno brand. The deal is expected to close by the end of the year subject to regulatory approvals and other customary conditions, the companies said.

AOL is the world's largest ISP, boasting close to 29 million users worldwide and around 18 million in the U.S. The newly formed company would also compete with Microsoft's MSN Service, EarthLink Inc., AT&T Worldnet and others.

"This is going to be interesting," said Jim Balderston, a director with Zona Research Inc.

The big question will be whether the combined company can sustain its business model of offering low cost or free Internet access, he said.

NetZero, Juno and LLC -- the online arm of retail giant Kmart Corp. -- are three of the largest remaining free ISPs. They use their free service model to help compete against other ISPs, and obtain revenue by selling banner advertisements and offering a premium service to subscribers willing to pay for it.

The low-cost services market requires providers to operate a tight ship, keeping overheads low while providing an acceptable level of service to their users. Making sure internal costs remain low while attracting new users to the new company could be a challenge, Balderston said.

"They need to convert as many of their 6 million unpaid subscribers into paying subscribers as possible," he said.

Unlike AOL and MSN, neither NetZero or Juno have large amounts of content or services to offer their customers, Balderston noted. The new company would have to convince consumers that its worth trading off the added content provided by its rivals for a low connection fee, he said. In addition, AOL and MSN can generate extra revenue from their added services, giving them another edge, Balderston said.

Still, the NetZero-Juno combination would dominate the market for low-cost Internet services, and could make the merger succeed if they play their cards right.

The companies have about US$220 million in the bank, Balderston added, which should be enough money to "make a go of it."

While the two companies appear on good terms today they have squared off recently in court. NetZero sued Juno late last year, charging that its navigation window, where it displays banner advertisements, violated a patent awarded to NetZero. Juno, meanwhile, sued both NetZero and Qualcomm Inc. last year, accusing them of infringing on one of Juno's patents that lets users view Web content while off line. Both lawsuits are still awaiting trial, and a NetZero spokesman said his company could not comment on the legal matters at this time. It seemed likely the suits would be settled if the merger goes ahead.

Mark Goldston, chairman and chief executive officer of NetZero, will become chairman, president and CEO of United Online, while Charles Hilliard, NetZero's current chief financial officer, will become CFO of the combined company.

All outstanding shares of NetZero and Juno would be exchanged for shares in the new company, which would be traded on the Nasdaq stock market. NetZero shareholders would receive 0.200 shares of United Online for each share of NetZero stock, while Juno shareholders would exchange each one of their shares for 0.357 shares of the new venture.

The companies' combined revenue was $41.5 million for the quarter ending March 31, they said in the statement.

Executives from the two companies will host a conference call on Friday at 8 a.m. PDT to discuss details of the merger. The call will be accessible via a Webcast from each companies' site.

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