United Online, Inc. Business Information, Profile, and History

Company Perspectives:

The mission of United Online is to be a leading provider of consumer Internet subscription services. United Online has a unique and efficient business model featuring proprietary technologies that enable it to provide members and corporate partners with services that are designed to meet members' individual needs.

History of United Online, Inc.

United Online, Inc. offers consumer Internet subscription services through several brands, including NetZero, Juno, and Classmates Online. The company operates as an Internet service provider (ISP) through NetZero, Juno, and BlueLight, offering several packages ranging from free, ad-supported Internet access to moderately priced Internet access. United Online's Internet access services are available in more than 8,200 cities in the United States and Canada. Through its MegaWeb Services subsidiary, the company offers web hosting and domain services, marketing its services under the brands FreeServers.com, BizHosting.com, GlobalServers, and MySite.com. Classmates Online is a community-based network connecting friends and acquaintances from school, work, and the military. United Online operates offices in New York City; Renton, Washington; San Francisco; Orem, Utah; Munich, Germany; Jarfalla, Sweden; and Hyderabad, India. The company is the product of a merger of Juno Online and NetZero, Inc. in 2001, a union that joined the histories of two of the most prominent competitors in the free ISP industry.

Building Subscriber Base with Free E-mail: The Launch of Juno Online in 1995

Juno Online Services L.P. was established in June 1995 as a subsidiary of investment firm D.E. Shaw & Co. with a $20 million investment. Charles Ardai, then 25 years old, was president, and David E. Shaw was the company's chairman. Shaw was also CEO of D.E. Shaw & Co., where Ardai was employed as senior vice-president. It was reportedly Ardai who convinced Shaw that free e-mail would be a "killer app" around which to build an entire business. Within a month Juno announced that it would provide free e-mail service that would be supported by advertising revenue. Another company, FreeMark Communications of Cambridge, Massachusetts, announced that it would offer a similar service by the end of 1995.

On April 22, 1996, Juno launched its free e-mail service. Customers would receive free e-mail in exchange for permitting advertising on their computer screens and providing demographic information about themselves. This information would be provided to advertisers, who could then target their advertising messages appropriately. Initial reaction was skeptical since the software was not downloadable over the Internet; Juno would send it on a disk via regular mail. Through an arrangement with AT&T Corp., Juno's service began with 200 points of presence, or local access telephone numbers, as well as a toll-free telephone number.

Juno began with 15 sponsoring advertisers, including Snapple and Land's End. Advertisers would pay Juno only for ads that were delivered to Juno subscribers. The company was seeking to have its software bundled with computers and had signed deals with two of the top ten PC makers by the April launch. FreeMark's competing e-mail service launched on May 6, 1996.

By June 1996 it was announced that WorldCom Inc., the fourth largest long-distance provider in the United States, would provide the fiber-optic network for Juno's e-mail service. In its first months Juno's service proved very popular and was expected to have a six-figure membership by the end of June. Juno spread the word about its service through traditional advertising methods, including ads in magazines, newspapers, and billboards.

Juno was attracting numerous advertisers as well. Advertisers could target their messages and be assured that they were at least seen, if not read. Since Juno's service was free, it was felt that customers would not abandon the service, as they were doing with paid services such as America Online (AOL) and CompuServe (which would ultimately be acquired by AOL).

In September modem manufacturer U.S. Robotics agreed to include Juno software on CD-ROMs that were shipped with the company's modems. Juno also signed software distribution agreements with Blockbuster Video, the Sam Goody chain of music stores, mail-order music service BMG Direct, and the Billboard Music Guide.

Other companies also were offering free e-mail service. In September PC Magazine reviewed three services: Juno, Freemark Mail, and HotMail. Juno and Freemark were dial-up services, whereas HotMail was accessible from any computer with a web browser. In a sense, HotMail was not actually free, because it required Internet access. The magazine found that Juno offered more features, allowing users to save messages as text files, save addresses to an address book, and import entire message folders. Its interface resembled Windows, and users could change fonts, text, and background colors. Mercury Mail was another company offering free e-mail.

By December 1996 Juno had 800,000 subscribers and about 30 advertisers. They included some large firms such as Ford Motor Co. and Miramax Films. For the year Juno reported revenue of about $100,000 and a net loss of $23 million, mainly due to operating expenses.

By mid-1997 Juno claimed to have 2.2 million users. Juno's 1997 advertising revenue was estimated at $4 million by research firm Jupiter Communications, and the company was spending more than that on membership growth, software, and market research. Freemark Mail had failed, and two other available services--HotMail and NetAddress--required Internet access. Juno's subscriber base climbed to 3.5 million by early 1998, then a reported 4.5 million by the end of March. The number of advertisers rose to more than 100. Juno signed a five-year, multimillion-dollar marketing deal with long-distance carrier LCI International Inc. for exclusive rights to advertise its phone services. One survey indicated that Juno's service was used by 14.7 percent of all Web and online users, compared with 6.1 percent for HotMail, which recently had been acquired by The Microsoft Network. For 1997 Juno reported revenue of $9.1 million and a net loss of $33.7 million.

Juno continued to actively defend its users from unwanted e-mail and vigorously prosecuted spammers (junk mail marketers). The company had adopted a "zero-tolerance" approach to unsolicited commercial e-mail in late 1997. In February 1998 it filed a lawsuit against five companies for allegedly forging Juno's domain name and making it appear that their unsolicited e-mail messages were coming from Juno. A similar suit was filed in May 1998 against a New York-based pornography spammer.

In April 1998 Juno introduced the Juno Advocacy Network, which was aimed at political lobbying and advocacy groups. Through the Juno Advocacy Network, such groups could reach Juno's subscribers with their messages based on congressional district, age, gender, hobbies, income, and other demographic data.

Offering More Services and Forming New Alliances: 1998-2000

Juno introduced premium service levels, for which customers paid subscription fees, in 1998. The first billable services were introduced on July 22, 1998. At the time Juno had 5.4 million users. In addition to basic free e-mail service, Juno began offering Juno Gold, an enhanced e-mail service that would allow users to attach files to e-mails, for $2.95 per month. Juno Web, the highest level of service, offered Internet access and full e-mail capabilities for $19.95 a month, a price comparable with other ISPs. Since the beginning of 1998 Juno had more than doubled its points of presence from 500 to 1,200 by purchasing dial-up access from a variety of providers, including Concentric Network, AT&T, Sprint, and WorldCom.

In December 1998 the Hartford Financial Services Group began advertising insurance services to Juno's 6.1 million members under a five-year agreement. Online queries could be answered with a quote within ten minutes. For 1998 Juno's revenue more than doubled to $21.7 million, but the company reported a net loss of $31.6 million.

In 1999 Juno formed marketing alliances with America Online and with WingspanBank.com, the Internet banking subsidiary of Bank One Corp. The agreement with WingspanBank .com gave it the exclusive right to market credit cards and certain banking services to Juno's e-mail subscribers, which had reached seven million by mid-1999. In a deal with America Online announced in August 1999, Juno would start offering a co-branded version of AOL's proprietary instant messaging service. Juno hoped that instant messaging would help attract people to its recently introduced online community, JunoLand.

Juno went public in May 1999 with an initial public offering (IPO) on NASDAQ at $13 a share. For the rest of the year the stock traded in a range between less than $10 and more than $27 before spiking to $87 a share in December 1999. After the first quarter of 2000, though, it was trading back in the $7 to $16 range and heading progressively lower to barely more than $2 a share in late 2000.

In mid-1999 Juno selected Rapp Collins Worldwide of New York to handle its $10 million direct response campaign. The campaign utilized direct response TV and direct mail. Juno's brand advertising was handled by DDB Worldwide. Both agencies were owned by Omnicom Group. By September Juno had about 7.2 million subscribers.

News Corp., which owned about 9 percent of Juno, announced in October 1999 that its News Digital Media subsidiary would supply Juno users with entertainment, news, sports, and business content through Juno's portal site, www.juno.com.

In December 1999 Juno launched version 4.0 of its software and expanded the functionality of all three service levels. Internet access was added to those levels that previously offered only e-mail. As with its free e-mail service, free Internet service was supported by advertisers. Juno Express was introduced as the company's highest service level. With Juno Express, customers in select markets could get high-speed broadband access to the Internet through a deal Juno made earlier in the year with Covad Communications, which operated one of the largest DSL networks. In May 2000 Juno announced that Juno Express was available in 22 U.S. markets. The company planned to roll out Juno Express over Covad's DSL network in new markets throughout the year. Juno Express was priced at $49.95 a month.

In offering free, ad-supported Internet access, Juno faced competition from several other free ISPs. The leader in the field was NetZero Inc., which was backed by a $144 million investment from Qualcomm Inc. Juno hoped to distinguish itself from other free providers by offering a range of billable services to which users could migrate after becoming more sophisticated. When one free ISP, WorldSpy.com, ceased operations, Juno offered to pay it a fee for every WorldSpy subscriber that transferred to a Juno account. WorldSpy had about 260,000 subscribers when it went out of business in mid-2000. For 1999 Juno's revenue again more than doubled to $52 million, with a net loss of $55.8 million.

Until 2000, Juno's advertising had been handled by DDB Worldwide. Following a review in early 2000, Juno awarded its $20 million advertising account to Hampel/Stefanides in New York. The agency produced four 15-second spots to air on CNBC and Fox Network in the fourth quarter of 2000.

In February 2000 Juno teamed with Mail.com Inc. to launch Juno WebMail, a web-based e-mail service that would utilize Mail.com's web-based e-mail technology. Juno WebMail would enable Juno subscribers to send and receive e-mail from any computer connected to the Web, using their juno.com e-mail address.

Later in the year Juno announced that it would host a co-branded version of Mall.com, with the eponymous Austin, Texas-based company, on its shopping channel. Mall.com would be featured on Juno's home page, shopping pages, and product category pages, and Juno also would launch a marketing campaign to promote Mall.com to its members through pop-up and banner ads. More than 120 vendors were affiliated with Mall.com.

In June 2000 Juno filed a lawsuit against free ISP NetZero and wireless telecommunications giant Qualcomm for allegedly violating its advertising technology patents. The lawsuit raised important issues regarding Internet-related patents, their enforceability, and whether they would stifle competition among companies seeking to offer free Internet access. Other major Internet-patent suits filed in 2000 included Amazon.com's suit against BarnesandNoble.com regarding its online ordering system and Priceline.com's suit against Microsoft regarding online purchasing.

With Juno's technology, subscribers logged on and downloaded their e-mail messages and received ads. The connection was then terminated while users read their e-mail and viewed the ads offline. Juno's suit charged that Qualcomm's latest Eudora e-mail software violated Juno's patents in this area.

In October 2000 Juno formed an alliance with Activeworlds .com to provide real-time 3-D chat capabilities to Juno's 3.4 million subscribers. Meanwhile, Juno's stock was floundering, though the company had managed to secure a $125 million financing commitment from an unnamed private source. It also formed alliances with IBM, Time Warner, and Barnes & Noble in the second half of 2000.

The alliance with Time Warner was expected to give Juno access to Time Warner's broadband pipeline. Juno was the second company behind Road Runner to gain access to Time Warner's broadband cable network. The two companies, along with America Online, were to participate in a trial being conducted in Columbus, Ohio, to see if Time Warner's cable system could handle multiple ISPs. In order for Juno to gain full deployment over Time Warner's cable system--and thus offer cable Internet access to its members--Time Warner would have to restructure its exclusive arrangement with Road Runner. At the time Time Warner was under pressure from the Federal Communications Commission to provide open access to ISPs to gain approval for its pending merger with America Online.

Juno's partnership with IBM was announced in August 2000. Under the agreement free Internet access from Juno would be offered on IBM personal computers. The deal was part of Juno's strategy to reduce its subscriber acquisition costs, which were $45 million in the most recent quarter, to less than $20 million in the current quarter. At the time Juno had about 3.4 million subscribers. About 730,000 Juno members were paying for billable services. For the second quarter of 2000, 62 percent of Juno's revenue came from billable services, and 38 percent came from ads and electronic commerce. The company continued to post losses, however.

The Rise of NetZero in the Late 1990s

Juno's rival and legal combatant, NetZero, could relate to years of financial losses, a trait shared by all of the free ISP companies that sprouted up in the late 1990s. NetZero posted an annual loss of $91.3 million on $55.5 million in revenue in June 2000, the latest of a string of deficits recorded by the company in its three-year history. Despite its woeful financial record, the company was still in business, something few other free ISPs could claim. The list of failed companies that offered free Internet access was growing with each passing month. BOSnet, USFreeway, and Cyber Freeway had folded. Freewwweb and WorldSpy.com had collapsed. The industry had imploded, leaving Juno and NetZero as the only concerns with a chance of proving that the free Internet business model could survive. The two companies ultimately put their differences aside (each was suing the other for patent infringement at the dawn of the 21st century) and decided their best chance at survival was to join forces rather than battle against one another. The union added NetZero's history to the heritage of the merged company, a history that began one year after Juno first offered its free e-mail service.

NetZero was formed in July 1997, beginning with roughly two dozen employees in Westlake Village, California. A little more than one year later, on October 19, 1998, the company joined the free ISP fray, launching its ad-supported service on a national basis. NetZero used its own targeting system for delivering ads to its subscribers, a proprietary technology called zCast. zCast software streamed ads to subscribers' desktops, displaying them in a window separated from the main browser. The ads were rotated every 30 seconds and targeted toward an individual subscriber based on details that helped advertisers reach particular consumers. To sign up for NetZero service, a subscriber was required to provide his or her age and income. The geographic location of a subscriber was identified by the telephone number used to access the Internet. Further, NetZero's technology tracked every web site visited by a subscriber, enabling the company to offer advertisers detailed information about a subscriber's interests. "What we're really about," NetZero CEO Ronald Burr explained in a November 9, 1998 interview with ISP Business News, "is delivering a quality advertising vehicle to American business."

NetZero quickly became a popular choice for those seeking access to the Internet. Within six months, more than 700,000 customers signed up for its ad-supported service, well toward reaching its goal of signing up one million subscribers during its first year. The company, unlike many of its peers, outsourced its network to Level 3, AGIS, and GTE, saving millions of dollars on infrastructure costs. A September 1999 IPO, coupled with a $144 million investment by wireless technology developer Qualcomm, gave the company much needed cash, but cash infusions only represented a temporary fix to what was proving to be a perennial problem. Every time a NetZero subscriber accessed the Internet, the company lost money. NetZero paid 45 cents an hour for access. Ad revenue only covered roughly half of the expense, resulting in losses that mounted anytime the company provided the service it was created to provide.

A new chief executive officer was hired in 1999 to lead the company toward a profitable future. Mark R. Goldston arrived in March, bringing his marketing and leadership talents to bear on the struggling company. Goldston was a high-profile executive, renowned for leading the team that developed the hugely popular Reebok Pump while serving as chief marketing officer of Reebok International Ltd. in 1988. After his brief but successful stint at Reebok, Goldston served as a principal partner at a private equity firm, Odyssey Partners, L.P., leaving in 1991 to become president and chief operating officer of L.A. Gear Inc. Goldston scored another marketing success at L.A. Gear, introducing L.A. Lights, a line of children's shoes that lit up when they touched the ground, but after Minnesota's Attorney General derided the company for putting mercury in the sneakers, Goldston was let go. Next, he spent several years working as a consultant before taking the helm at Einstein/Noah Bagel Corp., a spinoff of Boston Chicken. He departed Einstein/Noah Bagel after 21 months, leaving a company that was suffering from profound financial problems.

Under Goldston's direction, NetZero inched closer to profitability. By negotiating deals to buy bandwidth in bulk, the company was able to reduce its access costs to 27 cents per hour by May 2000, tantalizingly close to Goldston's break-even point of 24 cents per hour. In the fall of 2000, the company added substantially to its membership rolls by completing two deals within the space of several days. NetZero forged an agreement with an Arizona-based ISP, iFreedom.com, to refer its subscribers to NetZero. Next, the company agreed to buy the subscriber list of FreeInternet.com, a failed Seattle-based ISP. Together, the two deals added 3.5 million subscribers to NetZero's base of five million subscribers.

Merger of NetZero and Juno in 2001

Despite the progress toward profitability, NetZero, like Juno, was battling for survival as the new century began. In March 2001, NetZero followed Juno's move toward offering a pay subscription service, introducing its Platinum package for $9.95 per month. Several months later, in June 2001, NetZero and Juno put aside their differences and announced their agreement to merge, a move regarded by most industry pundits as necessary for the survival of both companies. "You have to look at this as a final step in the free ISP market," one analyst remarked in an August 1, 2001 interview with Upstart. "Through it all, these two came out, and it didn't look like these companies were going to come out of the trenches alone."

Under the terms of the merger, Juno and NetZero were organized as wholly owned subsidiaries of United Online, Inc. The new company, which would develop a portfolio of Internet subscription services, was the combination of two equals, but the new entity drew much from NetZero. United Online's main office occupied NetZero's headquarters in Westlake Village. Goldston, who had become director, chairman, and chief executive officer of NetZero, became United Online's principal executive, serving as the company's president, chief executive officer, and chairman. When the merger was completed in September 2001, United Online boasted more than 6.7 million active users in the United States and Canada, ranking as one of the largest ISPs in North America.

In the wake of the merger, the free ISP business model was given perhaps its best chance at success, but as United Online developed, Goldston increasingly moved the company away from free services. The market for Internet advertising--the sole source of revenue for a free ISP--was slumping, offering Goldston little choice but to guide United Online into other revenue-generating areas. In February 2002, Goldston brokered a deal with Comcast Corp. to buy service from the cable and Internet-access company and sell the service under its two brands, Juno and NetZero. A third brand was added in November 2002, when Goldston acquired the Internet access and e-mail assets of BlueLight.com from Kmart Corporation. The following year, United Online responded to the increasing popularity of broadband Internet access by introducing dial-up accelerator services. NetZero HiSpeed and Juno SpeedBand debuted in April, each costing $14.95 per month, or $5 more than the company's standard $9.95 per month package. United Online continued to offer free Internet access, but the free service was offered primarily as a way to promote the company.

As United Online prepared for the future, the company reached a turning point in its brief history and in the legacies of Juno and NetZero. United Online recorded a profit in 2003 and 2004, offering the first tangible evidence that Goldston's efforts were producing desirable results. The company also completed several important deals as it entered the mid-2000s, offering further encouragement that the revamped business model was built to succeed. In April 2004, the company acquired the consumer web hosting business belonging to About.com. The acquisition added a handful of brands to the company's portfolio of Internet properties, giving it a new subsidiary, MegaWeb Services, that offered web hosting and domain services. In mid-2004, United Online signed a multi-year distribution agreement with RadioShack Corporation that allowed it to offer its subscription Internet access at 5,000 Radio Shack stores nationwide. In November 2004, the company acquired Classmates .com, a community-based network connecting friends and acquaintances from school, work, and the military. In March 2005, United Online acquired PhotoSite, an online photograph-sharing business that offered free and subscription packages enabling photographers to display their photographs on their own web sites. In the future, Goldston was expected to add to the company's collection of subscription Internet services, ensuring that United Online could collect revenue from a variety of sources in the years ahead.

Principal Subsidiaries: NetZero, Inc.; Juno Online Services, Inc.; NetBrands, Inc.; Classmates Online, Inc.; Classmates Advertising, Inc.; MegaWeb Services, Inc.; Juno Online Services Private Development Limited.

Principal Competitors: America Online, Inc.; EarthLink, Inc.; Microsoft Corporation.

Chronology

• Key Dates:
• 1995: Juno Online Services is founded as a limited partnership.
• 1996: Juno rolls out free e-mail service in April.
• 1997: NetZero is formed and begins offering free Internet access the following year.
• 1998: Juno begins offering billable services, including enhanced e-mail and Internet access.
• 1999: Juno and NetZero become publicly traded companies.
• 2001: Juno and NetZero merge, creating United Online.
• 2002: BlueLight.com is acquired.
• 2003: United Online introduces NetZero HiSpeed and Juno SpeedBand, dial-up accelerator services.
• 2004: Classmates.com is acquired.
• 2005: PhotoSite is acquired.