NetZero

[Steve]

ISP Trades Free Bandwidth for Personal Data 

Georgie Raik-Allen 
Red Herring Online October 21, 1998 


NetZero is chasing the holy grail of the Internet: one-to-one
marketing. 

Like all such pilgrims, NetZero follows a path littered with the
remains of those that have gone before it. But, thanks to new
targeting technology and cheaper bandwidth, the company plans to
offer free Internet access in exchange for the type of personal
profiles that advertisers will pay big bucks for. 

It's not a new concept, but Marc Johnson from Jupiter Communications
advertising group said it was a "great idea," and that startups would
continue to pursue ad-supported free ISP until one got it right. 

"Someone will make it happen at some point, but I won't try to
predict when," Mr. Johnson says. 

NetZero launched this week with funding from its sole backers,
Idealab Capital Partners, the venture capital arm of Bill Gross's
Idealab incubator. The first-round funding figure was not disclosed,
but NetZero spokesperson Bob Pack said it was between $5 million and
$10 million. 

The NetZero working model To subscribe to the service, users need to
answer around 15 questions about their interests, demographic data,
and other personal information. NetZero uses the data to build a
profile of the subscriber that it continually refines by monitoring
online behavior. 

When a user logs on to the Web browser, a 1-by-3.5-inch personalized
banner advertisement opens on the screen. It can be moved around, but
not closed or reduced. A subscriber visiting an automaker's site could
receive an ad from a local car dealer or could get a special
promotion from an online book seller subscriber while browsing book
reviews. 

NetZero claims it can use the 3-digit dialup phone prefix to drill
down to a five-mile radius the location of subscribers. Such
targeting is considered critical to the Internet advertising market,
expected to be worth $4.5 billion by the year 2000. 

Mr. Pack said that ads on NetZero can also be targeted to a specific
URL. For example, an airline company could display its ad when a
travel site was accessed, or a car rental company could target its ad
to its main rival's URL. 

"It's real-time advertising based on real online behavior," he says. 

It all sounds pretty cool, but many similar ad-supported free
Internet access services have failed in the past. 

Mr. Pack claims that NetZero is better positioned than its
predecessors because "the cost of bandwidth has halved in the last
year and the number of advertisers online has doubled." The startup
leases networking time from AGIS and GTE at a cost "that has come down
significantly in the past 12 months." 

While Mr. Johnson thinks NetZero stands "a lot better chance" of
success than those that have gone before it, he was still not too
optimistic. "There is no guarantee. I wouldn't give them more than
50/50 odds." 

Subscriber base not yet there Online advertisers may be increasing,
but so are the number of sites on which they can place their ads. The
startup's major obstacle will be the huge marketing costs required to
attract a large enough subscriber base to bring those advertisers to
the table. 

"Right now they are selling against nothing. NetZero will have to
engage in guerrilla marketing to ramp up the subscriber base," Mr.
Johnson says. "The company's success depends on how much they are
prepared to spend." 

The startup wants to convert 80 percent of subscribers through ad
banners and attract another 20 percent of those users not yet on the
Internet. 

So far about 10 advertisers are signed up, but the startup wants
300,000 on the books in the next six months, and is aiming for
600,000 subscribers in the same period. 

In the meantime, "we are asking advertisers to take a leap of faith
because our subscription base is still low," Mr. Pack said. 

He sounds like a true believer, but in business -- even Internet
commerce -- faith is not always enough.

c Red Herring Communications 



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