When United Online President, Chairman and CEO Mark Goldston came aboard in 1999, the company’s previous headquarters consisted of a room full of 35 desks in a tiny Westlake Village office. Six years later, the Internet Service provider best known for its witty commercials for its NetZero dial-up service, has grown to 750 employees worldwide with offices in New York City; Renton, Wash; San Francisco; Orem, Utah; and Hyderabad, India. Additionally, the company’s new Woodland Hills headquarters puts its old digs to shame, with over 100,000 square feet of space, a network operating center, a quality control lab complete with dual-side usability mirrors and a state-of-the-art soundstage where the company’s marketing team can produce radio and television commercials. Goldston attributes the company’s rise to a maverick and contrarian bent that has served the business well. Realizing that duplicating America Online’s product offerings would be a death knell, Goldston and United Online carved out a niche for themselves offering low-cost Internet access programs starting at $9.95 a month. This strategy helped the firm post its best numbers ever in 2004, earning $117.5 million with sales of $448.6 million. In the last year, the company has entered an acquisitions phase in an attempt to diversify its product offerings. Last April, United Online purchased Orem, Utah-based consumer web-hosting firm About Inc. for $12 million. Since then, United Online has purchased social networking company Classmates.com for $100 million and most recently it bought photo-sharing firm PhotoSite. Question: Company revenues and net income have increased markedly in recent quarters. To what do you attribute this rise? Answer: The company is constructed to have a tremendous amount of operating leverage. It’s a very efficient company. As we grow our business, we don’t necessarily have to grow our infrastructure. We can drop large amounts of incremental revenue that we generate, down to the bottom line. So our revenue growth is largely a function of our creativity within the marketplace on a competitive basis. You can see our commercials. In terms of profitability, we run a really tight ship. We’re very focused on margin and cash flow. Since the day we founded the company, that’s the way we’ve been constructed. Everyone in the company is aligned that way. Q: How will the purchase of photo sharing website, PhotoSite, affect the company? A: It’s a really cool technology. We looked at every photo sharing website that there was and found PhotoSite the best. Previously, PhotoSite had been a part of a larger company called Homestead. You couldn’t extract it. When Homestead finally decided to break that business off, we were thrilled because we’d long wanted to buy it. They are the best at photo album building on the Internet. We think it’s a big part of the future. There are approximately 80 billion digital photos stored on people’s computers and I think only 10 to 15 percent of those photos get printed. There’s a generational shift happening in photo. Q: The company also recently purchased Classmates.com late last year? How has this purchase changed the focus of the company? A: The whole strategy of the company changed about two years ago, when we went from saying that we wanted to be the leading provider of value priced Internet to being the leading provider of consumer Internet subscription services. To do that, we had to find things that were incremental and non-cannibalistic. We’re broadening our reach to have customers that might be on broadband, without having to provide them with broadband access, which is not a good business. We were intrigued by Classmates. It has 40 million registered members. Almost 9 to 10 million a month are active. It’s the largest peer-to-peer community network of its kind in the world. So we thought it was an intriguing opportunity to buy a business that had both a lot of free users and a lot of pay users. Our expertise is in taking large free user bases and making them convert to the pay model. So we’re going to go to Classmates and make it go vertical. We’re going to make the site more robust and hopefully, down the road integrate our PhotoSite capability with it as well. We think it can be a very big part of our future. Q: United Online has announced that it will be trotting out voice-over Internet telephony (VoIP) service later this year. What are your plans for that segment of the company? A: VoIP is the next big category and it’s going to take over telephony in the next five to 10 years. Unlike when we entered the Internet business where AOL was already a major player, there is no major player in the VoIP business. It’s still very much embryonic with huge potential. Last summer, NetZero was named one of the 150 mega brands in America. We have an 87 percent aided brand awareness level. We stand for great connectivity, at an attractive price point in every major city in the United States. The infrastructure behind the VoIP service will be exactly what we do in ISP. We will leverage all of the things that we have in the company, in a new incremental category, using one of the biggest brands in America. It made total sense. We’re going after it, guns-a-blazing. My hope is in the second half of this year we will have a VoIP product from NetZero. We want to be very consistent with how we our positioned ourselves in the Internet category. We want to give people a high quality product at a low price point. Q: The stock price for the company has wavered around the $10 range, down from a 52-week high of $20.75 a share. Why do you think this has occurred? A: I don’t know. It’s very hard to say. It’s probably one of the most puzzling things. We’ve consistently turned high profits and growth. The market’s funny like that. We were at an all-time high two years ago, six months prior the stock was half of that. It keeps going up or going down. At the end of the day, since we’re all in this for the long-term, we try to create shareholder value by growing our revenues and our profits. The stock market is an efficient place. Over time, companies get rewarded for revenues and profit growth. We don’t make decisions to spike the value of the stock up. We make decisions designed to create sustainable, long-term value. My hope is that over the next few years the market will realize that the dial-up business is a huge cash machine and that our company is diversifying as well. Q: The company has made its name off of dial up service. As the market seems to be shifting towards high speed Internet connections, how do you plan to factor that into the company’s long-term strategy ? A: All of our new businesses are non-access related. We love the access business. We love the dial-up access business. We have approximately seven percent of the dial-up market. 93 percent of Americans don’t use United Online and the number two provider of dial-up. The way we look at it, if 93 percent of dial-up customers aren’t ours, then our focus should be on how to go from the 5,000,000 subscribers to 8,000,000 subscribers. If we can do that, it doesn’t matter if the market is 50,000,000 people, 40,000,000 people or 30,000,000 people. Q: There has been a great deal of consolidation in the ISP space, yet United Online has managed to come out as one of the major players in the industry. Why? What was the company’s strategy? A: Our strategy from the beginning was to be the value priced player, to derive some of our revenues off of advertising, the rest off of subscriptions. We stuck to that. Our strategy was to farm out all of the commodity functions like customer service. Our model had a fraction of the employees of other companies. We did it through automation. We had the equivalent of a robotic assembly plant, while our competitors were using an assembly line. Fast forward five years and everyone is trying to farm out the commodity services, laying people off to get the headcount down and we have a company that does over $700,000 in revenues per year, per employee. It’s unheard of. It’s probably twice the level of Yahoo! and twice the level of Ebay. Q: What do you see as the future for the company? A: We will be a powerful provider of Internet subscription services. Classmates is a big business that never had any marketing. They were a private undercapitalized company. We are a marketing machine. We are in the process of creating television commercials for the company. We’re going to use that as a growth machine and we’re going to find ways to take all the businesses that we have and offer that to this massive user base of 45 million people and utilize the law of large numbers. If you look at us now versus one year ago, we were big but we weren’t huge. Now we are one of the biggest companies on the Internet. Everybody wants to have the biggest possible audience. If you can find ways to mine that audience then you have very strong potential.
