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Fast Track

NetZero Year Founded: 1998 Core Business: Provide advertiser-supported Internet service free to subscribers. Subscribers in October 1998: 0 Subscribers in March 1999: 660,000 Employees in October 1998: 15 Employees in March 1999: 70 Top Executive: Ronald Burr, CEO Goal: To top AOL in subscribers Driving Force: Free, simple to use service and growth of the Internet JENNIFER NETHERBY Staff Reporter Without spending any marketing money, Westlake Village-based NetZero has grown to 660,000 subscribers since the Internet service provider made its launch in October 1998 with 7,000 more joining each day. “It’s been a pretty phenomenal ride,” said founder and Chief Executive Ronald Burr. NetZero provides free Internet access. Subscribers download software over the Internet, fill out a 25-question profile from income range to gender, and get free e-mail and Internet access for the price of a constant running advertisement in the corner of the screen while they’re logged on. Advertisers pay for space, providing the company’s revenues. The company was the brainchild of Burr, Stacy Haitsuka, Harold MacKenzie and Marwan Zebian, all former engineers who were partners at Impact Software, an L.A.-based software development firm. “It seemed so obvious, we wondered why no one was doing it,” Burr said of the prospect of free Internet access. “Then we got paranoid about secrecy.” The quartet started NetZero in 1996 with the premise that the Internet was like a highway a free public space and ISPs were toll booths that charged customers for road space they didn’t own. “That kind of didn’t make sense,” Burr said. “We wanted to make it more like radio or TV.” They did market research. They studied other companies that had tried free access and tried to determine whether the business model could be financially successful. “We came back and everybody was like, ‘Oh my God, this is huge,’ ” Burr said. The partners wrote a business plan and by summer 1997, they began hunting for venture capital. They spent a year networking and making contacts and joined EC2, a University of Southern California business incubator. During that time they used resources from their other company, Impact Software, to develop the software used by NetZero. In July 1998, new-media incubator Idealab provided venture funding. Silicon Valley firms Draper Fisher Jurvetson and Foundation Capital soon followed. Last October NetZero was launched and by the end of the first month, 1,000 subscribers were signing on every day, according to Burr. Advertisers, the financial backbone of NetZero, were given discounts, but ad rates have steadily increased and the service is now supported by more than 60 national companies and brands, including Clinique, Netscape, eBay and NextCard Visa. While the company won’t release revenue information, Burr said sales have doubled every month over the last three months. Like most Internet companies, NetZero remains in the red; Burr says it will take at least 1 million subscribers before the company becomes profitable. The founders plan to take the company public by the end of the year. The idea of offering free Internet space has been tried before, though at least two companies have failed. San Jose-based Bigger.net went out of business in October after reaching just 18,000 users. Cincinnati-based Tritium Network attracted 100,000 users, but suspended access last year while searching for new investors. Burr said these companies didn’t succeed because they focused on regional markets and bought their own Internet servers. NetZero saves money by leasing server networks nationwide and is able to attract national advertisers, he said. NetZero’s founders boast that their company has become the first viable Internet advertising space. With most browsers or Internet sites, the demographics are fairly general, while NetZero allows advertisers to target people by region, income, gender and other specific categories. “They’re buying the user and not the site,” Burr said. “It’s more like direct marketing.” He says it’s better for users that way too, because they see ads that are more appealing to them. Kevin Wandryk, vice president of marketing and business development at AdKnowledge, a Palo Alto-based company that creates tools for marketers to manage Internet advertising, said NetZero’s business model has a good chance of succeeding, as Web-based advertising keeps growing. “The prospect of NetZero as a business concept is an interesting idea,” he said. “You get free magazines supported by advertising, we watch TV and listen to radio without paying. Absolutely, in my mind there is no reason we won’t see aspects of that on the Internet.” NetZero’s ability to succeed, however, will depend on how many subscribers it can attract. “It follows the adage that where the eyeballs go, advertising dollars follow,” Wandryk said. NetZero expects an even bigger gain in customers as it works to sign deals with modem and computer companies to bundle its service with new products. Up to now, the company’s name has been known by the public only via word of mouth and media reports. Analysts are keeping a hopeful, yet skeptical eye. Forrester Research, which tracks ISPs, predicted in February that NetZero and other products like it will likely be used as an entry point, but most consumers will move to paid, premium services. Services like NetZero offer only bare-bones amenities and aren’t as fast as paid services like America Online, Forrester researchers point out. When NetZero started, the goal of its founders was to reach 1 million subscribers in a year. At the rate it is growing, it will hit that mark by the end of May. The goal now is to top AOL in subscribers. “Our whole goal is the mass-consumer market,” Burr said. “We’re the only market that can challenge AOL. It’s taken others years to get to this stage.”

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