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United Online Set to Dial Into New Business Strategy

Grappling with a business model that is fast becoming obsolete, United Online officials are hoping 2006 will be a watershed year as the company known for its low cost dial-up Internet service moves to a more diversified business strategy. In the coming months, the company will step up its rollout of NetZero Voice, a voice-over-Internet Protocol (VoIP) phone service. While the company plans to continue offering dial-up Internet access in the near future, it has begun to hedge its bets by trying to gain market share in the red-hot worlds of Internet telephony and social networking (via its Classmates.com property) as more people move to high-speed Internet. VoIP may represent the most potential to the Woodland Hills-based Internet firm, as it hopes to leverage the approximately 15 million active accounts that it has. VoIP is an Internet telephone service that allows for unlimited long distance calling for a fixed monthly price. United Online’s unique VoIP selling point is that it’s the first major Internet telephony program that can be used over a dial-up modem, as well as via broadband. Similar to its NetZero Internet offerings, United Online is targeting customers at a low price point, hoping to entice them away from pricier alternatives such as Vonnage, which promises unlimited phone calls anywhere inside the U.S. and Canada for $24.99 a month. In contrast, United Online’s unlimited calling program is available for $14.99 per month. Additionally, the Internet firm is offering a program called NetZero FreeVoice which touts unlimited worldwide computer-to-computer calling between NetZero voice users. “We think that VoIP is going to be a huge market, with up to 25 million people making the switch to Internet telephony,” Mark Goldston, the chairman, president and CEO of United Online, said. “We have a great brand name in Netzero and we want to leverage that with our built in customer base. Ideally, we’d like this to become a major and important part of the next several years. It’s a compelling proposition and a phenomenal product.” Since the VoIP product has only been available for a few weeks, the jury is still out on whether or not it will turn into a success for the company. However, what it is clear is that the VoIP market is currently red-hot. “The VOIP market is gaining a lot of traction right now. We’ve seen a three-fold increase in usage this year from the end of last year,” Dave Lemelin, a senior analyst for In-Stat, said. “We see those figures growing dramatically over the foreseeable future. The heavy Internet players like Yahoo, Google and EBay are likely all going to try to get into the market too. It’s going to get very competitive.” Goldston is well aware of this fact. However, he anticipates that United Online will be able to find its niche as a lower cost alternative to the other VoIP offerings. “There is no barrier to it from a consumer standpoint,” Goldston said. “You don’t have to go into a store to buy it. All you have to do is download it from our website. And when you compare our price tag to a conventional phone bill, people will be able to save a great deal of money each month.” There is certainly a lot riding on the company’s move into the VoIP market. Despite the fact that the company has been profitable, earning $117 million in 2004 alone, United Online has received a lukewarm reception on Wall Street as the stock’s price has hovered in the $12-$14 range for much of the last year. ‘Neutral’ rating According to Jason Avilio, an analyst covering United Online for First Albany Corp., the stock’s stagnation is due to investors’ skittishness about investing in a company so heavily vested in the world of dial-up Internet. Avilio himself has the stock rated at “neutral.” “Their stock’s value is largely a function of the markets’ perception of where the dial-up market is going,” Avilio said. “The theory is that there’s no terminal value in the business. However, United Online does understand that what they need to do is focus and diversify away, and they’ve done that with some of their acquisitions, including the purchases of Classmates and Photo Sharing. They’re trying to add more advertising business. These are some good first steps but to really diversify, they still have a long way to go. However, VoIP could be a big first step.” But while many analysts and pundits are signaling the death-knell of dial-up Internet, Goldston is not ready to acknowledge its demise yet. While he understands that inevitably, the dial-up business will go away, he points to the 40 million Americans still using dial-up, and maintains that America’s transition to the world of high speed Internet won’t be complete for another 10 to 15 years. In the meantime, he figures that United Online will have plenty of time to successfully transition out of this earlier business model. “While we have our eye ultimately on the long-term, our plans are very focused on the next two to five years, betting that a lot of companies are going to exit the dial-up market,” Goldston said. “Even if the number of dial-up customers nationwide shrinks from 40 to 25 million people, if the entire market is value priced than I think that we’re in a good place to serve the discount customer. However, I’d hope that five years from today, more than half of our business would come from non-Internet access related business.” But 2006 is shaping up to be a linchpin in the company’s plans to diversify its focus away from the dial-up access. And Goldston is planning a major push to educate the American people about United Online’s new offering. “We’re going to do a major push with our VoIP product in trying to educate the American consumer and find a way to enter the international marketplace,” Goldston said. “2006 will be the year where we recast ourselves and our position in the minds of the populace.”

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