IE 11 is not supported. For an optimal experience visit our site on another browser.

Low-cost Net provider carves cozy niche

United Online has secured a cozy little niche as a purveyor of no-frills, low-cost dial-up Internet access, operating in the shadows of established giants such as AOL, Earthlink and MSN.
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true">The Washington Post</a

As he reels off the stats behind the nation's fastest-growing Internet service, Mark Goldston sounds more like a carnival barker than a chief executive.

Since late 2001: Stock price up more than 1,000 percent.

Revenue up 53 percent in the quarter ended Sept. 30 compared with a year earlier. Operating income up 114 percent during the same period. Subscriber growth of 47 percent.

Profit margins topping 71 percent as of Sept. 30. Cash in the bank, no debt. And all for the low, low price of just $9.95 a month. Unless, of course, you want the souped-up version for just $14.95.

Goldston runs United Online Inc., a purveyor of no-frills, low-cost dial-up Internet access that has secured a cozy little niche operating in the shadows of established giants such as America Online Inc., EarthLink Inc. and Microsoft Corp.'s MSN.

Through heavy national television marketing of its NetZero and Juno brands, United Online, based in Westlake Village, Calif., has more than doubled its subscriber base from 1.2 million to 2.7 million over the past two years. It has done so profitably and efficiently: Company officials cited the ability to generate tens of millions of dollars in sales growth over the past year while keeping the payroll for about 460 employees essentially flat.

Analysts said that United Online has made headway by exploiting the fact that America Online and others have been slow to promote their own cut-rate pricing plans for fear of cannibalizing their more profitable, higher-priced offerings.

United Online offers dial-up access in 6,500 cities in the United States and Canada across its several brands -- including BlueLight -- for $9.95 a month. By contrast, America Online boasts 24.7 million subscribers who pay $23.90 a month. America Online said that in the past year, though, it has lost 2 million subscribers, mostly to services offering lower prices or faster connection speeds.

With its emphasis on price, United, in a sense, is borrowing a page from AOL's playbook, some analysts said. In the mid-1990s, with numerous competitors jockeying for leadership in the Internet space, America Online's decision to abandon hourly charges and offer unlimited use and monthly flat-rate pricing was the shuttle rocket booster that propelled its growth.

Another reason for United Online's success has been the marketing experience and brand management expertise of Goldston, one analyst said. Before taking the helm after the merger a few years ago of NetZero and Juno, Goldston had served as chief marketing officer of Reebok Ltd., vice president of worldwide marketing for Revlon Inc. and president of L.A. Gear Inc.

"He is super energetic and very much of a marketer," said Youssef Squali, an analyst with First Albany Capital Inc. "He certainly has used his marketing savvy from 30 years of marketing perfumes and sneakers to position this company appropriately in this environment. Some of it is luck. They happen to have hit the value space just as it was taking off."

These days, Goldston is focusing increasing advertising dollars on a fast-growing new product: accelerated dial-up connections that are five times faster at surfing the Internet than standard services.

In eight months, the share of United Online subscribers paying $14.95 monthly for NetZero HiSpeed and Juno SpeedBand has increased to 15 percent. While users may still find it difficult to cleanly download music and video over these accelerated dial-up connections -- as they can with more expensive broadband access provided mainly by cable and telephone firms -- Goldston said there is a significant market segment that just wants speed to access the Web for e-mail, checking news and searching the Net.

In addition to the advantage of price, Goldston said that unlike the cable and telephone firms pitching broadband regionally, United Online can advertise its high-speed offerings nationally on television. He also said that with falling telecommunications costs, as United Online rolls out new high-speed initiatives at the higher $14.95 price point, most of the additional revenue has boosted its bottom line.

Borrowing a concept from the famous "Pepsi Challenge" advertising campaign, United Online sent camera crews to malls in four U.S. cities, set up computer connections, and filmed shoppers as they sampled its high-speed product and compared it to slower, standard dial-up. Goldston and others said the kitschy television ads with consumer testimonials have been a major factor in the rapid growth of the faster dial-up service.

"I was bullish about it, but I wasn't this bullish," Goldston said. "A good number of people are trading up. We have a mixture of new sign-ups and upgrades."

America Online hopes to maintain its market share by launching its own $9.95-a-month, streamlined competitor under its Netscape brand name in early 2004. AOL primarily will market Netscape to computer users online, rather than on TV, and will offer it to AOL dial-up customers who call to cancel their service and cite price as the reason.

AOL officials said the Netscape offering will be easier to use, and faster to download, than any of its earlier entries in the budget arena. The company also said "Netscape," which has tested well in focus groups, is a strong brand name that conveys the notion of being innovative and pioneering. Subscribers will be given an e-mail address

"The Netscape portal with 20 million visitors a month will be a prime audience," an America Online official said. "We will advertise heavily on the site."

Goldston is dismissive of the challenge, noting that AOL already has two value-priced entries in the marketplace, CompuServe for $9.95 a month, and, through a partnership with Wal-Mart Stores Inc., Walmart Connect for $9.94. He also said America Online cannot afford to market its new entry too aggressively, lest it steal away its $23.90-a-month dial-up customers who make up the majority of AOL subscribers. He said much the same about EarthLink's value-priced PeoplePC offering.

Nevertheless, the mere announcement this fall that AOL was going to enter the value segment anew was enough to shake confidence in United Online. Analysts refer to this phenomenon as the "headline risk" in United Online's stock. The AOL announcement and others negatively affected United Online's stock, which peaked around $29 a share in September, and is now trading around $17.

One of the big fears about United Online, according to Wall Street analysts, is that the price of high-speed Internet connections offered by cable and telephone firms will continue to plunge, slowing United Online's growth. Another fear is that United's cost of acquiring new subscribers through advertising and marketing will increase as competition intensifies.

"His stock has been hammered over the competition issue," said Peter Mirsky, an analyst with Oppenheimer & Co. "Ultimately, the competition question goes to where subscriber growth will come from."

Goldston cited a recent demographic survey by International Data Corp. showing that the fastest-growing new group of Internet users in the coming years will be those with lower incomes than those online already. The study said Internet access in the United States is reaching a saturation point in all households except those with less than $35,000 in annual income and projected that the number in that segment would nearly double from 12.7 million now to 23.6 million in 2006.

"These people are going to go out and buy relatively cheap computers for $200 to $300 and say, 'Why am I buying the computer? I need to be online or my kid needs to be online,' " Goldston said. "They are going to spend $9.95 from us or someone else to get Internet access."