NetZero's Big Zero: Why United Online Will Never Be Great Again

NetZero is making headlines this week with a free 4G connectivity deal that isn't as free as it looks.

United Online's (UNTD) NetZero is a name familiar to penny-pinchers on the frothier side of the dot-com bubble, because the company used to offer a heavily ad-supported platform with limited free Internet access.

The new "no contract" deal sounds compelling at first. Customers have to buy either a $50 USB modem or $100 mobile hotspot from United Online. They can then go through 200 megabytes of data a month for free, though that is only good for the first year. After that, customers must upgrade to one of the premium plans.

I realize that 200 megs may seem like a lot, but that's the equivalent of roughly six minutes of high-def video streaming. That's for an entire month! Obviously the data sipping is kinder if you're just checking email or updating Twitter, but even the most casual of users will quickly burn through the free allocation.

NetZero's premium pricing is competitive with the big boys, peaking at $50 for 4 gigabytes of monthly data. However, it's also leaning on Clearwire's (CLWR) WiMAX platform for its 4G connectivity, and customer satisfaction has been mixed when it comes to reliability and speed.

In short, there's no free lunch.

The Forrest from the Trees

Forrest Gump's namesake character always found himself at the right place and at the right time throughout history. United Online has been the anti-Forrest.

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It has been at the right place often, but never at the right time.

This is a company that was offering dial-up with cheap or ad-supported models through both NetZero and Juno. It was brushed aside by the cable and telco giants.

United Online owns Classmates, the website that should have been Facebook. It was there connecting nostalgic alums while Mark Zuckerberg was still in grade school. Instead of cashing in on the MySpace and then Facebook social networking revolutions, Classmates limited its audience by only connecting those willing to pay to use the service.

Yes, the same company that blew Internet service by being too cheap blew social networking by not being cheap enough.
United Online also owns MyPoints, the points-based loyalty shopping website that predates the daily deals arrival of Groupon (GRPN) and LivingSocial, which ultimately won over the masses.

Then we get to FTD. United Online acquired the floral-arrangement ordering network in an $800 million deal four years ago. Too late. Folks are still sending flowers, but we're in an era of virtual goods. The most damaging aspect of the FTD purchase -- while it's still a steady performer -- is that all of United Online is now worth less than what it paid for FTD alone.

United We Strand

There wasn't anything overly inspirational in United Online's latest financial report. Revenue slipped 2% to $897.7 million for all of 2011, as product gains at FTD were more than offset by declines in its services. Operating income and outright profitability fell even harder.

There's little reason to get excited about 2012. Analysts see revenue and adjusted profitability declining by 3% and 36%, respectively.

United Online still hasn't learned from its mistakes:

• Classmates remains a gated graveyard of activity relative to the buzz on Facebook. It seemed as if United Online finally had its act together as it began scanning a ton of yearbooks for a new Memory Lane website, but it somehow chose to make that a premium service as well. As Facebook gears up for a potentially $100 billion IPO, Classmates -- which United seemingly shrewdly acquired for just $100 million in 2004 -- is just a small part of a company valued at 0.5% of what Facebook is worth.

• MyPoints was profitable when Classmates was not a few years back, but the loyalty shopping hub hasn't changed with the times. It remains the same clunky portal that offers points in exchange for generating commissioned sales leads or divulging personal information. MyPoints totally missed the flash sale revolution and now all of United Online is worth just 5% of Groupon.

• FTD is still a producer, but the NetZero and Juno communications segment is fading fast. Its communication services revenue fell by more than 25% last year, and the new mobile broadband service isn't going to change that. United Online will turn heads with the service, until former NetZero customers begin to speak up about their experiences.

There may still be an opportunity for the company to matter here, but its best hope at this point is for someone to acquire these broken brands and see if there's enough time to get it right. If that doesn't happen, United Online investors may long for yesterday the same way that some Memory Lane visitors do.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.


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