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

United OnlineNetZero 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.

5 Big Retail Chains That Will Be Gone in 5 Years
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NetZero's Big Zero: Why United Online Will Never Be Great Again

Click through to see 5 Big Retail Chains That Will Be Gone in 5 Years

By Rick Aristotle Munarriz, The Motley Fool

1. Barnes & Noble (BKS)

When the last of the Borders stores closed its doors forever a few months ago, it was only natural to view Barnes & Noble as the obvious beneficiary. Bibliophiles would just flock to the other gargantuan bookstore chain, right?

Wrong. Things aren't going so well at B&N. Sales actually fell in its latest quarter, as sales of the lower-margin Nook e-readers can't make up the sharp decline in physical books.

Yes, B&N is ready for the passing of bound books, but what will this mean for its cavernous stores? Store-level sales will continue to decline, and folks will continue to download their books from a wider variety of sources.

2. Sears Holdings (SHLD)

Lousy sales for Sears and Kmart during the holiday season proved that both department store chains continue to fade in relevance for bargain-seekers, and in late December, the parent of the two struggling retailers revealed that it would be closing as many as 120 stores.

Sears Holdings is in a lose-lose situation. It needs to update its stores if it wants to stand a chance against its "cheap chic" rivals. Unfortunately, the company just began tapping its credit line, so it's not as if it can afford the necessary upgrades.

Sears itself has been around for several generations, dating back to its mail-order catalog. Could it really disappear in the next five years? Well, Woolworth was around for more than 100 years when it was liquidated in 1997.

3. Best Buy (BBY)

Everyone seems to be buying smartphones and tablets. They're just not buying them at Best Buy. Shoppers are finding cheaper prices online, forcing Best Buy to shave its already meager margins just to remain competitive.

It gets worse.

"Best Buy's worst fears are coming to fruition," I wrote after the consumer electronics retailer's latest quarterly report. "The same shoppers whom it has armed over the years with smartphones, tablets, and laptops are now using those devices to find better prices online. Even when folks do walk into a store, they can seamlessly compare prices on their smartphone to make sure that they're getting the lowest price."

Let's also not forget that these are also the same devices that are making all of the shelf space that Best Buy has been devoting to CDs, DVDs, books, and video games obsolete.

For growth, Best Buy has turned to smaller stores that sell only mobile products. That strategy may or may not pan out over time, but either way, the gargantuan Best Buy stores as you know them now are toast.

4. RadioShack (RSH)

If Best Buy focusing on bite-sized stores emphasizing wireless handsets through different carriers and related accessories sounds familiar, welcome to RadioShack. The small-box specialist got into that game awhile back, after realizing that folks just don't need to stop by a strip-mall shop anymore to pick up some batteries or a remote-controlled car.

Is this market wide enough for both RadioShack and Best Buy Mobile?

Forget about the future. RadioShack's situation is ugly right now. The retailer has missed Wall Street's quarterly profit expectations all year long.

5. GameStop (GME)

Today, GameStop has one of the most profitable retail models around. The growing retailer's stores stock the latest gaming systems, video games, and accessories. Margins aren't that hot on hardware, but they're pretty sweet on software.
However, the juiciest part of GameStop's model is where gamers trade in their tired games and systems for store credit. GameStop goes on to resell those items at huge markups.

GameStop stores don't need a lot of selling space given the compact nature of their merchandise, so they fit conveniently in the middle of strip malls where rent is cheap. Sales have held up reasonably well, even though video game industry sales have been largely languishing since 2009.

GameStop definitely doesn't seem very endangered now, but now that even Best Buy and (AMZN) are accepting trade-ins, the most lucrative part of the GameStop model is under attack.

Let's also flash forward a few years. As console makers shift to digital delivery of software, where does GameStop fit in? The retailer has made some intriguing acquisitions in digital delivery, but the days of GameStop's physical stores are numbered.

Add It Up

Some of these chains will last longer than others. GameStop's balance sheet is a far cry from Sears Holdings, where credit ratings agencies are biting their nails as they ponder downgrades. However, all five of these concepts just aren't built to last in today's retailing climate.

Enjoy them while you can.

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