The Juno-IBM alliance puts the spotlight not only on the importance Internet service providers place on attracting new subscribers at minimal cost, but on just how low these stocks have sunk. The jury is still out, however, on whether the shares have reached bottom and represent a buying opportunity.
"Overall, investors are realizing that the ISP business model is a tough road to go," Yankee Group analyst Emily Meehan said. "The margins are not that great."
The shares of many Internet service providers have been hammered this year. Below, selected ISPs and the percent change from their 52-week highs.
|Juno Online Services||-81%|
|Source: CNET Investor|
When investors made an abrupt U-turn earlier this year and decided to value profits above subscriber and revenue growth, ISPs were caught in the selling frenzy along with e-commerce companies. Although there have not been widespread layoffs, closures or bankruptcy filings, which have marked the carnage in the e-commerce sector, the picture is nearly as bleak.
Shares of so-called free ISPs--which provide free Net access to a majority of their customers and derive much of their revenue from advertisements--have been hit particularly hard. In addition to Juno, shares of NetZero are down nearly 90 percent.
But even companies with paying subscribers have been dragged lower. Shares of EarthLink Network, Excite@Home, PSINet and Prodigy Communications have plunged at least 70 percent from their highs.
The downturn of the past few months "illustrates the uncertainty over which business model is going to succeed," said Jeff Sadler, an analyst at FAC/Equities. "Wall Street has abandoned many ISP business models, and time will tell which models come back."
Now investors are focusing on whether companies can survive, as measured by available cash--with EarthLink and NetZero appearing relatively healthy. EarthLink has about $750 million to $1 billion in cash, while NetZero has a war chest of $280 million to run a company of about 200-plus employees.
Juno is in worse shape and faces the same hard choices confronting many other Net companies: Cut expenses and sacrifice growth or keep spending and hope that investors once again start focusing on growth.
In a recent filing with the Securities and Exchange Commission, Juno reported subscriber acquisition costs of $38.1 million for the three months ended June 30, up from $13.9 million for the same period in 1999. It also reported $85 million in available cash.
"We are very concerned with Juno's prospects for growth and stability," Chase Hambrecht & Quist analyst David Levy said. "They need to raise more money or cut spending, but if they cut spending their customer base will shrink."
Levy said the IBM deal "will help them grow their customer base, but they still need to cut marketing expenses."
Juno has decided to reduce the cash it spends on customer acquisitions. In the SEC filing, it said "we expect to significantly reduce the cash portion of these expenses during the second half of 2000" while looking for other ways to attract customers through less costly means.
As examples of such deals, Juno recently worked out agreements with WorldSpy and Freewwweb that allow it to acquire the two companies' subscribers in exchange for Juno stock.
"We're in the same position that many ISPs are," Juno CEO Charles Ardai said in an interview today. "There's a balancing act between the goal of aggressive growth on one hand and reducing the cash burn rate on the other." Ardai said Juno burned through about $40 million in cash during the second quarter, and he expects the company to lower that rate to between $10 million and $20 million in the current quarter.
Meanwhile, the competition remains fierce as ISPs continue to forge relationships with the aim of attracting new Net users.
For instance, AT&T announced today that it will launch a co-branded service with warehouse retailer Sam's Club, Flooz.com, Toshiba and USA Today.
Under the program, customers who sign up for Net access via AT&T will see a toolbar on their PCs that includes customized advertising, email access and a search function.
In USA Today's case, the newspaper publisher will offer a subscription to the newspaper and Net access for a total monthly cost of $12.95. Toshiba will sell three desktop PCS and one notebook that includes three years of pre-paid access through AT&T WorldNet.
AT&T's program is just the latest of several.
Consumer electronics giant Sony plans to offer Net access this fall, and Web portal Yahoo said last month it will bundle its services with free ISP Spinway.com to sell packages to retailers and others.
America Online and Microsoft also have struck deals with retailers such as Circuit City and RadioShack to market their online services to shoppers.
The extreme competition implied by such deals leaves some analysts wondering whether some companies have already missed the boat.
"If the major market growth has already taken place," Sadler said, "and your company is not profitable and future growth will be a lot leaner, you've got to make sure your business model adjusts to the marketplace."
A company has to ask itself: "Are you sitting at the table with the wrong level of appetite?" Sadler said. And "now there are more people at the table and less food."