Investors buy into plans to give away Net access

In the latest example of free-mania, shares of Juno Online Services have more than tripled since the company said yesterday that it will give away Net access.

After the announcement, Juno shares surged 12.63 yesterday to close at 29, a 77 percent gain. Today, after analysts and investors had a night to dream of the real potential for giving away Internet access, the shares jumped to 72 before sliding back to about 60.

A number of brokers raised their target prices today, as Juno's share price soared. PaineWebber raised its 12-month target range to $120 from $60, and Salomon Smith Barney raised its target price to $80.

Shares in NetZero, which also offers free access, were swept up in euphoria. Its shares gained 70 percent in early trading before slipping to about 31.31, up 7.75.

Investors are bullish on the free Internet service provider trend because it gets the companies out of a low-margin business and into the potentially lucrative area of advertising and e-commerce.

"ISP analysts are issuing statements in which they clearly recognize that advertising and e-commerce revenues are more important than [ISP] access revenues," said Marlowe Burke, an analyst with Wit Capital.

Companies such as NetZero and Freei.Net generate their money through targeted advertising and e-commerce as opposed to charging subscribers a monthly fee to use the service.

"I think it's taken some time to earn the trust of investors that this will be the rule, rather than the exception," Burke added, noting a recent proliferation of free ISPs.

Technology investor CMGI, for example, recently acquired free ISP 1stUp.com to power its AltaVista portal. Kmart and Yahoo also will offer free Net access via the retailing giant's new e-commerce site, BlueLight.com.

Juno has 500,000 paying subscribers and 2.4 million customers who use its free email services. For Juno members who want to receive the free Net access, a window containing ads will appear on their computer monitors when they are on the Net.

The company will still offer Net access for $9.95 per month to customers who do not want to view the ads.

Juno's entry into the market, and the enthusiastic response from investors, spilled over to NetZero.

"Investors have looked at how Juno has traded over the past 48 hours and see that NetZero's stock chart has largely been flat since its IPO, so they think NetZero is undervalued," said Youssef Squali, an analyst with ING Barrings.

He added that he anticipates NetZero's run-up is a "momentum play," and investors will likely grab profits tomorrow.

NetZero had been the only publicly traded free ISP until Juno's announcement, but that failed to scare investors away.

"There is room right now for competition," Burke noted.

Even if market giants America Online or Microsoft enter the free ISP arena, Burke said she does not expect the share price for NetZero or Juno to take a severe tumble.

"If they launch a service, it's likely they will do it with a partner," she said. "They may have a premium service and then, in conjunction, offer a free service. [Juno and NetZero] may make good partners."

While investors have bid up the shares for NetZero and Juno, Squali said the market is overreacting.

"We don't believe it will represent 50 percent of the ISP market. We think it will be 15 to 20 percent of the market," he said. "So going on that assumption, the growing competition will have two long-term impacts: It will drive up acquisition costs for new customers, and it may affect their [advertising] rates."