2HRS2GO: Juno rise premature

5 min read

Juno Online Services (Nasdaq: JWEB) won't need any subscription revenue if the pace of the last two market sessions keeps up -- the company could just as well issue more stock to raise capital.

Yesterday the company said it would offer free Internet access. This morning PaineWebber reiterated a "buy" rating on JWEB and doubled its price target to $120 from $60 on optimism about the free ISP plan.

As of this afternoon, shares of Juno were up more than 300 percent from Friday's close.

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PaineWebber analyst James Preissler, with associates Thomas Bock and Richard Choe, believes Juno can turn a profit from a free ISP service. The analysts note that as of yesterday, NetZero (Nasdaq: NZRO) carried a market cap of $2.6 billion, or about $1,300 per subscriber.

Applying that value to Juno's 1.3 million potential free ISP base yields a stock price of $66 per share. Given that Juno happens to be trading right around there today, it's safe to say that the market is taking Preissler's word as gospel.

(Although given that NetZero's own market cap is up more than 33 percent today to nearly $3.2 billion, PaineWebber's logic dictates more boost for Juno as well. But I shouldn't say that -- it only encourages people.)

Let's overlook the fact that PaineWebber was an underwriter for Juno's IPO, and thus has an unstated obligation to be positive about the stock. Investment bank boosterism aside, Preissler's main point is the same one made by Bill Burnham in a recent ZDII piece: the free ISP model can work.

Falling expenses lie at the heart of the thesis. Burnham asserts new technologies are driving down the basic cost of access. Preissler says Juno can also get away with putting twice as many users on one network port as other Internet access providers. That might generate more busy signals and other congestion, but when users pay nothing, expectations are likely to be low, Preissler believes.

He might have a point. As some readers have pointed out, this free column often proves that you get what you pay for.

Each network port costs Juno about $5 per month, according to the PaineWebber analysts. They think that by packing 20 users on a port (compared to 10 for an ISP with paying subscribers), Juno can eventually get that cost "closer" to $2 over within the year and a half. At the same time, each subscriber should generate about $2.10 per month for Juno.

Juno "could have a theoretical normalized net margin of 15 percent as a mature company," write the PaineWebber analysts.

Somehow I find it difficult to have much confidence in an assumption that includes the words "could" and "theoretical", but that might just be a skeptical, sour grapes pundit talking.

Still, I am wondering what the exact e-mail-to-ISP conversion rate will be for Juno. Preissler estimates 1.3 million potential new ISP customers from Juno's current customer base.

Will every one of those 1.3 million possibilities become actual users? The PaineWebber report assumes so, but offers little to back up that belief. Being that it's the Advent season, perhaps faith is all you need -- it worked for Mary and the angel Gabriel.

My own belief tells me carefully reasoned answers are necessities for successful investing. I've yet to see anyone truly answer the question of what free ISP customers are ultimately worth, at least in business terms. If you're unwilling or unable to pay for Internet access, how much value can you deliver to a seller or an advertiser?

Burnham believes the Web is becoming a mass market medium, and the greater masses will take whatever is cheapest.

Fine, but does that make it a great business? Radio and TV broadcasters are the only large businesses currently viable without any direct financial contribution from end users, and only because they have monopolies or duopolies on content. If you live in the San Francisco Bay Area and want to watch the latest episode of Xena: Warrior Princess, you have to tune into WB 20. You don't have options.

On the other hand, a free ISP user having problems getting through to Juno at any given time can try NetZero or AltaVista, among others.

In fact, technically I'm counted an AltaVista ISP user. I have it as a backup service on my computer at home and my laptop for work.

Am I valuable AltaVista subscriber? Absolutely not. I can't recall when I last used it, and I'm willing to wager I'm not the only one like that.

Worse for AltaVista, I don't have to see their advertising all the time even when I use the service. I play online games like Sony's EverQuest and guess what? The EverQuest game screen completely covers the little AltaVista banner. I can and have logged onto EQ's servers for hours using AltaVista without seeing any advertisements.

I don't think I was violating any terms of service, since I wasn't using the service with the banner turned off. I just couldn't see it, because the game screen overrides everything else. I've found the same holds true with NetZero.

And it still remains to be seen if there's money to be made long-term from any ISP, free or otherwise. No publicly-traded pure ISP has generated net earnings over a string of quarters, except for Mindspring Enterprises (Nasdaq: MSPG) in 1998; but this year, Mindspring has lost money every quarter because the company felt the need for increased marketing and expansion through acquisition.

In case you're thinking of America Online (NYSE: AOL), remember it isn't a pure ISP. AOL blends Internet access with large dollops of proprietary content broken up by a combination of carefully placed banners and pop-up windows that can't be avoided. It's much different from a single floating advertisement that can be moved almost out of sight and certainly out of mind.

By the way, it took AOL a decade or more to become steadily profitable. Can you wait that long to see if Juno Online makes it?

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