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Juno angles for next big Net access trend

Charles Ardai, head of the Internet service provider, talks about the cutthroat Internet access business and explains how his company plans to not only survive, but thrive.

       
    As Internet service providers brace for a shakeout amid swooning interest on Wall Street, Juno Online Services--which offers both free and paid plans--is in the spotlight.

    Founded in 1996, Juno has outlasted several competitors with its hybrid business model to become the third-largest ISP in the United States, behind America Online and EarthLink Network. The company recently cracked the 10 million sign-up mark, although only a fraction of those are listed as active subscribers.

    Juno is also inking high-profile partnerships, such as a deal with Time Warner that makes it the first outside ISP to win a carrier contract with the cable company as it prepares to merge with AOL.

    But for all the signs of momentum, Juno is at a crossroads. Its share price has slid more than 85 percent in the past 12 months, to around $5.25, among a general decline in ISP stocks. Analysts are worried about the company's cash position.

    Juno reported that it had just over $80 million in cash in its latest earnings report, while rivals are far better financed. Free ISP NetZero has $280 million in the bank, and it is quickly gaining subscribers.

    Juno is responding by looking for cheaper ways to drive growth--for example, by turning to distribution partnerships. A major deal last week will see Juno software bundled with IBM's personal computers, and more partnerships could follow.

    Juno also recently captured remnants of free ISPs that have been collapsing one by one. Last month, Freewwweb and WorldSpy ceased operations, referring to Juno 960,000 potential new subscribers.

    In an interview with CNET News.com, Juno chief executive Charles Ardai talks about the cutthroat Internet access business and explains how his company--a four-year veteran of the free ISP wars--plans to not only survive, but thrive.

    CNET News.com: Some analysts are predicting that there are only going to be (a few) major ISPs in the future. What does it take for a free ISP to survive?
    Ardai: To some extent there will be a shakeout. And this is not just in the access space. This is for Web sites, too...As a rule, if there's a market for a product, there's room for two or three.

    I think the big issues are: (Do) they have the funding? (Can) they get up One strategy 'is to offer multiple services to consumers rather than just
one...If somebody decides to go to a free service, AOL loses them.' to a large enough size? And (do) they have the revenues?

    Now, in the case of WorldSpy (recently acquired by Juno), they didn't even try to sell ads...It wasn't that they tried and failed; they specifically said, "We're not going to show ads." That was an interesting experiment but ultimately not a successful one.

    What's your business model, and what are your business strategies?
    We have subscription fees, but we also have substantial advertising revenue and e-commerce revenue. So the business model is on one hand to have multiple revenue sources, multiple revenue streams rather than relying on just one. And so that's one side of it. The other side is to offer multiple services to consumers rather than just one...Like AOL, for instance--if somebody decides to go to a free service, AOL loses them.

    So is your goal to convert people from free services to billable services?
    Exactly...If they start with free dial-up, we can migrate them to billable premium dial-up. If they start with billable premium dial-up, we can migrate them to broadband. If they start with a fixed broadband solution like DSL or cable, we can migrate them to a more sophisticated mobile wireless broadband over time.

    How are you attracting subscribers?
    We have three or four pieces to it. There's a large organic growth piece, so word of mouth...Then what you do is you supplement that with other marketing. And there are two big categories, and we're shifting our focus from one to the other. The one category is what I might call traditional marketing channels. And this would include direct mail, television, radio, outdoor advertisements, print advertisements--things like that, which are typically front-loaded expenses.

    The second category of marketing would be alternative marketing channels, less traditional marketing channels where you pay on the back end rather than the front end, and frequently you can pay in stock rather than cash or in some way other than cash.

    So examples of this would be, for example, the deals that we announced with WorldSpy and Freewwweb...There are different terms for the different deals, but basically we pay once a subscriber joins us. So that's one advantage as compared to direct mail, where you pay up front and you don't know what you're going to get for it.

    And the second thing is that we pay either entirely or mostly in stock.

    What do you look for in a partner?
    Reasonably low cash burn is very attractive, of course. The less cash they're burning, obviously, the less they will need to do a deal to survive--but also the easier it is to do the deal. A large subscriber base or some other asset, some other large, valuable asset that fits well with Juno, that meets one of our needs. It doesn't have to be subscribers. It can be something else entirely. But it should be something that fits our business in some useful way.

    So low cash burn, valuable asset. If it's going to be an outright acquisition of a whole business, good chemistry between the management teams might be important.

    What concerns you the most when it comes to competition?
    Will we actually have access to all the technologies that our customers might want to use? Will we get our service onto the screens of their favorite handheld device? Will we get the service carried over their cable wires? If there's a new technology in the future, will we get carriage?

    We want Juno to be available everywhere they want it. And in the case of It boils down to a question of business negotiation...As new
technologies arrive and we want Juno to be carried on them, what deals do we
have to strike to ensure that these channels are open to us? telephone wires, the answer is quite simple because there were regulations in place that required the phone companies to wholesale access to their network. In the case of cable or other categories, there may not be regulations to help us.

    And so it boils down to a question of business negotiation: Can we come to terms with these companies? Now, so far, we've had success doing that, and we're happy with where things stand, but I think that is one of the big challenges. As new technologies arrive and we want Juno to be carried on them, what deals do we have to strike to ensure that these channels are open to us? So deal-making is one very important focus.

    What is the most innovative thing Juno has done thus far?
    Well, the first thing we did was to offer dial-up access for free. We were the first company to do that. That was back in 1996. That was revolutionary back then. When we did it, we only allowed people to use it for email. And that was in the early days, just because it was too expensive, phone rates were too high for us to give away full Internet access for free.

    Another thing...was what we did on the advertising side: this highly targetable, highly attractive advertising that can even continue showing when you're disconnected. That's a fairly subtle one. I don't think the average person knows about the guts of that ad system, but it actually is an invention that we're very proud of, and the government granted us patents on it.

    So what can we expect from Juno? Is there anything by the end of the year that we can anticipate?
    Well, there are a bunch of things we're hoping to get launched by the end of the year. For example, the cable trials with Time Warner and AT&T. Those are waiting for certain contractual obligations to be cleared. In the case of Time Warner, they have to clear contract with Road Runner; AT&T has a contract as well. So I'd like to see those up and running. Similarly, I'd like to see the Hughes satellite deal.

    We would expect our ad revenue to continue climbing, although admittedly more slowly than we would have projected a year ago simply because a significant fraction of the ad dollars that we get...come from other Internet companies. And these other Internet companies are no longer in a position to spend as aggressively on advertising as they might have been a year ago...Fortunately we have a fair number of non-dot-com advertisers...I think that will soften in some.