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NetZero Goes 0 for 2; Pitney Bowes Gets Stamp of Approval

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

May 30, 2000|JAMES PELTZ and MICHAEL HILTZIK

NetZero (NZRO)

Jim: Don't buy

Mike: Don't buy

*

Jim: Now, Mike, we both know the old saw about how one way to run a successful business is to give 'em the razor and sell 'em the blades. But--

Mike: What if you're giving away the razor and the blades?

Jim: Exactly! Because NetZero offers customers free access to the Internet.

Mike: As do several other firms, and their business model is basically the same: You get the free access all right, but in exchange they shove advertising down your throat. It's sort of the same premise as watching television.

Jim: Except in NetZero's case, first you have to fill out this long questionnaire that gives them a ton of information about your life, which in turn they peddle to the advertisers.

Mike: There's more to it than that. Yes, they not only peddle that demographic information in bulk to advertisers, but they offer advertisers a way to reach you as a targeted audience. In other words, an advertiser might spend a little bit more to put an ad up on the screens of all potential car buyers.

Jim: It all works as long as you're online. But most of the time you're not.

Mike: There's a little box on your computer screen--that you can't turn off--that carries all this advertising. NetZero makes no bones about the fact that it tracks you everywhere you go on the 'Net, every mouse click you make.

Jim: Suddenly, "free" doesn't sound so appealing.

Mike: It knows every Web site you're visiting. And NetZero has what it calls rockets, which are the highest-priced ads. For instance, if you happen to click on a site for Saturn cars, that little box on your screen might suddenly show you an ad for a Honda instead.

Jim: Well, I guess not everyone is a privacy freak, because NetZero claims to have something like 4 million subscribers, which places it second in size behind only giant America Online.

Mike: Although we should say statistics about online subscriptions and activity are notoriously soft. And it's even harder to tell how many of them are actively using NetZero, because those kinds of consumers often subscribe to 40 free Internet services.'

Jim: Why?

Mike: They'll use one or another either in rotation or they'll use one until they can no longer get a free connection, and then they move on to the next. In other words, how solid are these audiences?

Jim: Anyway, NetZero's stock was doing OK until January, when it went into a dramatic slide that sliced its value in half. Now it sells for less than $8 a share.

Mike: It's had plenty of company, of course, especially among the "dot-com" crowd.

Jim: Occasionally NetZero has gotten a lift, like in April, when wireless-phone giant Qualcomm invested more than $140 million in NetZero. But naturally NetZero is still earning zero, and frankly I see its prospects for going forward as little more than zero. I'd avoid the stock.

Mike: I wouldn't buy this stock either. Right now, in the Internet world, we're seeing one of history's greatest transfers of wealth from venture capitalists to the average consumer.

Jim: Meaning?

Mike: Meaning the venture capitalists--and stock-market investors--put a lot of money into NetZero. That's the money that's going out the door as NetZero covers its real expenses, such as the cost of providing Web access for its subscribers: phone lines, connections and so on. Those are the costs that are eventually going to have to be covered by advertisers.

Jim: Well, as an investor I'd be worried about how NetZero's advertising income is going to keep growing. Yes, the advertiser is getting a targeted audience, but whether it's No. 2 in size or not, NetZero is but a blip on the Internet. So how much longer will advertisers feel they're getting enough bang for their bucks? Otherwise, NetZero is just becoming a huge database about Internet users.

Mike: Yes, but databases are valuable.

Jim: You mean NetZero is a takeover target?

Mike: I don't know whether anyone would buy the company, but that database has value and could fetch NetZero a pretty penny. But let's be realistic: These free Internet services have come under intense scrutiny by investors in the last few months. The market is no longer willing to accept on faith that there is a huge pot of gold at the end of every dot-com rainbow.

Jim: They're also no longer willing to accept quarter after quarter of losses.

Mike: This is a point we've been driving home since our very first column nearly two years ago. And yes, at times we've gotten our toes cut off with a cleaver for sticking to our guns about this. But now the day of reckoning for these loss-ridden Internet companies is coming--fast. And I don't think $8 or so is low enough to jump into NetZero.

Pitney Bowes (PBI)

Jim: Buy

Mike: Buy

*

Mike: Up next is another company that's looking for real opportunity on the Internet, in part because it's one of the oldest makers of office equipment.

Jim: So the principle is "evolve or dissolve," right?

Mike: Right. Pitney Bowes has long been synonymous with the postage meter.

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