NetZero Inc. said Wednesday that it will dramatically scale back the amount of free Internet service it offers to customers and begin charging those who live in outlying areas.
The Westlake Village company was the first to offer free Internet access to customers willing to share personal information and look at targeted ads. The money-losing firm limited its free service to 40 hours a month in January and now plans to slash the amount to 10 hours beginning Oct. 1. Customers who spend more than 10 hours a month online will be charged $9.95.
The cuts are a tacit admission that the nearly 4-year-old company's business model isn't working, and its competitors have come to the same conclusion. The sinking advertising market forced Kmart Corp. to announce last week that it would end its free Bluelight.com Internet service this month.
"The reality of it is that they can't derive enough money through their ad-based model, so they're having to go to a pay-for-services model," said Richard Varner, president of Phoenix-based Biz-Net Brokers, which works on mergers and acquisitions of Internet-related companies.
About 70% of NetZero's customers use the service for less than 10 hours a month and won't be affected by the new charges, according to the company. In addition, 92% of users live in areas where the free service will continue to be available.
"We are very committed to offering free service," a NetZero spokesman said. "That said, there have to be limitations in place so that we can still offer it to a majority of our user base."
About 3.4 million people accessed NetZero's services during June, including 310,000 who already pay for the service.
Whether customers facing their first NetZero bills will stay with the company or switch to another provider remains to be seen, Varner said. NetZero's $9.95-a-month price tag is well below industry leader America Online's monthly Internet fee of $23.90, and slightly higher than the $8.95 a month Bluelight.com will charge.
"I don't know how many people will convert to [NetZero's] pay program," Varner said. "That's where their success will be determined."
NetZero also will cut costs by eliminating 66 jobs in six U.S. offices, including 38 at its Westlake Village headquarters. The cuts amount to a 26% staff reduction, the company said.
NetZero announced a deal in June to merge with rival Juno Online Services Inc. of New York by the end of this year. Juno has about 250 employees.
Before the cuts were announced, NetZero shares closed at 60 cents on Wednesday, unchanged in trading on Nasdaq.