Juno Online Services, Inc

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JUNO ONLINE SERVICES, INC.

New York-based Juno Online Services, Inc. was the third largest Internet service provider (ISP) in the U.S. prior to its merger with rival NetZero, Inc. In September of 2001, Juno Online Services and NetZero joined forces to become a new company, United Online. With more than 18 million registered accounts and 7 million active subscribers—those who access the Internet at least once a month—United Online surpassed Earthlink and became second only to America Online (AOL) among U.S. Internet access providers.

COMPANY HISTORY

Juno was founded in May of 1995 with the financial backing of David Shaw, an investment banker based in New York who once taught computer science at Columbia University. Other early investors in Juno included News Corp., Intel Corp., Prospect Street Ventures, and Sycamore Adventures. With four employees, the fledgling firm began offering its free email service eleven months later. Juno software was available via CD-ROM, or it could be downloaded from the firm's World Wide Web site; once users had loaded the software onto their machines, they could access Juno's servers by dialing a toll-free number. Juno marketed its free services in magazine advertisements and mailings that claimed, "E-mail was meant to be free." According to a January 2000 article in BusinessWeek Online, "A revolutionary, even audacious, idea at the time, Juno allowed its members to send and receive e-mail to or from anyone, anywhere on the Internet without charging a fee. The trade-off, as is the case with most free Net services, was that most users had to watch a series of ads in exchange for e-mail privileges. Although Juno members were only online long enough to download and upload messages, the company's proprietary technology kept pumping out a steady cycle of advertisers' pitches even as the users read or composed their e-mail offline." The ads appeared to customers as banners at the top of each page; users could then click on the banner to view more detailed information, and Juno could monitor the number of hits each advertisement received.

Many analysts considered the advertising business model upon which Juno was based promising. As a result, several competitors began to emerge, including NetZero, which was established in July of 1997. By mid-1998, more than five million users had signed up for Juno's free email services. In June of that year, Juno began offering its Premium Web service, which included full Internet access, for a $19.95 monthly fee. Management believed that as customers became more Web savvy, they would be willing to pay for enhanced services such as Premium Web. To differentiate itself from Juno, NetZero began offering free access to the Internet in October of 1998, prompting Juno to reduce its monthly Internet access fee to $9.95.

Subscribers grew to 6.5 million in early 1999. Juno conducted its initial public offering (IPO) that May. NetZero completed its IPO just a few months later, but with only 500,000 subscribers, the firm continued to lag far behind Juno. In December, Juno began offering full Internet access for free. The firm diversified into electronic commerce for the first time when it launched its Shop@Juno channel, which included links to Garden.com, Art.com, Bluefly, and 1-800-FLOWERS. This allowed the firm to add a third revenue source, a percentage of each sale originating at its shopping channel, to its business plan. However, advertising continued to bring in the bulk of sales, with subscriber fees making up most of the remainder. Sales grew 140 percent that year to $52 million.

Competition continued to intensify as several new ISPs—including BlueLight.com, owned by Kmart Corp.—began offering free email and Internet access. In April of 2000, QUALCOMM dumped $144 million into NetZero, and five months later, that firm's subscriber base reached 7 million. To boost its own subscriber base, Juno agreed to pay the bankrupt WorldSpy.com, another free ISP, to take over its 260,000 subscriber accounts. The firm also formed a strategic alliance with IBM Corp. by which IBM agreed to include Juno software on many of its personal computer (PC) lines. Also in 2000, Juno and broadband service provider Covad Communications launched Juno Express, the firm's digital subscriber line (DSL) service, a continual Internet connection roughly 21 times faster than a traditional modem-based connection. Within a few months, the high speed Internet access, which cost subscribers $49.95 per month, was available in more than 60 major markets in the U.S., including New York City; Milwaukee, Wisconsin; San Antonio, Texas; and Indianapolis, Indiana. Subscribers could also opt for high-speed mobile wireless access to the Internet, which Juno offered in conjunction with Metricom. Juno's sales grew 120 percent to $114 million that year, and subscribers exceeded the 12 million mark; however, the firm remained unprofitable, posting a $131.4 million loss.

Legal troubles with NetZero began in June of 2000 when Juno sued its competitor, alleging that NetZero infringed on its patent for technology that displays advertisements to users even when they are offline. Six months later, NetZero turned the tables and accused Juno of patent infringement, claiming that Juno had illegally copied portions of its ZeroPoint technology, which displays advertisements in a separate window.

Juno added a Games Channel to its online offerings in January 2001. Along with various types of games, including card, trivia, and simulation, the channel also included content from three leading game sites: Gamers.com, Boxerjam, and iEntertainment Network, Inc. Registered subscribers grew to 14 million. The release of Juno 5.0 included a mail assistant that allowed users to specify how they want e-mail messages sorted, integrated e-mail and Internet services, and an intelligent dialer that records the performance of all the access numbers used by each subscriber and selects the number most likely to offer a successful connection each time a user attempts to log on to Juno.

A BUSINESS MODEL CHALLENGED

Under mounting pressure from shareholders to produce profits, Juno began experimenting with ways to convince users to switch to fee-based services. According to a March 2001 article in BusinessWeek Online, the firm began making it more difficult for its most frequent users to log on to the free service. "The misconnects were no technical glitch. Juno was deliberately curbing heavy hitters' access to prod them into switching to its $14.95-a-month plan. The reason: A survey of its subscriber base revealed that a mere 5 percent of users of its free service accounted for most than half of Juno's online costs." Also forcing Juno to reexamine its free ISP model was the fact that the North American economic downturn in 2000 and 2001 prompted many firms, dot.com and otherwise, to tighten their online advertising budgets. With its main source of revenue drying up, Juno needed to find other sources of income.

By mid-2001, several of Juno's free ISP rivals had declared bankruptcy, and many analysts began to call into question the viability of the free ISP model. In June, Juno and NetZero announced their intent to merge; the deal was completed three months later. The newly merged firm, named United Online, was the second largest Internet access provider in the U.S. As stated by Forbes.com writer David Simons, "The haunting question is whether the merger creates a viable long-term business or just delays a fate already suffered by free Internet service providers around the world."