Juno and NetZero end feud, agree to merge

NetZero and Juno Online Services -- the largest of the “free” Internet service providers -- have surprisingly agreed to merge, putting an end to a year of lawsuits, restraining orders and overall bad blood between the fierce rivals.

The ISPs announced yesterday they would form one provider called United Online, providing both advertising-paid services and subscriber-paid services. The free services will fall under the NetZero brand, which has been far more successful in attracting advertisers, and the paid services will remain under Juno’s umbrella. Combined, the two companies will have a customer base of 7 million active subscribers – users that log on to their accounts at least once a month. The numbers would make United Online the second largest ISP behind industry mammoth America Online, though a distant second when compared to AOL’s 28 million users. Only 1 million of United’s subscribers would hold paid accounts, however, meaning the new company will still be extremely dependent on waning online advertising revenues.

Ironically, a merger seemed to be the last thing on both companies’ minds given their intellectual property war. Juno started the squabbling in June 2000 by filing a patent-infringement suit against NetZero, claiming the ISP was violating a Juno patent by incorporating offline advertising in its email client software. The application in question displays ads even while a user is offline, composing or reading e-mail.

In December, NetZero fired back, filing a patent infringement suit against Juno over its use of its on-screen advertising and navigational window. NetZero said the application was a rip off of ZeroPort, NetZero’s patented advertising and messaging window.

But at some point in the skirmish, the two companies not only made amends but also decided that their best strategy was to join forces, Juno officials said.

“Once we started to learn more about each other, we realized there were tremendous synergies between us,” a Juno spokesman said today.

The two companies would combine the respective technologies, which until now was the source of their squabble, and leverage their individual expertise in the two Internet access models. Of all the free ISPs, NetZero has been most successful in attracting advertisers by using its customer data to target specific demographics, the Juno spokesman said, while Juno has a strong revenue base from its 1 million paid subscribers.

While only making up 14 percent of the total, those 1 million paid subscribers accounted for 60 percent of the two companies combined $41.5 million Q1 2001 revenues. The two companies only took in $16.8 million from advertising and e-commerce. Advertising-based ISPs have blamed the dot-com slowdown for their revenue problems, but many, including Juno and NetZero, maintain the model can work with more controls, such as time restrictions and using free services as a way to coax users toward paid services.

Juno and NetZero now believe that a combination of paid and free services is the proper business model, especially during the current economic slump.

“Put these two [models] together and you have a potential powerhouse that can break this tier structure with AOL way up at the top and the others vying for scraps at the bottom,” the Juno spokesman said.

While billed as a merger, the $70.7 million deal seems to favor NetZero shareholders and executives, as NetZero shareholders will hold 61.5 percent of the company, with the remaining 38.5 percent going to Juno shareholders. NetZero CEO Mark Goldston will become president, chairman and CEO of United Online, and NetZero chief financial officer Charles Hillard will assume the same position at the combined company, leaving Juno president and CEO Charles Ardai and several other top managers to seek new opportunities.

Under the terms of the agreement, shareholders will receive 0.2 shares of United for every share of NetZero owned and 0.357 shares of United for the every share of Juno owned. If the merger is approved the company will trade on the NASDAQ stock exchange under the ticker symbol UNTD.