Free ISP Closes Doors, to be Acquired by NetZero

Ad-supported free ISP FreeI Networks joined the casualties of the market correction and ad spending slowdown Friday, filing for Chapter 11 bankruptcy protection and announcing that a competitor likely would purchase its assets.

The news ends a tumultuous week for the two-year-old, Federal Way, Wash.-based FreeI, also known variously as freeinternet.com and Freei. On Oct. 3, the company pulled its $173 million IPO, citing market conditions, and announced layoffs of about 90 employees.

FreeI chief executive Robert McCausland refused to confirm that the company was in buyout talks at the time.

FreeI sold banner ads in a small window that remains open during users’ Internet sessions. The ads could be targeted based on demographic information given by users when they registered for the service, and by their Web surfing activities.

The company also sold rich media ads that ran during log-on, as well as banner space, classified ads and content channel sponsorships on its site, the first Web page that users visited each session, and private-label Internet service.

Despite sizable investments — the company raised a total of $93 million in financing since August 1999 — and efforts to monetize its site traffic, the company had a prodigious burn rate. SEC filings show that for 1999, FreeI took in just $983,000, while spending $18.7 million.

Westlake Village, Calif.-based competitor NetZero said on Friday that it signed a non-binding letter of intent to acquire certain assets of the company. The deal is subject to approval by regulators and bankruptcy court.

If the deal goes through, FreeI users most likely will be referred to NetZero’s service. FreeI claims about 3.2 million users — about which 40 percent to 50 percent use the service at least once a month — while NetZero says it has more than five million users, and about two million active users.

Few details of the buyout were being released, but the company said it plans to provide uninterrupted service to FreeI users.

“Our intent is to provide maximum continuity for FreeInternet.com users,” said NetZero chairman and CEO Mark Goldston. “NetZero intends to help FreeInternet.com users transition as smoothly as possible so they can continue to enjoy the benefits of free Internet access and email.”

Investors were reacting favorably to the news, with shares of NZRO up 2.56 percent to $2.50 at press time.

Like FreeI, NetZero generates income through ad revenue — and has been feeling the pinch of an online ad spending slump. But unlike the floundering company, NetZero lowered its CPM rates to between $2 and $3 to compensate for lessening ad revenues. FreeI’s rate card featured CPMs ranging from $20 to $65.

NetZero, which posted a fiscal 1999 loss of $92.6 million after sales of $55.5 million, in recent weeks also announced additional initiatives designed to beef up its own revenues.

Earlier this month, it said it would begin offering guarantees of 33 percent increase in the number of site visits, for first-time advertisers on its system. Last month, the company rolled out a research division, which will sell reports and provide site analysis based on its users’ opt-in demographic information and Web surfing habits.

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