NetZero Takes In-Depth User Profiling to New Level.

Free Internet service providers have traditionally offered subscriber databases as their most attractive asset to advertisers. But Westlake Village-based NetZero Inc. goes beyond that, trumping its in-depth profiles of subscribers' online behavior - to the point where it is guaranteeing advertisers an increase in hits.

Web surfers know their every click around the Net can be observed and shared with advertisers. But how much does Big Brother really know?

Everything, if you're a registered user at a free ISP like NetZero. And it is because of -- not in spite of -- this watchful eye that NetZero stays afloat in the fast-diminishing free ISP market.

Now, NetZero is dangling an unusual carrot in front of new advertisers. Beginning in early October, NetZero is offering a guaranteed 33-percent increase in Web site traffic for new, qualifying advertisers.

NetZero's technology allows it to monitor the increased visits to an advertiser's site during the advertising campaign. The traffic flow will be measured and compared to the four-week period before the campaign began. If the promised increase is not realized, NetZero will give the advertiser an additional 33 percent of purchased impressions spread over the following month.

Like many growing Internet companies, NetZero is posting ever-larger net losses, $26.9 million (27 cents per diluted share) for the second quarter ended June 30 vs. a net loss of $8.2 million (72 cents) in the year-earlier quarter.

Nonetheless, advertisers appear to be buying. For the second, NetZero reported revenues of $18.7 million, up from $16.9 million in the first quarter ended March 30 and way up from $3.7 million in the second quarter of 1999.

"Of all the free ISPs, NetZero is the best at monetizing traffic," said Goldman Sachs Group Inc. analyst Vik Mehta. "They're not only bringing new users in, they're providing advertisers the ability to reach out to them. In doing so, they're providing a value, and that's what the whole business is about."

"NetZero is leading a charge to greater knowledge of audience," said Jupiter Research analyst Marissa Gluck. "The online advertising market is looking for greater efficiency, so being able to know your audience is incredibly important."

The ISP knows its users' online behaviors inside and out, thanks to its unique tracking technology.

Tracking users' every move

It doesn't matter where NetZero's users travel on the Net, or what links they follow; every movement is seen, stored, studied and shared.

The information enables advertisers to target users with promotions. While most traditional market research targets respondents using only demographics, NetZero can provide advertisers with the sites users visit, the amount of time they spend at each of those sites, and the specific online paths they take. A giant, 50-terabyte data warehouse, powered by technology from Oracle, stores the data and research collected by NetZero.

Ads targeted at users' specific interests and online behavior are placed on a banner bar, which users cannot close. The bar, which docks at the top or bottom of the screen, displays a rotation of targeted ads and offers navigational tools and e-mail access. Targeted ads also appear during the user's log-in and log-off

"The tracking technology has helped make NetZero the undisputed leader in the free ISP market," Gluck said. "They're the only company to make a successful go."

NetZero, with 300 employees, is the largest of the free ISPs. About 2 million of its 5 million registered users are termed "active," meaning they have logged onto the site in the last 30 days.

As if that weren't enough, on Oct. 9 NetZero, in a Securities and Exchange Commission filing, revealed its intention to purchase "certain assets" from Washington-based rival Freeinternet.com, also known as Freei Networks. The assets include Freei's roster of 3.2 million subscribers, which would increase NetZero's total subscriber base to over 8 million.

Even then, for-fee ISPs do not have to worry about NetZero putting a dent in the ISP market, according to Gluck.

Back-up service

"Most consumers who use a free ISP use it as a secondary ISP," Gluck said. "AOL consumers aren't turning away from AOL. They're using the free ISP for a back-up, something to fall back on if there are slow periods during peak traffic hours."

NetZero will not disclose personal information, such as name, address, phone number, credit card numbers or e-mail addresses, of those 8 million users, but the users can hardly claim to have privacy.

Nevertheless, NetZero manager of marketing Rusty Taragan called the privacy agreement NetZero has with its customers "clear and conspicuous."

"We're very clear and up front as to what information we're going to collect and share," Taragan said.

When it comes to privacy legislation, Gluck said, NetZero might find itself in less murky water than the larger, for-fee ISPs.

"It's a stickier situation in terms of privacy issues at many other sites because consumers aren't aware they're being watched and targeted," Gluck said. "Consumers knowingly give up information to NetZero, and they're getting something tangible in return."

Still, Gluck said that if she was an advertiser she would look towards Yahoo or AOL as opposed to NetZero.

"Yahoo has a larger base of consumers," Gluck said. "If reach is a consideration, you're going to look to a Yahoo or an AOL. Because NetZero doesn't have that reach, the company is forced to go deeper into the user's behavior."

Jupiter Research estimates that advertisers will spend $5.3 billion to place online ads in 2000 and $7.3 billion in 2001. A total of $3.5 billion was spent on online ads in 1999, according to Jupiter.