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NetZero and Juno Online Services have announced plans to merge, creating what they say would be the United States' second-largest Internet service provider, after America Online.

The combined company will have more than 7 million active users, based on figures for March 2001, the companies said in a statement. However, only 1 million of those are paying subscribers, while the other 6 million use free Internet services offered by the two firms.

Both NetZero and Juno would become wholly owned subsidiaries of the newly formed company, to be called United Online. The deal, announced late Thursday, is expected to close by the end of the year, the companies said.

Mark R. Goldston, chair and chief executive officer of NetZero, will become chair, president, and chief executive officer of United Online. Charles Hilliard, NetZero's current chief financial officer, will become chief financial officer of the combined company.

AOL is the world's largest ISP, boasting close to 29 million users worldwide and around 18 million in the United States. The newly formed United Online will also compete with Microsoft's MSN Service, EarthLink, AT&T Worldnet, and others.

NetZero, Juno, and Bluelight.com--the online arm of retail giant Kmart--are three of the largest remaining free ISPs. They use their free service model to help compete against other ISPs, and they obtain revenue by selling banner advertisements and offering a premium service to subscribers willing to pay for it.

Financially Challenged

The companies' combined revenue was $41.5 million for the quarter ending March 31, they said in the statement.

Both firms have experienced financial challenges of late. Juno's revenue more than doubled to $114 million in 2000, but its net losses grew even faster--to $131.4 million, up from $55.8 million. NetZero's net revenue increased 63 percent to $32.5 million in the last six months of 2000, but its net loss rose 83 percent to $72.2 million.

Both companies have announced plans to wean themselves from a revenue model based heavily on advertising. NetZero requires anyone logged on to its free service for more than 40 hours a month to start paying premium service charges of $9.95 monthly. Juno announced controversial plans in January to create a distributed supercomputing service for researchers using downtime on its subscribers' computers. The plan included changes in subscribers' service agreements that could conceivably require them to leave their computers on all day and allow Juno to initiate a periodic connection to download data from participants' hard drives.

However, both ISPs recently said they expect their free and low-cost service to benefit from AOL's recent decision to raise rates.

Past Disputes Set Aside

Ironically, NetZero and Juno met not long ago in court. NetZero sued Juno over Juno's use of an advertising and navigation window that NetZero contended infringed on a NetZero patent.

Juno, meanwhile, sued both NetZero and Qualcomm last year, accusing them of infringing on one of Juno's patents that lets users view Web content while offline.

About two-thirds of Juno's revenue comes from subscriptions to its premium services, and the rest comes from advertising and electronic commerce in its so-called Juno Guide, the ISP said at the time of the dispute. NetZero argued that Juno's approach too closely copied its NetZero ZeroPort window and won a temporary injunction, which was later lifted.

(George A. Chidi Jr. of the IDG News Service contributed to this report.)

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