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Thursday, Mar 28, 2024

STARTUP—Founders Abandon NetZero, Move on to Next Thing

Ready to take advantage of foundering Internet service providers, some of the first people to see the potential there four years ago, Ronald Burr and his three co-founders of NetZero Inc., say they are back with a new startup that will speed up the growth of broadband technology. Burr, who left NetZero in July as it struggled with mounting losses, says his Westlake Village-based Layer2 Networks Inc. has acquired at bargain-basement prices millions of dollars worth of hardware from failed dot-coms and ISPs to create a network of dedicated connections to the Internet’s so-called backbone, existing telephone networks. “Companies that go into broadband just didn’t have the capital to build this second layer and that’s where we come in,” Burr said, referring to layer 2 or the segment of the Internet service provider network which connects to the local telephone network main circuits. “I felt this was a great opportunity and a new challenge,” said Burr, of his departure from NetZero. “There wasn’t much entrepreneurship involved in NetZero anymore. It was just management and I wanted to do something else.” Burr’s exit came as NetZero estimated it would lose $205.4 million during 2001 on revenue of $57.2 million, compared to a $91.3 million net loss on $55.4 million in revenue in 1999. In June, the company laid off 26 percent of its workforce, or 66 people, to reduce costs in preparation for a pending merger with another one-time free Internet service provider, Juno Online Services Inc. At the same time, NetZero introduced a subscriber-based service to bolster its revenue. “They’re going to be one of the few ISPs still standing when the dust clears,” Burr affirmed. With at least $20 million of venture capital to work with (Burr would not disclose the names of his investors), Layer2 is scouring bankruptcy auctions looking for used equipment offered by failed telecoms and ISPs for pennies on the dollar. “An aggregate router box that costs $200,000, I bought for $25,000, and so on. It’s much cheaper than if you bought it brand new and a lot of it is still in boxes, brand new,” he said. The router box is the main hardware used to connect the Internet user network to the Internet backbone. Burr, who hopes to begin building the network in January, is now seeking contracts for the service from telecoms and ISPs still in business. Accompanying Burr from NetZero were Stacy Haitsuka, Harold R. MacKenzie and Marwan Zebian, all now top executives with the new company. Broadband has been touted as the next generation of the Internet, marrying cable television, telephone service and the Internet with one connection. Burr said the new company would install the hardware and lease the circuits from telephone companies in cities like Los Angeles, Houston, Chicago and New York, establishing a network of high speed connectors to telephone circuits that allow high bandwidth. These connections would then be leased to broadband firms or ISPs for an unspecified monthly fee. “In the past, companies would have to spend millions on the hardware alone, and it just got too expensive for a lot of companies,” Burr said. Mark Davidson, a consultant with Davidson Associates, said Burr’s new firm could take advantage of the declining cost of bandwidth access. “You had costs as high as $150,000 to $200,000 a month for an OC3 line a year ago, but now that’s going for $8,000 to $9,000,” he said. An OC3 line is capable of carrying 100 T1 lines, or high-speed lines that carry a maximum 1.5 megabytes of information per second. Digital Subscriber Lines, by comparison, carry 400 to 500 kilobytes per second. David Smith, vice president of Internet strategy for the telecommunications consulting firm Garnet Inc. of Stamford, Conn., said efforts to speed up the availability of broadband have been spotty and may not pick up until 2003 or later. “I’m not sure what it’s going to take to see significant growth there,” he said, adding that AT & T; has made strides in setting up its broadband network around the country since it acquired cable television provider MediaOne Inc. in 1999. Smith, however, said he was unsure what impact Layer2 would have on the broadband industry. Jim Delany, CEO of Woodland Hills-based ISP, Broadband Highway Inc., said Layer2 could indeed speed up the advent of broadband if Burr’s business plan is solid. “It’s a question of whether they’ll have the customers and whether they can do this and make it pay for them,” Delany said. “Broadband hasn’t taken off because it’s too expensive for the end customer and for the company to spend a tremendous amount on equipment.” But Layer2’s Burr says the key to success is his company’s acquisition of used equipment, or so-called gray market equipment, much of which, he says, remains in unopened boxes. “We don’t have the expense that other companies would have had,” he said. With initial startup costs of $20 million to build the network, Burr hopes to alleviate what he calls the “bottleneck” that’s been stifling the expansion of broadband development. “People just couldn’t afford all that hardware,” he said. Total costs for the network, however, were not disclosed, but Davidson said it could cost “hundreds of millions” to serve the nation’s top markets. Burr, however, says a number of unnamed ISPs have expressed interest in the service that would bring broadband to thousands in Southern California. “They like it because they don’t have to commit any capital risk and it completely simplifies their commitment to broadband,” he said.

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