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Trouble Shooter
Ian Zack, Forbes Magazine, 04.30.01

Larry James refocused an ailing Internet kiosk outfit. Can he make it profitable?

Larry M. James arrived in Bryan, Tex. two years ago to take over a financial mess called NetNearU. The company had a decent idea, but it was down to its last dollar. Cofounders Peter Catalena and Dennis Goehring, former pay phone entrepreneurs, had installed 170 pay-per-use Internet terminals, mostly in airports and truck stops, for travelers who needed to get online but didn't want to deal with tiny handheld screens and painfully slow downloads.

NetNearU had a clear business model. It was going to sell its terminals to telephone companies and retailers, and collect 15% to 20% of user fees (25 cents a minute, with a minimum of $1) and half the revenues from banner ads, using software that allowed it to customize ads for time and place: one set of pitches for the 6 a.m. business crowd at Dallas-Ft. Worth airport, say, and an entirely different mix for late-night teenage revelers at Disney World.

Yet it was spending too much building low-end units at $2,600 apiece; the founders' $2 million was about gone. "They had a great product, but it was not a sophisticated operation," says James, who made $20 million when long-distance provider USLD Communications was sold to LCI International.

First, James, 53, decided to get out of the hardware business, outsourcing the units to ATM-maker NCR for $5,000 to $8,000 each. He hired a comptroller and a chief financial officer. He also invested $1.5 million of his own for a 9% stake and raised $6.5 million in a private offering, mostly from friends and peers. He has since raised another $2.6 million privately and $6 million from BlueStar Ventures in Chicago.

With that $16 million in capital he approached long-distance carriers with a persuasive pitch. You've got great real estate in airport pay phones, he told them, but growth in wireless is killing that business. Indeed, the number of pay phones in the U.S. has dwindled to 1.8 million from 2.4 million in 1998, reports Summit Research Associates. "We can't just vend dial tone anymore," admits James Agliata, AT&T's director of business development for public markets. So far, the terminals haven't replaced phones, but AT&T bought and deployed 217 NetNearU terminals, some of them hybrids combining Internet and pay phone access. It plans to add 1,000 over two years. Sprint bought 70 terminals and Verizon 18.

A fair start, with a customer list that also includes McDonald's and BP Amoco, which are deploying the Internet terminals in part to hawk their own products on-screen. But it's not enough to make NetNearU profitable. Last year the company posted a pretax loss of $3.8 million on revenue of $2 million from maintenance fees, coin-box collections, software licenses, development fees and hardware sales. James figures he can double the number of units out there to almost 1,000 by June—and break into the black next year when he plans to have 2,900 terminals. But that profit hangs on the assumption that banner ads don't dry up completely.

Another hitch: the threat of new wireless devices, which could render Internet kiosks obsolete. James says he is ready with a $600 antenna-equipped add-on to turn every NetNearU kiosk into a wireless access point, connecting the hard-wired terminals via a radio signal to laptops equipped with wireless cards up to 500 feet away. Better hurry. Austin-based Wayport already has more than 250 similar hookups in hotels and 4 in airports, although it had only 30 paying subscribers at the end of March. Wayport does not sell ads, generating all its revenue from user fees. NetNearU also plans to sell wireless subscriptions, enabling travelers to pay a monthly rate for unlimited connections. "Think of it like the Cirrus system for ATMs," says James. "It may be AT&T's or someone else's name on it, but the network behind it will be ours." A nice idea. But $16 million doesn't buy much of a network these days.



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