Ian Zack, Forbes Magazine, 04.30.01
Larry James refocused an ailing Internet kiosk outfit. Can he make it
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
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
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.