ZapMe! Plugs In to Yahoo! (Fool Plate Special) October 27, 1999

An Investment Opinion

ZapMe! Plugs In to Yahoo!

By Dave Marino-Nachison (TMF Braden)
October 27, 1999

Though my memory could conceivably have faded since high school, my memory of the presence of corporate advertising is pretty much limited to the Pepsi emblem on the football scoreboard.

When compared with the business plan of ZapMe! Corp. (Nasdaq: IZAP), that concept seems woefully old-fashioned on one hand and decidedly practical on the other.

San Ramon, California-based ZapMe! is, on its surface, about good feelings. It signs contracts with school districts to set up computer labs -- some more than 200 middle and high schools, representing approximately 220,000 students, had them as of July 31 -- with free multimedia PCs, a laser printer, satellite communications hardware and broadband access to both the Internet and the "ZapMe! Network," which among other things features e-mail, educational sections of various stripe, message boards and a personal planner.

The notion is certainly honorable, as many school districts struggle with technology-related funding issues. But since ZapMe! is, in fact, a for-profit corporation and not a philanthropy, what's the catch? Good question, and getting a handle on precisely how ZapMe! is going to make back the cost of installing these labs in schools across the country is a somewhat difficult assignment. We'll give it a shot.

The company plans to make money through corporate sponsorships and advertising, underwritten public service announcements, e-commerce relationships and partnerships -- Sylvan Learning Systems (Nasdaq: SLVN), for example, will give ZapMe! a cut of the profits from any joint educational activities. The company will also make money through other sponsorships, like that of the U.S. Army, which uses the ZapMe! network for recruiting. Further, ZapMe! intends to rent out its labs for after-school use.

While the student demographic is certainly an attractive one for many companies, there are plenty of hurdles for corporations hoping to reach them through ZapMe! Will enough school districts sign up? Will installation and service be reliable? Will schools and students using ZapMe! computers ever actually use ZapMe! branded online resources given the enormous breadth of the Web already out there? And why would any teenager click on a banner advertisement for Gilat Satellite Networks (Nasdaq: GILTF)?

That's not to mention that schools have plenty of other ways to get powered up, from simply buying their own equipment to government and other corporate grants and donations. The price of promoting itself as a hardware, content and service provider has been and should continue to be high at ZapMe!, where losses are mounting.

Investors appear to have had some trouble figuring out what to make of ZapMe!; the stock didn't take long to head below its $11 per share initial public offering price since the company hit the market last week.

But shares of ZapMe! moved up about 15% in early trading today after the company announced a deal with Rule Making portal giant Yahoo! (Nasdaq: YHOO) to offer ZapMe! users co-branded personal Web pages not particularly different from the My Yahoo! feature, except for an interesting orange background

ZapMe! does appear to be an idea that could have used a little more time in the oven, and that the company announced the hiring of a CEO just a month before IPOing probably didn't help. The company snagged Rick Inatome, chairman of computing products distributor and PC value-added reseller Inacom Corp. (NYSE: ICO)

On first glance, it looks like investors might want to spend a little time auditing this one before enrolling for good. It's something of a shame, since at its core the concept of providing needy schools with high-tech gear free of charge is an extremely worthy goal.

Perhaps the best scenario for students -- if not ZapMe! officials and investors -- would be that leading U.S. corporations steal ZapMe!'s idea, endow an enormous non-profit foundation and put this company out of business entirely.

Related Links:
ZapMe! Web site