People and Freebies Just Click

Partners bank on consumers' love of gratis products to fuel Web sites .
By Ian Katz
Business Writer, Sun Sentinel
Jan 2, 2006

Gulfstream Internet Group's business model is based on one indisputable fact: People like free stuff.

Gulfstream, founded by former Boca Raton high school buddies Phil Nadel and Bill Diamond, both 39, runs four Web sites that give away products such as long-distance phone minutes and downloadable songs to 7 million users. The catch: You must agree to receive e-mails from Gulfstream's advertisers or buy products from them.

For example, a user on Boca Raton-based Gulfstream's most popular Web site, www.phonehog.com, can get nine free long-distance minutes for agreeing to receive e-mail travel offers from ShermansTravel. Anyone who signs up for EarthLink's Internet service at $9.95 per month gets 875 minutes.

"The hurdle [for users] is that you have to take some action," said Nadel, Gulfstream's president

On www.mpfree.com, a Gulfstream site with a library of 750,000 downloadable tunes, users get 35 songs for subscribing to EarthLink. Though the songs are free to customers, Gulfstream pays royalties to music companies. It also pays long-distance resellers for the minutes it gives away.

Gulfstream hopes to take in enough money from advertisers to cover the costs of the freebies it buys. It's a delicate balancing act. If Gulfstream's offer to customers seems low -- like one free downloadable song for subscribing to a magazine -- users won't have enough incentive to try the products. But if the company gives users too much, it won't be profitable.

Though he won't release exact numbers, Nadel said revenues surpass $5 million annually. The four sites, which also include iPodsweepstakes.com and 100tunes.com, are gaining 12,000 members a day, he said.

The idea for Gulfstream's business model was born while Nadel and Diamond, who were friends at St. Andrew's School in Boca Raton, were running along State Road A1A, training for a marathon in 1998. The two had gone their separate ways after school -- Nadel was managing a finance firm and Diamond was working in his family's construction company -- but they had talked of going into business together.

From the start, the idea was to give their members instant gratification. They wanted to distinguish their program from those of most airline frequent flier programs, which require customers to build up miles for months or years before they can be exchanged for a reward.

In the early days, the company was so shoestring that Nadel and Diamond would take turns "babysitting" the server at night to make sure the first site, Phonehog, didn't go down. That experience taught them to outsource parts of the business where they don't have expertise.

Though the model is unusual, it is not unique. Competitors include Ebates.com and MyPoints.com, which is owned by United Airlines.

Now Gulfstream is planning to create new sites, including some in Western Europe and the United Kingdom. The company wouldn't necessarily open offices overseas, but would use sales representatives in Europe.

That's a long way from A1A, but Nadel and Diamond figure they have a shot at success anywhere people like free stuff.

Gulfstream Internet Group
Business: Advertising-supported Web sites that give users free products
Where: 945 Clint Moore Road, Boca Raton
Owners: Philip Nadel and William Diamond
Established: 1999
Revenue: More than $5 million annually.
Employees: 6
Advice: "Do what you're good at and outsource the rest," Nadel said.