Prodigy Exits Retail DSL Business, SBC Assumes Control
Prodigy Communications' six-month partnership with SBC Communications had significantly
boosted subscribers for both companies, but had been a significant drain on capital for the
former, forcing the ISP to abandon plans to become the nation's largest retail DSL provider. On
January 19, Prodigy and SBC significantly restructured their relationship, as the ISP turned its
high-speed operations over to SBC. The companies will continue to co-brand their product, but
SBC will now assume responsibility for selling, billing and servicing DSL within its territory.
Prodigy becomes the preferred provider of content and certain Internet services to SBC's DSL and
business dial-up customers, and the preferred ISP for residential dial-up subscribers acquired by
SBC. Prodigy will continue to resell DSL outside of SBC's markets through its relationship with
Covad, in which SBC also has a $600 million investment.
This move marks a significant but necessary turn-around for Prodigy, which at the end of
September 2000 boasted the largest DSL subscriber-base in the consumer market with 338,000
customers. Facing financial problems and high costs associated with the acquisition,
provisioning, and support of DSL customers, Prodigy received a boost from SBC in the form of a
$110 million credit line. Now, with DSL-related expenses all but eliminated, and SBC paying a
monthly fee for portal and network services (as opposed to Prodigy paying SBC for DSL
services), Prodigy will have much more freedom to focus its efforts on narrowband sales and the
development of content—the aspects of its business that enabled it to become a top-tier national
ISP. At the same time, this financing has afforded SBC greater influence over Prodigy and its
high-speed strategy overall, evidenced not only in the re-acquisition of its DSL services, but also
with the placement of additional SBC executives on the Prodigy board and at the ISP's helm as
interim CEO.
The Yankee Group believes that despite its intentions to remain competitive in the online services
market by increasing its content and services, particularly in the burgeoning wireless Internet
arena, and SBC's promise to deliver 3.75 million DSL and 375,000 dial-up customers over the
next nine years, Prodigy will still struggle to compete with the incumbent top-tier ISPs that have
managed to expand their access and content services while remaining financially independent.
On the flip side, with greater control over sales and provisioning and more robust content from
Prodigy, SBC will hopefully be better able to counter the growing competition in key strategic
markets.
Authors: Robert Lancaster and Meridith Rosenberg
February 6, 2001 |
