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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: thecow who wrote (24815)	7/3/1999 6:20:00 AM
From: puborectalis	Read Replies (1) \| Respond to of 41369

AOL and Prodigy woo users with hardware deals By Tom Davey Redherring.com July 3, 1999 Internet service prices are dropping. As providers pile on special offers, hardware freebies, and customized advertising, the effective out-of-pocket cost for Net access may soon be next to nothing. What's good for consumers, however, may put a financial crimp on ISPs. Take the latest moves by America Online (NYSE: AOL), by far the biggest ISP, and Prodigy Communications (Nasdaq: PRGY), the sixth largest. Both are giving new customers a $400 rebate toward a new PC if they buy a three-year Internet service package. AOL is working with Emachines, the fast-growing vendor of PCs in the $400 to $600 range, and Circuit City (NYSE: CC), which will give the rebates on Emachines and several top PC brands. Even notebook buyers will get the rebate. It's a tough way to make money. Factoring in the $400 rebate and discounting the bank interest AOL pays to give consumers the money up front, the ISP is receiving only about $8 a month in revenues per customer. Prodigy fares even worse, with around $7 a month. "The key right now is to get as many people as possible onto your site and worry about the business model later," says Drew Ianni, an analyst at Jupiter Communications. AOL's aim is to sign up as many of the 75 percent of consumers as possible who still do not have an Internet account. BRANDING SCHIZOPHRENIA But rather than offering such a lucrative rebate on the AOL brand -- the ISP equivalent of Coca-Cola (NYSE: KO) -- the company is pushing its CompuServe subsidiary, the generic brand. CompuServe includes unlimited Internet access but has additional proprietary content that differs from the AOL brand. "The AOL brand recognition is stronger," says Audrey Weil, general manager of the CompuServe division. "As this becomes more of a mainstream market, brands really matter." Such branding creates a dilemma as AOL offers cut rates and bundled deals. The AOL brand is aimed squarely at families because much of its content is directed at children. CompuServe content, on the other hand, is geared for adults and professionals with specific interests. For example, lawyers can look at their own home page and more easily drill down to specialized legal content. But with the Emachines deal, the off-label brand will be aimed at the vast demographic market of lower-income households that have yet to buy their first PC. "This is a way of trying to expand the CompuServe brand," says Jupiter analyst Zia Wigder. She notes that the CompuServe subscriber base has not grown much since AOL acquired the company a few years ago. And despite the low service revenues, she believes AOL should still be in a position to continue its growth because its huge base of customers is a big draw for advertisers. But she and others agree that AOL's expansion to new demographics groups could face stiff competition from aggressive ISP bottom-feeders. "You're going to see ISP pricing trending downwards," says Ms. Wigder. "A lot of ISPs are looking beyond traditional access revenues." FREE SERVICE FOR FORCE-FED ADS At least one vendor, NetZero, has seen great success by offering free Internet service in exchange for requiring consumers to supply demographic information and to watch targeted advertising. The ads are supplied via proprietary software and appear as a small window on users' screens while they surf the Web. NetZero, which went online just last October and plans to go public later this year, claims to have more than 1 million customers and 40 advertisers, according to a spokesman. This growth rate would be among the fastest ever for an ISP and would already place it among the five or six largest subscriber bases. And NetZero could have a shot at grabbing a large piece of the untapped demographic that AOL and Prodigy have their sights on. At least that's what Compaq Computer (NYSE: CPQ) may be banking on. Compaq recently kicked in $33 million for a stake in NetZero. Compaq will also offer NetZero's free service with new models of its consumer PCs.