NYT out with more on AOL.......As AOL's Brand No. 2, Compuserve Is
Being Rejuvenated
By MATT RICHTEL
n a conglomerate-driven world, investors expect big companies to own
more than one brand. Viacom operates MTV and VH1. Coca-Cola
sells Diet Coke and Tab.
The question is whether this business model can work in the still-forming
and highly volatile market of Internet service providers. The first such
attempt in this industry -- America Online's ownership of its former rival,
Compuserve -- suggests that the answer is yes, even if serious challenges
remain in keeping the new brand profitable.
America Online said last week that so far in its
fiscal first quarter, which will end on Thursday,
the long-struggling Compuserve added 300,000
subscribers. Although the company declines to
give a total subscribership, industry estimates
now place the figure at 2.3 million -- which would
still be well below Compuserve's peak of 3.6
million in 1995.
On the surface, there is an easy explanation for
the recent upswing: Since the quarter began, Compuserve has offered cash
rebates to new subscribers who buy certain brands of computers and
agree to sign up for three years of Internet access at $21.95 a month.
The rebates notwithstanding, AOL executives consider the surge in
Compuserve subscriptions a sign of healthy growth in a cutthroat industry,
and a measure of redemption. When the company acquired Compuserve in
1997, it predicted the dawning of a multiple-brand era in the Internet
access market, a view that industry analysts doubted would be fulfilled so
soon.
America Online's premise is that the Internet access market will fragment
into different consumer tiers -- budget or "value" tiers, premium tiers and
various other levels in between. The company considers the America
Online brand a premium service, for which subscribers pay $21.95 a
month, without rebates, for fare including 19 separate topic "channels,"
15,000 chat rooms and a wildly popular instant-messaging capability. The
company considers Compuserve, which these days is a glorified Internet
access provider offering a smattering of content and chat, a "value" brand.
"It's like Hertz and Budget," said
Audrey Weil, a senior vice
president of AOL and general
manager of Compuserve. "Hertz
is the largest and most dominant,"
Ms. Weil said, "but Budget has a
brand name you've heard of and
that is a good alternative in the
value space." The analogy
extends only so far, of course:
Hertz does not own Budget, and
in some places, their rental rates
are similar.
America Online's reasoning
differs from the conventional
wisdom about the market for
Internet service providers. Until very recently, many industry executives
and analysts predicted that providing Internet access service was a
business that would go the way of utilities; as with electricity, consumers
would care little who provided access so long as the electrons flowed.
But America Online executives have taken a different view, especially the
company's president and chief operating officer, Robert W. Pittman.
Formerly president of MTV Networks, Pittman oversaw development of
the VH1 brand in 1985 (which at the time he said he envisioned as MTV
for "old folks, dullard, the not so hip") and he is a flag-waver for the
many-brand business model.
So is Steve Case, America Online's chairman, who in an interview cited
AOL's acquisitions of Netscape and the instant-messaging service ICQ.
"We've migrated into being a multibrand company," Case said.
But whether the Compuserve brand specifically will thrive remains in
question. Before the recent rash of Compuserve subscriptions, membership
had been languishing since America Online's 1997 deal to acquire
Compuserve, which had suffered a long decline under the ownership of H
& R Block. Elsewhere, though, the Internet access market has been
booming -- led by America Online's own flagship service, which has grown
to more than 18 million from 11 million since the company bought
Compuserve.
Not long after the purchase, America Online laid off 500 Compuserve
employees and began to shift back-room and technology operations from
Compuserve headquarters in Columbus, Ohio, to the parent company's
home in Reston, Va. America Online says that by sharing such costs, it
was immediately able to turn Compuserve profitable, although it has
declined to give specific figures.
And yet, the first real subscriber growth by Compuserve under its new
ownership has come only since America Online began offering the rebates
-- $400 with the purchase of certain computers, if a subscriber signs up for
three years of Compuserve, and $100 with PC purchases if the customer
agrees to a one-year subscription. The viability of this business model has
been questioned by competitors and some analysts.
"A $400 rebate up front is uneconomical; they're not going to make any
money," said Charles Betty, president and chief executive of Earthlink,
which agreed last week to a merger with Mindspring that would form the
nation's second-largest Internet service provider after America Online.
Certainly, the rebate offer of $400 a customer -- which does not include
Compuserve's marketing costs -- exceeds the $180 to $200 that Betty said
Earthlink pays to gain a new subscriber. But Pittman, while declining to
give specific figures, said Compuserve can operate in the black under the
rebate arrangement because of its technology-sharing relationship with
America Online.
"We are going after the price buyer," Pittman said, adding that
Compuserve would accept lower profit margins than AOL. "We will live
with the smallest margin we can live with," he said.
There are other outstanding questions. A survey this month by J.D. Power
& Associates of customer satisfaction among seven top Internet service
providers found that Compuserve ranked second from the bottom and
America Online ranked dead last, according to Peter Dresch, director of
media relations for J.D. Power in Agoura Hills, Calif. The others, in
descending rank of satisfaction, were Mindspring, Earthlink, AT&T
Worldnet, Microsoft MSN and Prodigy.
In the case of Compuserve, customers ranked the service as below
average in four of the survey's categories: cost and billing, e-mail services,
navigation and ease of use. Ms. Weil, of Compuserve, said she expected
consumer responses to improve with time.
AOL challenged the survey, asserting that it included few users of the
latest version of Compuserve -- Compuserve 2000, which was introduced
in February. The J.D. Power survey was conducted starting in July, but the
bulk of Compuserve 2000 users, AOL said, were added after the survey
was conducted.
Two decades old, Compuserve was among the first big-name online
communities, and it was originally populated with technology-savvy,
business-oriented subscribers for whom Compuserve was both a
community and a research tool. It was also among the first services to
substantially expand overseas, but its growth languished as the emergence
of the Internet spelled the end of proprietary online communities built on
the old Compuserve model.
The new crowd of price-oriented users is a different breed. America
Online maintains an existing hourly pricing plan for what it calls the
"classic" Compuserve clientele, vs. people who opt for the Compuserve
2000 service to which the rebates apply.
At the time of America Online's acquisition of Compuserve, there was
much gnashing of teeth by old-guard users about the arrival of the
newbies. But such tensions seem to have passed, said Mike Bayer, who
has been a Compuserve member since 1981 and a volunteer system
operator for Compuserve since 1984 and is now an online forum leader.
The company declines to say how many current customers are holdovers
from the old days, but Bayer estimates that it is about one-third of the total.
There is still a question about whether Compuserve's success might be a
burden to America Online, if the popularity of the rebates could cannibalize
the premium brand, said Scott E. Reamer, director of Internet research for
S.G. Cowen, the New York-based brokerage firm.
Reamer said investors would want to watch the next several quarters
carefully to see if America Online can continue its own impressive growth
while Compuserve grows, too. But right now, he said, the Compuserve
acquisition is starting to look good for America Online.
"No one really expected much from Compuserve when AOL bought it," he
said. "They've turned it around." |
