CompuServe eyes stake in Prodigy

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CompuServe is negotiating to acquire Sears, Roebuck & Co.'s 50% stake in the Prodigy online service.

Executives close to CompuServe tell Advertising Age that the online services company and its parent, H&R Block, in recent weeks have made overtures to Sears, which is known to be interested in shedding its Prodigy holdings. No formal offer is on the table, but analysts value the stake at $500 million.

Just how CompuServe and H&R Block would work with Prodigy's other owner, IBM Corp., isn't clear. IBM is said to have held discussions with Sears earlier this year about taking over management of Prodigy. Observers say IBM doesn't want to get out of the online business, but that it's frustrated by the performance of Prodigy.

An IBM spokesman wouldn't confirm or deny CompuServe-Sears talks, nor would he discuss IBM's plans for Prodigy. As for Sears, "we don't comment on rumors or speculation," a spokeswoman said.

CompuServe plans to roll out a new, consumer-friendly online service early next year, code-named "Wow." Executives close to the company speculated that CompuServe would like to meld Prodigy, which has a strong reputation as a family-oriented service, with Wow, giving it an immediate, built-in subscribership.

CompuServe's existing online service is very technology-oriented and has a strong appeal in the business community.

"I would absolutely think that inside the confines of CompuServe . . . anything's on the table now because they don't want to give up their lead," said Emily Green, senior analyst at Forrester Research, Cambridge, Mass. She said that in a meeting earlier this summer, Bob Massey, CompuServe's new President-CEO, "did not discount the possibility" of a deal with Prodigy.

Mr. Massey declined to comment to Advertising Age on whether a bid is being considered for Sears' stake. But he added: "Everyone knows that Sears is interested in bailing out [of Prodigy] and they're interested in finding a suitor . . . I think each of the Big 3 [online] companies would have an interest in working with the other if the price was right."

H&R Block President-CEO Richard Brown couldn't be reached for comment. But Ozzie Wenich, VP-finance, said: "I know of no such initiative."

Sears and IBM have each invested more than $1 billion in Prodigy since its founding in the early 1980s, and Prodigy only recently has begun to show a profit, albeit a small one.

"It is not clear, frankly, that we bring anything to it," Sears Chairman-CEO Arthur Martinez told Reuters earlier this year.

Sears' share of Prodigy posted an after-tax loss of $900,000 for the first six months of 1995, an improvement from the previous year's loss of $3.8 million, according to figures obtained by Crain's Chicago Business.

The online industry has already seen one major consolidation this year as MCI Communications Corp. merged its fledgling Internet operation with News Corp.'s struggling Delphi service.

Prodigy's strongest asset is its subscribers, but that value dwindles each day its competition's lead grows. Prodigy has 2.2 million subscribers, trailing No. 2 CompuServe's 3 million and fast-growing No. 1 America Online's 3.5 million.

New Prodigy President-CEO Ed Bennett has begun an aggressive marketing campaign to change the online service's image, but some say the drive may be coming too late.

"What Ed is trying to do is to move the Prodigy brand into the mainstream, and we all know how hard it is to move brands," said Scott Kurnit, president of MCI/News Corp. Online Ventures and Prodigy's former marketing chief.

Analysts say a deal between CompuServe and Prodigy would be difficult to complete, despite the apparent synergies between Prodigy's subscribership and CompuServe's planned Wow service.

"If Sears were smart, they'd spin their share off to the public to get what it's worth," said Abhishek Gami, analyst at Duff & Phelps Equity Research, Chicago. A CompuServe investment in Prodigy "would require a complete overhaul of the look and feel and software and underlying technology of the service."

Contributing to this story: Kim Cleland, Bradley Johnson and Crain's Chicago Business Associate Editor Mark Veverka.

Copyright September 1995 Crain Communications Inc.

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