ONLINE FIELD BECOMES A COMBAT ZONE

By Published on .

The commercial online services, led by Prodigy and America Online, are engaged in an increasingly bitter battle of one-upsmanship over pricing, Internet access and user interfaces.

In the short term, it is a battle for market share. With the all-important holiday season approaching, the existing online services are setting their sights on consumers anxious to log on to their new computers.

But much more is at stake. Lately, the Internet has stolen much of the limelight, with the promise of new tools like the next-generation Mosaic that make navigating the vast computer network easier. And today's battles may seem like minor skirmishes compared with the increasing threat of Microsoft Corp.'s upcoming Marvel online service and such services as Ziff-Davis Publishing Co.'s Interchange and Apple Computer's nascent eWorld.

"With so many new online services launching now and in the next 12 months, some of the [existing services] will close up shop or they'll sell out or they'll merge with another," said Kathryn McCabe, editor of Online Access. "The market cannot support all the people who are coming into it now."

Others believe there's room for growth-only 10% of computer households and about 5% of U.S. households are now online-and they're fighting tooth and nail for it.

Prodigy fired first, offering a $9.95 monthly membership package that matches one offered by AOL. Prodigy also cut its hourly price to $2.95, and AOL quickly followed suit, although AOL's initiative won't go into effect until Jan. 1.

"I'm not sure I see it as a price war," said Scott Kurnit, Prodigy exec VP-consumer products, marketing and development. "We took a look [at Prodigy pricing] and said we need the entry price under $10 and we need to simplify pricing. Is that a price war? Not necessarily."

But Mr. Kurnit admits the Internet is a major battleground for AOL and Prodigy.

AOL, the first of the Big 3 online services to offer members access to Internet newsgroups, last week said it was expanding its Internet connection to allow users to retrieve information using file transfer protocol, or FTP capabilities. AOL also said it would establish a site on the World Wide Web for Internet users.

Prodigy, meanwhile, opened its own Internet area last week, offering access to Internet newsgroups and, by early next year, World Wide Web access. Prodigy also introduced real-time chat, a popular service on AOL.

"Clearly that was competitive, in terms of services the other guy provided that we didn't provide," Mr. Kurnit said. "Prodigy was not originally constructed as a communications service. We were competitively disadvantaged."

Delphi Internet Services Co., still the only existing commercial service to offer full Internet access, is stressing that advantage more than ever. The fifth largest online service scrapped plans for a proprietary graphical interface and instead will construct an "open" architecture that incorporates World Wide Web and Mosaic and makes Delphi more a part of the Internet than an access provider. That interface, designed to replace the current cumbersome text-based one, won't be available until next year.

The interface battle is raging between Prodigy and AOL, too. AOL last week started shipping new software that will enable the online service to offer more multimedia capabilities integrating text, graphics, photos and sound.

Prodigy will unveil its own new interface in the first half of next year, eliminating the intrusive "billboard" ads at the bottom of screens and, like AOL, preparing for multimedia uses.

In each initiative, Prodigy is attacking the "soft underbelly" of AOL, said Gene DeRose, president of Jupiter Communications Co., New York. Prodigy's philosophy is "if it works for AOL, it might work better for us."

Prodigy is borrowing from AOL when it comes to marketing, too. Instead of running TV spots from agency J. Walter Thompson USA, New York, Prodigy will devote the bulk of its fall media budget to print advertising and bundling software with magazines, as AOL does.

CompuServe also said it is boosting subscriber acquisition efforts. The largest service, with more than 2 million subscribers, CompuServe is also expanding Internet access but is not changing its pricing structure.

"We do not believe the online services have been reduced to the status of a commodity," said John Meier, senior VP-market planning and development, CompuServe. "There's still some significant qualitative differences between CompuServe and the others, and to be drawn into a price war is not in our best interests."

Despite its aggressive moves, Prodigy is still the underdog. AOL is profitable, while Prodigy, a joint venture of IBM Corp. and Sears, Roebuck & Co., has yet to reach that mark. And while AOL's subscriber base is growing, passing 1 million earlier this year, Prodigy's remains stagnant at about 1.1 million accounts (although it claims 1.7 million actual subscribers).

"We've gone from a distant third to a dead heat and we're poised to move into the lead," said America Online President-CEO Steve Case, who now predicts AOL will have 1.5 million subscribers by yearend.

"These guys are fighting for the bottom line," said Roland Sharette, VP-director of interactive resources at J. Walter Thompson USA, Detroit. "I think [Prodigy] needed a lot more growth this year than they were able to gather."

No one is predicting the demise of any existing service yet. But the outcome of this fall's turf war may well determine who is better able to do battle with the next generation of online services.

Microsoft's service, code-named Marvel, is expected to ship with the Windows 95 operating system sometime next year. Microsoft won't divulge details, but the implications are ominous: as many as 30 million potential users in the first 12 months and a price structure as low as $4.95 per month or possibly free to consumers.

"The people at Microsoft are really going to put pressure on the pricing in a way that these [existing] services haven't seen," Online Access' Ms. McCabe said. The existing services are "trying to get a head start on [lowering prices], but Microsoft has a reputation for being very successful when it comes to predatory pricing."

AOL's Mr. Case believes it will be difficult for Microsoft to form key alliances because of potential partners' fears that the computer giant will eventually wind up competing with them. But he admits Microsoft is likely to be a major player in the online industry in the future.

"We certainly still have an eye on Prodigy and CompuServe, but our focus is less on who's there and more on who's coming," he said.

Marvel and other new services will challenge the existing services on the content front. Marvel is known to be shopping a revenue-sharing arrangement that would give information providers 50% of revenues or more, compared with 10% to 20% at the current online services.

"That creates tremendous problems for any player in the online vending business. It creates a tremendous opportunity for content providers," said Maureen Fleming, editor of the Information Industry Bulletin, Stamford, Conn. Ms. Fleming asserted that contentwise, AOL has the most to lose from a competitor like Marvel. Its deals, she said, require very little upfront investment from content providers, making it easier for them to jump to another service if a more attractive offer comes along.

With Marvel, Microsoft Chairman-CEO Bill Gates "can control whatever passes over his online service, and if his service has the most powerful operating system, the most subscribers and the most powerful interface, he's going to attract more advertising, more vendors and more subscribers," said John Aronsohn, consumer communications analyst at the Yankee Group, Boston.

In the meantime, the Internet is drawing some potential content providers.

"These information providers are sick of working for nothing," Ms. McCabe said. "A lot of them have been going on the Internet because they don't want to deal with the current setups in the commercial online services."

But players and observers believe consumers want-and need-a friendly face to guide them around. CompuServe's Mr. Meier said the Internet represents "digital anarchy" and that commercial services "can bring some order to that chaos."

Adds Prodigy's Mr. Kurnit, "As we go forward, the Internet will allow lots more content to flow. We will be bringing good things off the Internet and putting them on Prodigy or giving you access to the Internet to explore at your own risk."

What may happen eventually is what happened in the magazine publishing and cable TV industries-existing services will stop trying to target mass audiences and instead narrow their approach to different niches.

"Of course you need to differentiate yourself," Mr. Kurnit said. "It's going to be hard for any one company to play against a lot of different consumer segments."

Mr. Case disagrees, saying there will be "half a dozen" major online players in five years, each with several million subscribers.

Bradley Johnson contributed to this story.

In this article:
Most Popular