On the surface, the fortunes of the two best-known online service providers are currently in marked contrast. Largely as a result of its new flat rate pricing, AOL?s shares have leapt and prospects are looking upbeat, after a summer of cost cutting, restructuring and financial nervousness. Compuserve, on the other hand, has announced a massive $58 million quarterly loss and a refocusing plan that has gained less praise from analysts than its rival?s.
However, though the arch-rivals? quarterly fortunes may be different, both face the same fundamental problem - how to survive the Internet explosion. Both have made their fortune in a proprietary online market that all business logic must say has a short life ahead of it. Both have made some moves to adapt to the Internet explosion that has changed their world forever. But both will need to make far more radical strategy changes to ensure their survival as money-making, high value services in a market where information is cheap.
Despite the apparent similarities of their positions, early signs indicate that AOL and Compuserve will adopt very different rescue strategies. In the past couple of weeks, AOL has made much of its flat rate fee, but its deal with search engine maker Excite may prove more significant in the long term, giving AOL a serious position in the Internet market.
Compuserve, however, is moving away from consumer business and towards niches in business and non-US markets, where it believes the Internet is not yet sufficiently prevalent, or high quality, to steal all its revenues. (This has also been the approach of less prominent online providers, such as the reborn Europe Online.) This may be a very short term strategy, observers say, and are urging Compuserve to seek a more dramatic change of direction - perhaps to become a Web hosting service.
America Online does seem to have bounced back remarkably swiftly from its doldrums of September and October, when it slashed staff and admitted to losing subscribers almost daily to the Internet. Its shares leapt by 10 per cent to 36 3/4 on Monday when Wall Street?s Lehman Brothers issued a positive research note and reiterated its ?buy? rating on the stock. Lehman Brothers said it expects AOL to see strong subscriber growth - despite a slowing in the growth rate in recent months, this was reversed in October when 400,000 new customers were added, and AOL will release its November figures this week.
Although Lehman and other analysts referred to the flat rate pricing scheme as a temporary fillip for AOL, this also brings its own problems. Scott Kauffman, vice president at Compuserve, which said it will not take this step despite the attractive temporary boost to subscribers, said ?$19.95 for unlimited access doesn?t work?. Instead, Compuserve will move to a model where access is charged separately from premium content.
The problem with flat rate fees for unlimited access, apart from squeezing margins, is that customers spend longer online and this puts a huge strain on the network. AOL, of all the online companies, may have the resources to address this, and has promised to spend $250 million in the next six months on expanding capacity and improving the service on a network that has already seen a 19-hour outage this year, before the flat rate scheme came in.
Analysts at Forrester Research agree that Compuserve is right to give up on the access business and to concentrate on content, but is doubtful that it has chosen the right route by targeting the business sector. ?This is already served by able competitors such as Dow Jones, Nexis and Individual, all of which are moving to the Web faster than Compuserve, cutting prices as they go, ? said analyst Bill Doyle. Actions such as Dow Jones? joint venture with the FT and Reuters, announced at the Online show this week, back up this opinion, especially in Compuserve?s other chosen escape route, Europe. ?Europeans aren?t stupid,? said Doyle. ?AT&T tried to foist Interchange on a consortium of Pearson, Burda and Matra-Hachette. Now Europeans get it too: if it?s not Internet, it?s short lived.?
This is why AOL?s deal with Excite may have longer term potential. Excite will take over AOL?s own Web Crawler search engine, which never had the resources to become a major navigator, with a team of only 12 behind it. It will then be the sole provider of search technology to AOL customers for five years, and AOL will take a 20 per cent stake, which many analysts expect to lead to a full takeover. The agreement gives Excite a valuable market boost but it also gives AOL a basis, for the first time, for an innovative Internet strategy. Rather than just offering Internet options within its online service, it is now in a position to own a premier search engine, and has the resources to make sure that Excite robs Lycos and Infoseek of advertising revenue. Excite gives AOL customers far better Web access than they had before, while Excite can personalise advertising sales by using AOL?s customer database. The combination reduces AOL?s dependence on subscriptions.
As for Compuserve, Forrester believes it must pull the plug from its current service, except to keep it running for loyal customers, and also forget about content aggregation. ?Compuserve used to do well in aggregation but the Web is changing the economics of the business. The Web?s aggregators, such as Yahoo and Individual, are awash in red ink,? said Forrester?s recent report, ?Compuserve retrenches?. It echoes the advice of many when it urges Compuserve to make use of its greatest asset, its network in 87 countries, to offer one-stop Internet access for corporates and remote users and become a Web hosting business, running applications for third parties.
Whatever the routes AOL and Compuserve do take, they will be beset by rivals - cheap and cheerful Internet content services, the more aggressive remains of the online business, the new Web services offerings. There are survival strategies available, but their success is certainly not assured.
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