Compuserve last week fell victim to the growing competition in the online content providers market, as its owner, H&R Block, finally took down the for sale sign and agreed a $1.2 billion sale to telecomms company Worldcom.
A secondary deal, under which Worldcom sold on the content side of the business to Compuserve's arch-rival America Online (AOL), creates two Internet behemoths, one in infrastructure and the other in content.
On the infrastructure front, Worldcom gets the Network Services side of Compuserve, including its 1,200 corporate customers, and in a connected deal, has also purchased AOL's Network Services division.
In return, AOL gets the content side of Compuserve, its Interactive Services Division - including 2.6 million consumer subscribers to add to AOL's existing nine million - and $175 million in cash.
"We see this as an opportunity to enhance our long distance, local service and data transmission business with strong new capabilities, and Compuserve's outstanding network services fits perfectly with our plans," said John Sidgmore, vice chairman and chief operating officer of Worldcom.
Antitrust problems create the only doubts about the deal, but the three companies' executives were confident there would be no problems, with the increasing number of competitors in the market and with Microsoft ramping up its MSN content and Internet access service.
But the new partners may not be such a close fit as they first appear. Although on the surface it seems an obvious economy of scale to combine AOL's and Compuserve's online businesses, they are in fact quite different offerings.
Compuserve is aimed at business professionals, with targeted services and news. America Online is intended as an entertainment medium for the mass market. Both companies' services are still primarily accessed via proprietary technology rather than directly over the Internet.
These are key issues that need to be addressed if the combined company is to fight off rising competition for its once cosy niche. Microsoft claimed it was not concerned about possible increased competition to its MSN online service from the newly merged rivals.
"We see this as an opportunity, as our research has shown that MSN is quite appealing to Compuserve users and certainly more so than what is offered by America Online," said Judy Gibbons, MSN marketing manager in the UK.
ForAOL, though, the deal means one less competitor and more subscribers - the key goal when the long term aim is to increase advertising and commerce revenues. It also gets cheaper Internet infrastructure access through a five-year deal with Worldcom and $175 million in cash to invest in new content offerings.
Users of the online services will not notice significant differences for a while. It is likely to take up to six months for the deal to be concluded but after that an increasing amount of content is likely to cross over, while AOL will aim to leverage Compuserve's experience in online advertising.
The purchase is particularly advantageous for America Online's joint content venture in Europe with German media company Bertelsmann, which only had an existing base of 700,000 subscribers but will now add Compuserve's 850,000 European customers.
Overall, America Online's deal to lease significant amounts of infrastructure capacity from Worldcom at discount rates should help remove some of the traffic bottlenecks it has experienced over the past year, particularly since introducing flat fee services.
"The acquisition of Compuserve's interactive services will help fuel our global expansion - especially in the critical European marketplace, which we believe is poised for tremendous growth," said Steve Case, America Online chairman.
According to John Moroney, principal analyst for new media at consultancy Ovum, for Worldcom to take under one roof the Internet infrastructures of Compuserve and AOL, plus its existing Internet service provider subsidiary UUnet, makes good sense.
"To run a vertically integrated company in this market is a mug's game because all the telcos are going after this market with a vengeance, but with the help of this deal, Worldcom can take them on or work with them," he said.
Although smaller than the international telecomms companies, Worldcom will be a big player through its focus on providing corporate access and a backbone for Internet traffic, as well as developing new offerings such as fax over the Internet.
However, Worldcom's Sidgmore dismissed the idea of Internet telephony challenging the domination of the established telecommunications companies. "I do not believe Internet telephony will be a replacement for the mainstream voice switched network for a long, long time," he said.
But the deal could benefit the expansion of other new technologies for getting faster access from homes and companies to the Internet. AOL's Case said it would be expanding its use of ADSL (asynchronous digital subscriber line), a communications technology for running high bandwidth over normal copper telephone wire.
Case said 200 US cities would be able to access the network using ADSL within the next few months, although no plans for Europe have yet been announced.
Overall, while the takeover is likely to mean one less choice in the long run for consumers, the consolidation means more investment in the America Online product and possibly further price cuts as it passes savings on infrastructure access costs on to the customers.
As Ovum's Moroney points out, with digital television just over the horizon including all kinds of interactive services straight to the home, the Internet content battle could be just a sideshow on the way to the main event.
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