The long-running saga of who buys online service provider Compuserve ended this week as telecomms company Worldcom agreed a $1.2 billion bid with Compuserve's majority owner, H&R Block.
The deal creates two Internet behemoths, one in infrastructure and the other in content. Worldcom gets the Network Services side of Compuserve including its 1,200 corporate customers, and in a connected deal, has also purchased the Network Services division of Compuserve's chief rival, America Online (AOL).
In return, AOL gets the content side of Compuserve, its Interactive Services Division - including 2.6 million consumer subscribers to add to its existing nine million - and $175 million 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.
While AOL will retain both brands for the mean time - existing subscribers for either service will not be affected - there will be economies of scale on content development and features will begin to cross-feed between the services once the deal gets shareholder approval and passes regulatory hurdles, expected by the end of the year.
The purchase is particularly advantageous for AOL in Europe, where it only had an existing base of 700,000 subscribers but can now add Compuserve's 850,000. AOL also signed a five-year deal to lease significant amounts of its required infrastructure from Worldcom at discount rates. This should help remove some of the traffic bottlenecks AOL has experienced over the last year. AOL's chairman Steve Case will get a seat on the Worldcom board.
"This transaction will boost our momentum by concentrating our focus on AOL's core interactive services and content businesses. In addition, 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 Case.
Various companies were in the running to buy Compuserve, on offer for sale since last year. The leading contender for the content provider appeared to be venture capitalist Welsh, Carson, Anderson & Stowe, followed closely by AOL itself, whose bid earlier this year failed.
Worldcom's complex offer makes sense, according to US analysts. The combining of AOL's and Compuserve's content side makes a stronger player to stand up to the challenge of Microsoft, Time Warner, Disney and other major online providers.
The consolidation of the Internet infrastructure of Compuserve and AOL with Worldcom's existing Internet service provider subsidiary, UUnet, also makes sense. Although fairly small compared to some of the international telecomms companies, it will be a big player with its single focus on providing access and a backbone for the Internet, as well as developing new offerings such as fax over the Internet.
AOL also announced it would expand 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.
However, despite the significant expansion of the Worldcom infrastructure through the deal, Sidgmore dismissed the idea of Internet telephony challenging the domination of the established telecomms carriers.
"I do not believe Internet telephony will be a replacement for the mainstream voice switched network for a long, long time," he said.
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