Is AOL DOA?: Tough times for online services

By Richard Morochove

First published November 7, 1996

The number of computer users who are going online continues to grow rapidly. Paradoxically, that's bad news for the big online services.

Online access providers such as America Online (AOL), CompuServe, Microsoft Network and Prodigy are in trouble even as more computer users sign up to access their services. They're losing money and restructuring their operations.

How could an industry in the throws of such impressive growth be in such trouble?

AOL is the biggest of the services, with more than 7 million members worldwide, concentrated largely in North America. It's still growing rapidly. Company chairman and CEO Steve Case expects to add another 800,000 subscribers in the final quarter of this year.

Yet AOL will lose money, particularly after a U.S. $460 million charge to write off deferred marketing expenditures and restructure its operations. How many AOL trial diskettes have you received in the mail? The company was counting these diskettes as an asset, but the write-off acknowledges they're no longer as effective as they once were in acquiring new subscribers.

These aren't good times for AOL. The recently-recruited president of the company left in June. In August there was an embarrassing service outage that lasted nearly a day. The U.S. Federal Trade Commission inquired about the company's billing practices and awarded damages to a group of AOL subscribers who complained.

While AOL is the biggest, it isn't the only online service in trouble. CompuServe, number two in the industry with about 4 million members, was sold off by its parent company H&R Block and has reduced staffing levels.

With all their troubles, CompuServe and AOL are in relatively good shape compared to some other online services. Apple Computer shut down eWorld.

Genie, once the world's second largest online service, was a textbook example of mismanagement by GE Information Services. A pale shadow of its former self, Genie was recently sold to telecommunications provider IDT Corp. of New Jersey, which bought the service mainly for its online games.

Fourth-ranked Prodigy (one million subscribers) has abandoned its role as a provider of somewhat expensive proprietary content and slow gateway service for the Internet. Prodigy will offer direct, unlimited Internet access via a standard browser, plus its proprietary content, for $20 U.S. a month.

Microsoft has reinvented its online service, Microsoft Network, third largest with over 1.5 million members. MSN will have new content, a new interface and a price of $20 U.S. a month for unlimited access. MSN will feature a "program viewer", based on a television-style motif, with six "channels" and more than 20 news and entertainment programs, which MSN will produce itself.

Microsoft's strategy of producing its own content for MSN is a questionable one. In the early days of online services, the provision of good content was inextricably linked to the service itself. After all, why would anyone pay to go online unless there was something to read, a game to play or a chat line to participate in?

But organizations set up to transmit online content may not be best-suited to deliver that content. No one expects Rogers CableSystems to prepare interesting, high-quality television programming. Yet television viewers are prepared to pay Rogers to deliver to their living rooms programs produced by others.

The AOLs of the world are under enormous pricing pressure from Internet Service Providers (ISPs) that connect you to the Internet, but stay away from creating original content. The once small, widely-scattered ISP industry is consolidating, which brings the efficiencies of large scale operations. Canadian ISPs such as IStar and HookUp Communications have grown to deliver national service, largely by taking over smaller regional service providers.

AOL is now restructuring into three parts, one to sell the online service, another for the development of original programming and a third to oversee the telecommunications network.

In response to less expensive ISP competition, AOL and CompuServe have cut their hourly rates. Then cut them again. But Internet users want reliable service and a predictable bill. The hourly rate is out and the monthly flat-rate is in.

More ISPs are offering unlimited Internet access for less than $30 per month. AOL's new rate plan, effective December 1, offers unlimited use of AOL and the Internet for U.S. $19.95 per month, with discounted rates as low as U.S. $14.95 monthly if you pay in advance for two years.

Yet I don't believe we've seen the end of price cutting nor the last extension of the flat-rate pricing. With the CRTC's authorization of competition between telephone and cable TV companies, it's only a matter of time before you'll be offered one-stop shopping for all your communications needs, a flat-rate plan for cable TV, local telephone service and Internet access.

In the future, we may receive AOL from AT&T. CW