============================================================================= Seidman's Online Insider ============================================================================= Weekly Summary of Major Online Services and Internet Events ----------------------------------------------------------------------------- Vol. 3 Number 23 June 9, 1996 ============================================================================= Copyright (C) 1996 Robert Seidman (robert@clark.net). All rights reserved. May be reproduced in any medium for non-commercial purposes, so long as attribution is given. IN THIS ISSUE ============= - Important Note - Revisited - Update On AOL Growth Slowdown - CompuServe Gets on the Desktop - Microsoft: Online Killer Reborn? - Disclaimer - Subscription Info IMPORTANT NOTE - Revisited ========================== For those of you who missed it last week, I'm moving to CMP Media, Inc. soon and will be editor at large for NetGuide Magazine. As a part of the shift my new employers have insisted that I take some time off. Apparently they don't want a burned-out, cranky, e-mail inundated, downtrodden employee. So, I'm taking off two weeks between jobs. What this means is that I will be doing the unheard of and taking TWO count 'em, TWO weeks in a row off from the newsletter. I'm not honestly sure I'll be able to do this without going through withdrawals, but I'm aiming to take the time off. The newsletter will be back on or near June 30th, courtesy of NetGuide. Stock Watch and NewsWorthy Notes will be back when I return. By the way, I don't plan on doing much e-mail the next few weeks! While I'm still my own publisher, I may try to twist the protege's arm and see about getting at least a newsletter or two of abstracts distributed in my absence. Who knows, maybe the protege will surprise us all and come out with a contrary opinion and slam AOL into the pavement. We'll see. Speaking of AOL, slamming them into the pavement seems like a pretty good right about now.... Update On AOL Growth Slowdown - More fun With Numbers ===================================================== WHOOPS. It seems like I was quite lenient on the AOL growth slow down. Way too easy, some told me. I could handle that if it were true, but it's even worse. I WAS WRONG. That doesn't sit well with me. On or around May 28, AOL announced 6 million members. But I missed something in the press release. Here's a partial quote from AOL CEO and chairman Steve Case in the release: "America Online recently passed the 6 million member mark worldwide..." WORLDWIDE?? I'm not pleased at missing such a thing, but fortunately a lot of people didn't miss it. A few months ago, I'd asked Case whether AOL counted GNN and International in their subscriber counts. At the time, he advised that they did not. But, beginning with the 6 million announcement they began slamming them in. Needless to say, I was a little taken aback when I found out about this. But just to be safe, I decided to double check with Case. "Historically, we did not include International and GNN in our total member count, as they were immaterial," said Case. "Last month, when we had an analyst call to announce Q3 results, we indicated that going forward we would report on a total membership basis, and that we expected to hit 6 million soon," Case said. According to Case the milestone was reached "several weeks ago." I'm not sure exactly when, since they didn't begin using the 6 million figure until around May 28. With this data though, the growth slow down is much worse. We don't have exact figures but we know that the German AOL service has reported 100,000 subscribers and that GNN is nearing 300,000, so we'll call it 250,000. Essentially, between the time AOL announced 5.0 million on February 6 and 6.0 million on May 28, they didn't really add a million customers to the domestic AOL service. If you subtract out the GNN and international accounts, they only added 650,000 or so. While International and GNN accounts represent real revenue, it is important to separate them out, or at least understand what they represent, so that these numbers don't cloud the comparative picture. It would appear that AOL actually reached the 6.0 million milestone for all its membership base around May 15. If you use that as a benchmark, they added a million members in 99 days. That would be a net add, across all services of about 10,000 accounts per day. Not as good as the post Christmas seasonal growth, but still not bad. But they really only added about 650,000. That leaves them adding about 6,600 net accounts per day from the beginning of February to the middle of May. With AOL pulling back on marketing for new customers (more on that later in the newsletter,) this will probably trend down. Jeff Goverman, an analyst with Cowen used similar data and revised his forecast for AOL's domestic growth for the quarter ending June 30 to only 400K subscribers where he had originally predicted 750,000. I don't always agree with Goverman's analysis, but I think he's right about this one. If they hit 6.0 million (with International and GNN) in the middle of May, and hit 5.5 million near the end of March, then they've only added 150,000 net accounts to the domestic AOL service halfway through the quarter. If true, even Goverman's growth predictions may be optimistic -- by as much as 33%. AOL appears to be on a run-rate that would only yield 300K net domestic subscribers added for the quarter ending June 30. *Deliberately Slowing Growth?* AOL is now saying they are deliberately slowing growth (by spending less on marketing) until the Fall. Some at AOL have said they are doing this to work infrastructure. Some analysts have suggested that they're spending less because they want to show less expenses and better financial results and that they won't do a stock offering at the current price to raise capital to support aggressive marketing efforts right now. I don't buy these theories. AOL was spending a lot of money on acquiring customers - up to $100 or more for each net new subscriber added. Growth is still good, but customer turnover is anywhere between 50% to almost 100% depending on what you read. This is due in large part to trial accounts (which AOL counts in their subscriber numbers) who cancel. One of AOL's problems is its interface. In spite of being the best and easiest interface to use around, the interface wasn't without problems. First and foremost is the way the interface handled transmitting the graphic artwork necessary for the colorful online areas. Essentially, the software froze your system and made you wait until the artwork was transmitted. With the new 3.0 interface for Windows, which is being made available today (Sunday, June 9) in a preview download for members, this problem goes away and artwork progressively renders in the same way most popular Web browsers work. Speaking of Web browsers, that's another big problem with the existing interface - the Web browser stunk. With the 3.0 release for Windows, the browser is a ton better. For one thing, it's faster. More importantly perhaps, is that it can display pages in the way they were meant to be displayed. Everything from tables to frames works in the new browser, and while there is no Java yet, I can't think of a single "must have" Java application that's currently running on a Web page. The new browser represents a significant improvement. These improvements combined with other look and feel improvements make for a pretty solid interface for America Online. So why not just market blitz the new 3.0 client software for Windows now? Do they really want to work on improving infrastructure? I doubt it. Do they want to reduce churn? Unquestionably, and the new interface may help them do just that. So why not send it out now? Here's why. The current version doesn't contain Microsoft's Internet Explorer, and as you may remember, in exchange for using the Internet Explorer, AOL is getting an icon in the Win 95 online services folder just like CompuServe. The problem is probably that neither AOL or Microsoft want to use the existing 2.0 release version of the Internet Explorer in AOL. The 3.0 Internet Explorer currently in beta is a much better browser. In fact, I already prefer the IE 3.0 beta to Netscape. It's snappy, and I like that. But IE 3.0 won't be out of Beta until later this summer. I asked Steve Case what the plans were for 3.0. "It was never our intention to include MS IE in the initial 3.0 Win release," said Case. "As soon as IE 3.0 code freezes, it will be made available to existing members as a download. It will then be integrated in AOL 3.0 and that will be the disk we broadly distribute to prospective customers this fall," Case added. So my best guess is that AOL doesn't want to spend a lot of money blitzing the world with diskettes, when they feel they'll have an even better product to blitz in a few months. Case told me he hopes that AOL's 5.75 million or so subscribers (sorry, but I will not count the GNN subscribers because they're not using this software!) convert to 3.0 and will become evangelists for the service. "We think 3.0 represents a substantial enhancement to AOL and we intend to get a lot of mileage out of it," Case said. But will it be enough? The analysts opinions on AOL this week were all over the map. None predicted doom and gloom for AOL, but some downgraded their outlook for the stock. But Alex. Brown analyst Steve Eskenazi raised AOL from a "buy" rating to a "strong buy" rating. Eskenazi expects a major deal between AOL and Netscape to launch "a major offensive in interactive advertising" will be announced soon. Eskenazi also looks at AOL's churn in an interesting way and comes to the conclusion that 75% of all churn is coming from the 30 day trial accounts and that if you factor that across all accounts, average lifespan of a customer who doesn't cancel after the free trial is over is 48-60 months. Earlier in the week, Montgomery Securities reduced their rating on AOL from "buy" to "hold", citing growth of Internet services and the ease of connecting to them. Not to be outdone, Robertson, Stephens & Company analyst, Keith Benjamin issued some analysis taking a direct jab at the Montgomery Securities report. Benjamin's report, which I didn't obtain permision to quote from, essentially said that those analysts saying that AOL is threatened by the Internet are wrong. In the short-term, I agree with Benjamin, but in the long term, especially because of Microsoft's plans with "Nashville" (see piece on Microsoft below), I wonder. Either way, AMER rebounded a little on the reports from Alex. Brown and Robertson, Stephens & Co., but still closed the week down 13.5% at 48 7/8. Meanwhile, Steve Case recently sold roughly 8% of his America Online shares for about $14 million. Hey, he doesn't have a big salary. In addition to Case selling 275,000 shares, 7 other AOL officials combined to sell 206,000 shares. AOL is still CRUSHING #2 CompuServe. In the past year, according to a recent story in Business Week, CompuServe added 1.2 million subscribers, and with all that growth they're losing money for the first time. According to the story, AOL added 3.2 million subscribers during the same period. The story reports that CompuServe's growth is down from 100,000 subscribers a month a year ago, to about 65,000/month. The story reports that WOW! only has 50,000 customers so far. CompuServe Gets on the Desktop ============================== As expected, CompuServe and Microsoft announced in a joint press conference that CompuServe, in exchange for using the Internet Explorer as the primary browser for its service, CompuServe will get an icon in the "online services" folder which will be a future addition to the Win 95 operating system. AOL struck a similar deal with Microsoft earlier in the year, and it was widely expected this would happen. But for CompuServe, this is a great deal because not only will the icon for the CompuServe Information Service (CIS) be in the folder, the icon for WOW!, CompuServe's family service will be in the folder as well. CompuServe was excited about the opportunity to have not one, but two icons. It significantly reduces their subscriber acquisition costs because in the future, they will not have to send disks through the mail. It also brings up some interesting opportunities for WOW!, which currently requires Win 95 AND a CD-ROM drive. The CD-ROM requirement might go away as a result of the bundling. CompuServe also announced that they were entering a broad technology alliance with Microsoft to license Microsoft's Normandy tools for the Internet. Microsoft announced Normandy as a platform for developing customized commercial Internet services, aimed specifically at Internet Service Providers. The runs on Windows NT with the integrated Microsoft Internet Information Server. Normandy is basically a set of tools for supporting mail, NNTP news (the protocol used for USENET messaging), chat, information retrieval, white pages, and personalization. Call me crazy but it sounds like Blackbird, the original code name of the developer tools for the original Microsoft Network, has been reincarnated. You were only waiting for this moment to arrive...Microsoft says the software will be finished in September and plans wide scale distribution of an "in-the-box" solution towards the end of the year. CompuServe feels like it got a good deal with Normandy (and while CompuServe is definitely licensing these tools, it's not clear whether they are actually paying much, if anything for the right) because they will get the source code for Normandy and be able to modify it to taste. Also, Microsoft has assured they will work extensively with CompuServe on any development issues. For the short-term, this may be a great deal for CompuServe as it plays directly into their "RED DOG" strategy for transitioning CompuServe to the Web. However, the tools are basically untested and unproved. If they work, ultimately I don't see how they differentiate themselves from other services, including Microsoft, who will use the tools. CompuServe doesn't see it that way though. They believe the tools are like an artist's paints, and that they will be able to differentiate based on how they use the tools. Microsoft: Online Killer Reborn? ================================ This time last year, many were predicting that the Microsoft Network would kill off all the other online services. MSN's position on the Win 95 desktop would be a threat to the other online services. With over a million customers MSN hasn't yet been much of a threat, but they haven't really tried yet, either, and 75% of the Windows world is on Win 3.1, and can't use MSN yet. Before launching into why I think Microsoft is going to be a tough challenge for the online services, I'd like to take a second to talk about the Microsoft vs. Netscape battle. It's the subject of my first piece in NetGuide, which should be available at newsstands near you soon, if not sooner! In the piece I conclude that while Microsoft wins, Netscape doesn't have to lose. So, I was sort of glad to see this quote from Jim Barksdale on Friday, after speaking to the National Press Club: "These things are always presented as win/lose battles, but they aren't," Barksdale said. "They're out there hyping the industry. I get some business from that. I'm out there hyping the industry and they get some business from that," he added. "It's a foot-race; I don't doubt that," Barksdale said later. "But over the long haul, they will not crush us." Now first, I was glad to see Barksdale using the operative word, "hyping". Hey, at least he's honest. I like that. But I have the curse of living with a memory that never forgets, and I dug this Barksdaleism up from last December where he was speaking on the same subject. "It's a tough fight-I'll grant you that-but we're brave. We're well financed. We believe that God is on our side," Barksdale said. Barksdale has mellowed some since December! Actually, I think it is more that the realization is sinking in that they can't beat Microsoft in an out and out fight. I agree with Barksdale's comments from Friday though, it's not always about win/lose, and Microsoft probably won't crush Netscape. There are plenty of opportunities. But it will be a tough fight. Microsoft is giving away the Internet Explorer. No $39, no nothing. FREE. You're an IS manager and you have to license a browser for your company's 10,000 employees. One has a fee and one is free. Both browsers basically work the same. The IE 3.0 beta currently lacks support for Netscape plug-ins and Java, but its coming. And while those things are very cool, they're not yet "must haves" for most people. For most people, especially those using dial-up Internet connections, Plug-ins and Java only slow things down. If I am the IS manager, it's not a difficult choice. Back to the online services... Microsoft may have lulled the online services like CompuServe and AOL into a false sense of security. MSN has not been priority one for Microsoft, in fact, it would seem like it has not been much of a priority at all. But Microsoft can afford to play the waiting game with MSN. Priority number one right now is to reinvent themselves as the premier Internet company. The top priority is Internet Explorer. They want it everywhere. That's the first step and they have a ways to go, but they're making up ground. Sometime in the fall that's the browser that 10 million or so AOL and CompuServe customers will use. Ten million is no small number. Secondly, Microsoft plans to release an upgrade to the Win 95 operating system code named "Nashville." Nashville will allow users to make the Internet Explorer their desktop shell. In other words, users will be able to manipulate their system via the browser. Users will be able to organize and personalize their desktops via the browser. Double click on a Word document within the browser. Up pops Word with the document. It's an interesting model, and if end users really like managing their desktop in that environment, it will have been a brilliant move for Microsoft. The Internet, or at least the Web then becomes a ubiquitous experience. The Web is already the environment users will be working in. Accessing the Internet will be no different than accessing files and applications on the desktop. I'm guessing that Microsoft is wishing two things. Wish one is that this will be well received and used by end users. Wish two is that if it is well received, that this will present a barrier to using other browsers, and ultimately other online services. If wish one comes true, I think wish two is a slam dunk. Tie this into the Normandy tools and it gets even more interesting. The proprietary online services had a couple of things going for them. One was ease of use. If the Web browser is the shell for the desktop, and it's easy to use, then accessing the Web will be easy too. The other main ingredient online services had going for them was easy to use communication tools. E-mail, message forums, chat rooms. Normandy hopes to solve these problems. If they succeed, we don't have to make a big leap of faith to jump to the logical conclusion that Microsoft will begin marketing the hell out of the Web based version of MSN. So get out the Kleenex and the Puffs, the crying game is about to begin. Someone once said (I think maybe Scott Kurnit) something along the lines of Microsoft levels the playing field by knocking down all the buildings. It's ironic how all of this is working out. Perhaps the best thing that ever happened to Microsoft was that they didn't develop an Internet strategy long ago. That Netscape leaped out in front of them. Because if it hadn't happened that way, the crying game would've begun a while ago. But make no mistake, it's coming. AOL, even with its own new 3.0 client has to come up with ways to truly differentiate itself, and Nashville may force AOL to consider shifting the service over to the Web sooner than they would've done it on their own. But Microsoft can quash the cries of AOL and CompuServe by saying, "HEY! We gave you an icon on the desktop!" CompuServe and AOL will cry though, even if Microsoft doesn't give MSN preferential treatment. Microsoft could build in the function that should a user decide to use an online/Internet service, that they would have to make a choice, much like you have to make a choice when you get phone service and have to pick a long distance carrier. Except there's a significant difference. The phone companies got split-off from AT&T. In this scenario, Microsoft has the potential to be the equivalent of AT&T AND the local phone company when it comes to digital dial-tone. It's a powerful position to be in. "You've used our browser on AOL and CompuServe and even on your desktop. If you love that, you'll really love OUR online service, MSN. Brought to you by the same folks who made all the groovy stuff you're already using." The above presents a nightmare for Steve Case and Bob Massey. A nightmare they appear to be walking into it. CompuServe seems to be running right smack into it, and AOL is sort of dancing around it. But AOL, with their 3.0 software, right now, for better or worse, has a lot of ways to differentiate their service versus the potential Web based services which will be offered by Microsoft, Prodigy and CompuServe. Will that differentiation be enough? Over the long haul, I'm not sure it will be. Either way, it's going to be a wild ride, and I look forward to watching the events unfold. Disclaimer ========== Coming soon, a new and improved disclaimer?? I began writing this newsletter in September 1994, at the time I was working for a technology company now owned by MCI. In March 1995, I began working for International Business Machines Corporation. I speak for myself and not for IBM. Subscription Information ======================== To subscribe to this newsletter by e-mail: Send an e-mail message to: LISTSERV@PEACH.EASE.LSOFT.COM In the BODY of the message type: SUBSCRIBE ONLINE-L FIRSTNAME LASTNAME Example: Subscribe Online-L Robert Seidman If you wish to remove yourself from this mailing list, send a message to: LISTSERV@PEACH.EASE.LSOFT.COM and in the body of the message type: SIGNOFF ONLINE-L . A Web version of the newsletter is available at: .