============================================================================= Seidman's Online Insider ============================================================================= Weekly Summary of Major Online Services and Internet Events ----------------------------------------------------------------------------- Special Announcement May 12, 1996 ============================================================================= Prodigy Buyout Announced ==================== We're not so vain here at the Online Insider that we believe that Prodigy management announced the buyout from Sears and IBM on Sunday just so it could sneak into this week's newsletter. But hey, sooner or later the Sunday distribution was bound to pay off for me! The press release started off this way: "International Wireless Incorporated and a group of Prodigy executives, announced the acquisition of Prodigy Services Company from its owners, IBM Corporation and Sears, Roebuck and Co. The announcement was made today by Greg Carr and Terry Dillon, Co-Chairmen, International Wireless, and Edward A. Bennett, President & Chief Executive Officer, Prodigy." International Wireless will acquire Prodigy in its entirety, and the acquisition will be led by Prodigy management. Financial terms were not disclosed and the acquisition is subject to regulatory approval, which is expected in June. Though no details were given, Bennett told reporters that it was on the higher side of the $100 million to $250 million that had been floating around in the press recently. Also participating as both a financial and strategic partner is Grupo Carso, which owns Telmex, Mexico's telephone and telecommunications company. It would appear at first blush that Grupo Carso is the "deep pockets" funding the buyout. Greg Carr is also co-founder and Chairman of the Board for Boston Technology. Boston Technology provides equipment in software for several major telecommunications company. One of their specialties is voice mail services. There is some synergy between Boston Technology and the service Prodigy is attempting to become. This afternoon I had the chance to speak with Ed Bennett, who will remain as President and CEO of Prodigy (and join the board of International Wireless) and Greg Carr of International Wireless. I asked Bennett if Prodigy is still on track to move towards moving away from the proprietary Prodigy service and positioning itself as an Internet service. Bennett advised that within a year, Prodigy will be a totally TCP/IP based service without any of the proprietary software that exists today. But it's more than just about connectivity and access to Bennett, who envisions Prodigy as "a fully interactive mega online web site," Indeed Bennett wants Prodigy to become "The world's largest web site". That opens up some interesting possibilities. When I asked Bennett and Carr if they would try to form strategic partnerships with access and connectivity companies and I could almost hear Carr smiling through the telephone. At Boston Technologies, there are existing relationships with Ameritech, AT&T, AT&T Wireless, Bell Atlantic, BellSouth, NTT, Southwestern Bell, TelMex, Time Warner and GMCC of China. "Ed and I believe that some of those telephone companies might be interested," said Carr. I believe they're right. Carr said that Prodigy and Boston Technology will probably announce a more formal alliance that will involve technology sharing and co-marketing. The affiliation with Boston Technology could help Prodigy in the international space, as more than 50% of Boston Technology's business is currently done outside the United States. (This is separate from the recently announced InternationalLink service, a new Web site which integrates links to various web-based international online services at < http://www.internationalink.com >.) Carr advised that the first international expansion will be in Mexico, where a Spanish language version of the Prodigy service will be launched. As some of you know, I recently balked at Bennett's buyout plan. I even went as far as saying that Bennett should be fired. At the time though, I was working with out all the data. As it turns out, it would seem that Bennett submitted a plan a few months after joining Prodigy. The plan was approved by the partners ("because it was a good plan," according to Bennett.) But a funny thing happened on the way to the fair. Sears decided it didn't want to be in the online business anymore and they were pretty public about wanting to sell the service. This apparently scared off IBM and the net result was that the plan never got the funding, or the chance it needed. "It was a real conundrum," said Bennett. Indeed. That being the case, I think the "Bennett Maneuver" was appropriate, and he should be congratulated. "The buyout is not the silver bullet that's going to solve Prodigy's problems,'' said Adam Schoenfeld, a vice president at Jupiter Communications, a market research firm in New York, in a story by Reuters. "Prodigy is still Prodigy. Ed Bennett is a really smart executive, but he and his team are not miracle workers...I give them a low chance for long-term survival,'' Schoenfeld said. In the online space of America Online and CompuServe, I'd agree with Schoenfeld. But Prodigy doesn't have to play on that field and in that league to be a profitable company. I believe there is a business in the "content" space, and that if Prodigy can keep some of their content superstars on board, that their chances for success are better than what Schoenfeld predicts. As an online service that competes with America Online, CompuServe and others, I think Schoenfeld is on the money. They still have "about a million" subscribers (which would make them number 4 behind AOL, CompuServe and MSN), according to Bennett, and he plans to work hard to keep the loyal following. "We'll do our best to give the content they deserve, do our best to communicate about all the new features we'll be undertaking, and make the necessary improvements to the service," said Bennett. But I didn't get the sense from Bennett that there would be a big push to acquire new subscribers for the online service, and I wouldn't be surprised if the big push comes in the form of getting folks, regardless of what service they're on, to come look at Prodigy's content. If Prodigy is to succeed in the content space, what they're really counting on is advertising revenue. Something, which on the web, has not proved to be a viable business yet. Bennett expressed that he was very bullish on the advertising possibilities on the Web, though he admitted that he didn't necessarily see it getting to be the "huge" business some have forecasted. Still, Bennett sees close ties to the cable industry he came from. "It took years to get advertisers to believe in the cable audience," said Bennett. "The issues that the cable went through, 'is anyone watching?' 'how do you measure them?'," are the same issues which are being asked on the Web now according to Bennett. Bennett believes these issues will be resolved, but thinks the end result will be different than television, radio or print ads because the Web is an entirely different medium. Schoenfeld is right to be cynical about Prodigy's chances for success. But I'm not sure they need a miracle to succeed as a content production company. What they need is a lot of good content, and good tools for chat and messaging on the Internet (Bennett said that in addition to using existing Internet tools like IRC, they are working on developing software for chat and messaging. Maybe they'll license AOL's virtual places??) If we take a look at Yahoo, which as of Friday, had a market value of over $865 million, I get more optimistic. Still, Yahoo has something Prodigy doesn't have -- alliances with players like Softbank and Ziff-Davis. Yahoo also is already generating gads of traffic. But relationships with Grupo Carso and Boston Technologies aren't a bad place to start. Ultimately what Prodigy needs is a lot of people (I mean a LOT of people) looking at their Web sites. Prodigy's highly-touted new Web service dubbed "Stim" is expected to be launched sometime this week during the E3 conference in Los Angeles. For now Bennett and crew can breath a sigh of relief and get on with the business of running their company without the albatross of uncommitted partners around their neck. Bennett has spoken of driving a company with highly motivated employees. How to motivate? One way is certainly stock options, and Bennett continues to say this approach will be used. Stock options are good, but an IPO would be even better. According to printed reports, Bennett continues to say that an IPO could happen given the right circumstances. And what a story that would be, if after some time, Prodigy has an IPO and it does well. I don't see it being a mega Internet/Online company like an AOL or a Netscape, but again, it doesn't need to be. Bennett thinks Prodigy can now be a swift moving, nimble company. If Bennett can motivate his employees and everyone is having fun producing content, what sweet icing on the cake a successful IPO would be for them. But there is a lot of work in front of them for that to happen. "I've had about three hours of sleep in the last week, and most of it came last night," said Bennett. Bennett knows that this is only the beginning of the story, so there still may be many sleepless nights in front of him.