Copyright © 1995 Robert Seidman (robert@clark.net). All rights reserved. May be reproduced in any medium for non-commercial purposes.
In This Issue...
This week, the justice department basically announced that it would not attempt to block the August 24th launch of Windows '95. Essentially, the DOJ said they didn't expect to complete their investigation before August 24. While the investigation continues into whether the practice of bundling Microsoft's online offering (Microsoft Network) with the operating system is anti-competitive, this was a victory for Microsoft.
Analysts believe there were several factors leading to the green light, notably that the delay would potentially hurt business that have bet their wad on Win '95. If that's the case, the Justice Department could be setting a dangerous precedent with regard to Microsoft. I'd elaborate on that, but it doesn't have much to do with online services!
Finally, we know the Microsoft Network pricing. There will be several plans available: a standard monthly plan, a discounted annual plan and a "heavy user" plan. Microsoft also announced that they would freeze initial subscriptions at the 500,000 subscriber level to make sure, that from a performance point of view they were capable before adding new subscribers.
The three plans:
STANDARD: $4.95/month for 3 free hours with additional hours at $2.50 an hour (yep, it really is true that 5 hours is $9.95/month)
ANNUAL: $49.95 per year; includes the monthly fees for a year three hours of usage per month; each additional hour is $2.50. Basically, you get two "months" of the monthly fee free per year when you go this route. Charter Members (limited to the first 500,000 who sign up for MSN) can get the annual plan at $39.95/month or about $3.33/month
FREQUENT USER: $19.95/month for 20 hours, with additional hours at $2.00/hr.
Three words: Microsoft is brilliant.
Okay, you may hate them, but this was brilliant! Why? Because it doesn't make the pricing look terribly aggressive vs. the other services (standard plan would still be $9.95/mo. for five free hours). This led industry analysts to say things like:
"I think a lot of people were under the impression that (MSN's prices) would come under (the average)," said Michael Rinzel, senior online analyst for Jupiter Communications in New York. "But I don't think that's the case. If you're used to being on an online service for five hours, there's no difference."(Source: Knight-Ridder Tribune Business News).
Yes, this is true. This may be exactly how Microsoft hoped people would react. But there's a problem with this sort thinking for one important reason: most of the people using online services today do not use more than 5 hours a month. And there's another thing that makes MSN's seemingly non-aggressive pricing a wolf in sheep's clothing:
Microsoft really isn't after the 7-10 million homes who already are subscribed to an online service (don't get me wrong, they'll take us too!) -- they want the 90 million homes who aren't subscribed to an online service.
People new to online pricing don't think in terms of hours, they think in terms of dollars. It's $4.95 vs. $9.95. LESS THAN HALF! That's the number that will stick in the heads of first time subscribers.
"We want to make it easy for customers to join the MSN community, so we're offering programs that will meet the diverse needs of our members," said Russell Siegelman, general manager of The Microsoft Network. "For instance, our Standard Monthly Plan gets people online at a very competitive low monthly price. If members choose the Annual Plan, they get a substantial discount, especially if they take advantage of our special charter member offer."
I'm an "online-a-holic", as are many of you who read this. We're not in the masses. Maybe someday, maybe not. Right now, the "average" subscriber may be online 6-7 hours a month, but according to industry insiders, less than 66% use five hours a month. We'd love for AOL to tell us how many people use less than 3 hours a month. While we don't know how many, we do know it isn't a trivial amount. While it is true that many subscribers will bargain shop and that the Microsoft Network will need to compete on all levels, the fact is, the folks using the service only a few hours a month probably don't care all that much about content and services. They'll be using the service occasionally for e-mail or sports scores. You can do this pretty much anywhere. If that's all you're doing, there isn't much incentive to go shopping for a new service. Today, that type of user accounts for 3.5-5 million users.
For the more than casual user, and especially the frequent user, there is one golden nugget in the announcement from Microsoft that goes unanswered. How much of the GOOD STUFF will be in the $2.50/hr. zone. See, Microsoft Network is also offering content providers the right to set rates on content. So, when NBC launches on MSN, all of it might be in the $2.50/hr. zone, or maybe only some of it will be in the $2.50/hr. zone. They might charge an additional monthly subscription fee to get to the GOOD STUFF (like an online chat with Kramer or something). For now, we'll have to wait and see. Stay tuned...
Under the guise of the "Assured Customer Satisfaction Plan"Microsoft created demand for MSN by announcing they would heavily monitor the service performance and stop adding new subscribers temporarily at the 500,000 level.
"There's been a lot of speculation about how many customers will sign up for MSN. But really, our focus is on having satisfied customers, and that's why we're implementing our Assured Customer Satisfaction Plan," said Siegelman. "We believe the 500,000-member milestone is a good place to measure how well we're meeting our members' needs, and to identify, if necessary, how we need to fine-tune our service."
I think this is brilliant for two reasons. Primarily, it creates a demand for the service (I've got to sign up, I just HAVE TO GET IN BEFORE THEY CLOSE ACCESS!). Also, there are many people out there who were familiar with the growing pains America Online has experienced, especially in '94. All the while, members ragged on AOL for adding new subscribers before fixing all the problems. So "old-timers" may look at Microsoft as "doing the right thing". In fairness, this policy is much easier for the deep pockets of Microsoft. As for AOL, in retrospect, their gamble seems to have paid off in spades. Speaking of gambles...
MCI and Delphi finally announced their plans. They are now the first venture to result from MCI's $1 billion (and potentially $2 billion) investment in News Corp. As predicted in this newsletter, Scott Kurnit, the former #2 at Prodigy and now the former president of MCI Information Services was named president and CEO of the new venture between MCI and Delphi.
The venture will include about 250 employees from MCI and about 450 from Delphi. There is no name for the service, but the Delphi name is out. A contest will be held to name the service, check out the internetMCI Web page at http://www.internetmci.com/ for details.
The venture will combine over 200,000 MCIMail customers, and the "thousands" of internetMCI customers with the 100,000 (or less) Delphi Customers. They'll create content for businesses and consumers that will exist totally on the Web.
Each of the parent companies have committed $200 million to the venture, which hopes to launch as a subscription service on the Web by Christmas.
While this announcement may be news in the online/Internet circles, it plays only a very small part of MCI's plans that led them to invest $1 billion in News Corp. On the surface, that may be true, but it is already obvious that MCI is taking the long view and isn't looking to cash in on the online joint effort in the very near term.
MCI's Kurnit is a big believer that the open systems will ultimately win, but there too, MCI is entering the game late as AOL, CompuServe and Prodigy are already offering access to the Internet. AOL will begin its own stand alone Internet service on August 24 (notably, the same day that Microsoft Network makes it's maiden voyage as a public system) and expectations are that Prodigy and CompuServe will ultimately do the same.
In the near term, it is quite possible that AOL will overpower the combined MCI/Delphi effort with their stand alone GNN service. While serious online detractors chide the AOL approach, don't be surprised if AOL is extremely successful in attracting "first time" Internet users. Insiders at AOL are predicting that AOL's GNN branded service will be the biggest stand alone Internet service within 6 months.
In the past, with respect to online services, content has NOT been king. It is the communications services (e-mail, bulletin boards, chat) and downloading which reign as champs. But, the success of the Web has proven that content is important. The joint MCI/Delphi effort will leverage News Corp's vast content. Will it be enough? I doubt we'll know until at least this time next year. To date, everything on the Web has been extremely experimental. Other than advertising revenue, there isn't a lot of money currently being made on the Web (unless you're a software company that just happens to make a web browser/server).
Kurnit recognizes the strength of a proprietary application such as AOL vs. the Web is that it can be easier to develop applications that make services easier to use. But Kurnit is a believer in "helper" applications designed for better presentation/utilization of Web content and hopes to buy, license or develop these technologies. "When you look at the Internet, there is amazing diversity and creativity that is spawning, and we would certainly look to make acquisitions," said Kurnit in an interview with Reuters.
Kurnit stressed that he didn't feel that they needed to own everything they might seek out (i.e., they'll use licensing), but that they would seek strategic acquisitions.
"An application that displayed stock quotes better than they are displayed elsewhere would be something we would be interested in," Kurnit said.
With at least $400 million in the venture, plus the deep pockets of the parent companies, you can bet that software developers reading that comment are out there trying to develop a better stock quotes interface for the Web. Kurnit is counting on that. With millions to spend, he has every reason to feel confident. If MCI truly believes in Kurnit's vision, they're going to have to give the effort time. They'll do well to ensure that the same gang in Atlanta that was responsible networkMCI business stays far away from Kurnit's domain.
Kurnit's shop will need to focus on the content and services that will attract customers. Period. With networkMCI business, MCI paid millions of dollars for a massive and brilliant advertising campaign. MCI wanted to make a statement that they were serious about branching out beyond telecommunications. They may have been better off going with the AT&T vaporware "You Will"approach.
MCI doesn't need to make any more statements. They've now gone back to their roots as a risk taking company. Kurnit's gamble is that in the end, the Web will win the race over proprietary systems and that the new venture he's heading up will win with services and content. The real question here is: how far away is the long term? If MCI exercises patience with the new venture, they may just prove Kurnit right. Until then, the venture, backed by billion dollar parents is an also-ran compared to relatively small America Online.
Netscape's made their initial public offering this week. Initially there were to be 3.5 million shares at $12-14/share. But as the IPO date approached, demand was so high that they bumped the price to $28/share and expanded the offering to five million shares. Even in doubling the IPO price, they still aimed too low. By the time the stock hit the open market it was at $71/share and soared as high as $75/share before dropping back to the $50's.
The 5 million shares passed through several hands, but by the end of the week, the trading volume on the stock had lightened to around 2 million shares. It closed the week at $52/share. Netscape's primary creator, Marc Andresseen, was worth $58 million (on paper) and Netscape's Chairman James Clark's shares were worth approximately $565 million after the first day of trading, instantly making him one of the richest people in the country.
With almost $152,855,000 in revenue for the quarter ending June 30, America Online's quarterly revenue increased more than %275 vs. the same quarter one year ago. America Online also said that they'd added 700,000 subscribers for the Mar-June quarter, which is pretty phenomenal. Net income grew more than 6 times over the same quarter one year ago to about 6.2 million. Earnings per share before merger and amortization costs totaled $.16/share. Including the special costs, EPS was $.13/sh.
While subscriber growth was down vs. the previous (Jan-Mar) quarter, where 734,000 subscribers were added, the spring growth is surely a testament to AOL's aggressive marketing strategy (they pay close to $40/subscriber they acquire, which according to reports is significantly more than the amount spent by other services). The Jan-Mar quarter is traditionally the best quarter because it represents the growth that comes from all the Christmas PC purchases. Yet, AOL managed to keep a close pace in the Mar-Jun quarter. And though they didn't grow as rapidly, they improved on the Jan-Mar revenues by %39.
"Fiscal 1995 was a terrific year for America Online,"said President and CEO Steve Case. "We tripled our subscriber base for the second year in a row, growing to three million members and going from the nation's number three online service to number one. We substantially expanded the breadth of content on the service. We completed a number of strategic acquisitions, were first to market with 28.8 kbps support through our own AOLNet, made great strides toward entering the international market, embraced the Internet and invested significantly in emerging content and enabling technology opportunities."
Added Case, "Our growth as a company over the last year positions us to leverage our critical mass and momentum to attract and retain content and marketing partners, to provide a rich, engaging and ever-expanding service to our members, and to generate substantial new revenue streams that can enable us to price our services attractively while still investing heavily in innovation."
Curiously, over %8.5 (about 12.9 million) of AOL's revenue came from sources other than online services revenue. There's only very limited advertising on AOL right now, so it looks like they're selling a ton of books, t-shirts and yes, coffee mugs. (I know, I know, I'm still working on the mugs...honest!)
In the near term, it appears that AOL is well positioned to fend off the threats from Microsoft. Through its own aggressive marketing, AOL has accomplished an important feat-they've gained mindshare.
On the way to a meeting in Virginia (not with AOL!), I read a story on the cover of the USA Today about the death of Grateful Dead legend, Jerry Garcia-may he rest in peace. I was actually very surprised about the amount of front page coverage dedicated to the cyberspace grieving of Jerry Garcia's passing-with several specific mentions of America Online and their Grateful Dead forum (Keyword: Dead). I doubt even a year ago this sort of attention would've been given to cyberspace or America Online.
Purists resent the fact that many people view America Online and the Internet as the same thing. And more and more, much of the media refers to the Internet and then shows an America Online screen. Love it or hate it, it's brilliant marketing.
Since I was in Virginia, I had dinner with two of the best and brightest minds in the online industry who work at AOL. While waiting in the visitors area at about 6:15pm, the place was a buzz. "What's going on," I asked. (I had been "un"wired for about 4 hours with no e-mail, and no online news) "Quarterly earnings were great. Stock closed at $65.25!"
The stock was sort of the Teflon stock o' the week before settling down to close the week at $62.38 (still up over $8/sh. from the previous week). With history as a guide, the stock should've gone down when MSN announced their pricing and it should've gone down when the DOJ announced (effectively) that it wouldn't block the launch of Win '95. But the stock didn't go down-perhaps Netscape gave the AOL stock the strength it needed to make it until Thursday's financial results announcement.
I realized by the look of the employees that Steve Case and America Online had accomplished a very difficult thing-they've got their employees (at least a solid core group, from what I could tell) extremely motivated-no, nothing short of "fired up"to do battle with Microsoft. And while money surely plays a part, it's more than that. They have a team of people committed to the common goal of being the best-and winning. You have to see the look in their eyes to understand, but had you been there, I'm sure you'd have seen the same thing that I did.
As for my dinner, I didn't get any scoop. We talked about online, Netscape, Microsoft (one of the guys will only refer to them as "The Evil One", coffee mugs (yes, it was someone from AOL who actually suggested the coffee mug thing in the first place, and he clarified his concept, which, I agreed with and will clue you in next week), and why Steve Case doesn't respond to my e-mail much anymore.
One theory offered was that in some recent "attacks"of AOL, I singled out Steve Case rather than the collective AOL. And I can see that point, but to me, Steve Case _is_ America Online and always has been. The monthly letters come from HIM.
While, even I sometimes use "Steve Case" where I mean the collective America Online, I hope Mr. Case doesn't take my comments too personally. The fact remains that for me, and many AOL members, he is AOL.
When you consider the great things AOL has accomplished as a company, even with all the potholes and flaws that have existed (and in some cases continue to exist) Mr. Case should be proud to be considered "Mr. America Online". My bet is that he is.
CMP's Interactive Age Magazine calls it quits as a print publication and will move to exclusive use of electronic distribution and will appear in print only as a supplement to certain subscriber demographics who receive CMP's Communications Week.
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ProActive Media Inc. filed suit against The Walt Disney Company seeking $2.1 mill. in damages for alleged copyright infringement. ProActive, publisher of MMWIRE, has established a web site with details on the suit. This is especially interesting because Disney is typically very vicious towards those who violate THEIR copyright. Check it out at: http://www.mmwire.com/lawsuit.html
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Time Inc's PATHFINDER announced they'd begin providing daily news services via their Web site (http://www.pathfinder.com). Included will be wire feeds, stock quotes (already there via Quote.com) weather updates and sports statistics and scores. Maybe it's time to do the In, Around and Online daily for real...-Time Inc. invested in Open Market Inc., a software developer that has developed transactional facilities and tracking software (which Pathfinder currently licenses). No details were disclosed.
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IBM announced they'd hired James Firestone, who worked with IBM CEO Lou Gerstner at American Express as the head of its newly formed consumer division. The new division will also have responsibility for IBM's consumer online and multimedia efforts.
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According to the New York Times, Cap Cities/ABC has fired the Manger of Online Services for ABC news for transmitting a sexually explicit photograph over the company's computer network. Mitch Davis, the terminated employee could not be reached for comment of the Times' story.
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AT&T is planning its own Internet and online services (apparently separate from Interchange) that will include the hosting and distributing of content, according to a report in the Wall Street Journal.
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CompuServe announced Magee Enterprises, Inc. introduction of Rosebud, an automated program for use in filtering and retrieving news, financial, sports, weather and email information. Rosebud will gather its information from sources available on CompuServe, but will provide delivery to any Internet e-mail box. To find out more, a Pre-release version is available on CompuServe. (GO PCCOM and look in the download area).
This Last 52 52
Week's Week's Week Week
Company Ticker Close Close High Low
------- ------ ------ ------ ------- -------
America Online AMER $62.38 $54.25 $65.25 $14.94
Apple AAPL $43.06 $44.50 $50.94 $32.50
AT&T T $51.50 $51.75 $55.88 $47.25
Bolt,Beranek & Newman BBN $35.75 $36.25 $39.38 $12.63
FTP Software FTPS $23.00 $24.38 $35.50 $14.88
General Elec. GE $57.75 $57.63 $60.50 $45.38
H&R Block HRB $37.13 $37.00 $47.63 $33.00
IBM IBM $109.25 $108.75 $111.75 $63.75
MCI MCIC $23.25 $23.50 $25.88 $17.25
Mecklermedia Corp. MECK $39.25 $41.00 $44.00 $ 4.25
Microsoft MSFT $96.50 $93.88 $110.25 $53.88
Netcom NETC $34.75 $33.75 $39.50 $16.75
Netscape Comm. Corp NSCP $52.00 -- $75.00 $51.38
NetManage NETM $17.75 $18.25 $22.50 $ 8.13
News Corp. NWS $23.63 $24.13 $25.13 $14.38
Performance Syst. Intl PSIX $19.25 $19.00 $25.50 $12.00
Sears S $34.00 $32.13 $35.13 $21.50
Spyglass Inc. SPYG $43.75 $43.25 $54.00 $26.50
UUNET Technologies UUNT $43.25 $40.00 $51.75 $21.75
See you next week.
I began writing this newsletter in September 1994, at the time I was working for a technology company that is now owned by MCI. In March, I began working for International Business Machines Corporation. As of July, my management has agreed to allow me to do some work on the newsletter during business hours (probably about 6-8 hours a week). I speak for myself and not for IBM.
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