I don't think this person knows quite what they hit on. I understood the comparison immediately, and it is at the forefront of why CompuServe is moving to the Web. Out of Africa was a really good movie. Well produced, well acted, but well, kind of serious and kind of stiff. I saw it once. "Better Off Dead," on the other hand is a fun comedy which I've probably seen four times. From an artistic value standpoint, "Out of Africa" is probably a much better movie, but given the choice, I'd watch "Better Off Dead." And as some people are beginning to think America Online would be better off dead, the double meaning of the statement coming from a "maybe someday" contributor to this newsletter has me optimistic that I just might be able to retire in small blocks of time someday. Okay, it's a fantasy, but you never know! Either way, a few bits and pieces of analysis from the protege, are sprinkled into the "Red Dawg" piece. We'll see how the protege thing develops from here...
"Red Dawg" Leaves AOL King O' the Hill
======================================
On Tuesday CompuServe, the second largest online service, announced that the project code-named "Red Dawg" was a project intended to migrate CompuServe's online service to the Web. While CompuServe claims they will maintain the proprietary interface as long as there is demand for it, they join Prodigy and
Microsoft Network who also are in the process of shifting their online services to the Web. Reigning supreme and now alone as the king of the proprietary online services space is the Vienna, Virginia based America Online. Between this announcement and investor "fear" regarding AT&T announcing WorldNet as the second largest ISP, CompuServe stock fell almost 17% to close the week at 23.
Interface, Interface, Interface
At this point, America Online has the best user interface. With the introduction of their Beta 3.0 client software, which is no doubt being delayed because they're working with Microsoft to integrate Microsoft's
Internet Explorer Web browser into it, AOL clearly, at least in my mind has the best user interface. The biggest complaint I have and hear about AOL is the forced artwork downloads. Well, that's all gone in 3.0. Hallelujah! CompuServe is currently beta testing a 3.0 version of its own client software, but it is not on par with what America Online already has. We've seen AT&T's Interchange fold and move to the Web (though we're really still not sure what they will be doing, if anything, in the way of a subscription service.) When that happened, Europe Online, which originally planned to use the Interchange software shifted to the Web as well. At the time, a spokesman for Europe Online said something along the lines of "it doesn't make sense anymore to have a proprietary interface unless you're America Online." I agree. It would have taken CompuServe a lot of time and a lot of money to compete head-to-head with AOL's interface. So one major benefit for CompuServe in moving their service to the Web will be in the interface. The interface should now become easier to use. All a member will need to connect is Web access, through CompuServe or any other ISP. By accessing the service through the Web, any changes to the interface can be made and implemented more quickly. Instead of a user having to download the new software each time CompuServe wants to make a change, the Web pages can be updated without the user ever being affected. This will give CompuServe more flexibility to be competitive.
Let's Beat AOL to the Punch?
For all the hoopla over the fact that the Web is the online service killer, I think there is a little more to it than that. CompuServe could have invested millions and millions of dollars to come up with an interface that competes with America Online, but what is the value of that if everything truly migrates to open standards based on Java or something else someday? Why not try to use your might as the number two service now, before America Online announces similar plans, and beat AOL to the punch? Making the move to the Web will allow CompuServe to utilize other Internet technology and be in synch
with what is becoming the standard. AOL may be able to afford to wait, but the others can't. By making the move now, CompuServe will be a step ahead by already having their service in place if and when AOL decides to make the switch. Along those lines, it wasn't a surprise when later in the week, CompuServe announced that Tim Oren, previously VP and GM of the Internet division, had been named vice president of Internet technology for the CompuServe online service. Oren's task will be coming up with a strategy for acquiring key technologies for CompuServe and quickly integrating the new technologies in CompuServe's Internet products and services. CompuServe has said that it will integrate new technologies like Active-X and Java into the service by the end of the year. While CompuServe is trying to reassure its members that it has no plans to abandoned theproprietary client software, we can't help but wonder.
Content Providers Will Like This
It will also be easier for CompuServe to acquire content, because the content providers will not have to do anything differently than they will for the Web in order to supply content to CompuServe. It is rumored that CompuServe was receiving heavy pressure from its content providers to make such a switch. In addition to making it easier for their content providers, CompuServe will also free up their own resources (both human and financial) which are currently being used to support their dated software. Is the Web the New Home for Online Service? In the short term, with the possible exception of America Online, the Web will be the place for the commercial online services. Over time though, it wouldn't surprise me to see the services develop their own software, whether it be in Java or some other language, which are not Web based. America Online now stands alone with proprietary software, but there isn't much doubt that ultimately AOL, too, will be forced to embrace the Internet standards. For CompuServe there is the question of whether they can succeed on the Web in the rise of steep Web competition. You have to be able to compete on price, quality, content and usability. While the Web shift will help them resolve some interface and content production issues, they will have competition from Microsoft Network, Prodigy and others. For me, the interesting thing will be to see what effect the online services moving to the web have on today's free and open Web sites. How much content will remain freely available on the Web via advertising support as the online services move their content aggregation businesses to the Web. I think the model will
have to change a little bit over time, because it looks like the online services are bringing their "basic" cable model to the Web. Look at what MSN is doing. They're planning on offering flat-fee, all-you-can-eat pricing for those who are accessing from another ISP. The flat-fees will be relatively low, so I think that there will be lots of advertising. So, let's say there is something like the USA Network on cable, which derives revenues both from subscriptions and from advertising. The question I have is what the Web sites will do once there is a subscription/ad revenue model in place via the online services. Will they still run open sites that only generate advertising revenue? Some bigger sites undoubtedly will, but others, well, it's too early to say just yet, but it isn't unthinkable that they will change. At least if you buy into the theory that the goal is to MAKE MONEY.
Has Growth Slow Down Left AOL Vexed in Vienna?
==============================================
America Online's subscriber growth is clearly slowing, but the question is, is the growth slow down normal? This is an especially difficult question to answer because there is not enough history for us to have a good feel for what "normal" is. But, we can make a couple valid assumptions. The first assumption is that a growth slow down following the "PC under every Christmas tree" quarter is probably normal, but whether the slow down they experienced this year is normal is hard to say. Secondly, if they've leveled off to about 8,500 average net new subscriptions per day and can maintain or grow beyond that, they will have added over 3 million customers for the year and end calendar year 1996 with about 7.8 million subscribers. Not too shabby. The better question is how much of this "growth" slow-down is attributed to an actual decrease in growth, and how much of it is attributed to higher subscriber cancellations. America Online has expressed concern about churn, and has said that they will cut back on their acquisition efforts to focus on providing better service. Some have suggested that cutting back on promotional efforts is just a cost cutting move on AOL's part, but they have denied this. One problem for AOL is that last August they publicly stated that the average life of an AOL customer was 41 months. Most people scoffed at this because at the time, most AOL subscribers had been on the system for less than a year. If the average life of a customer was really 41 months, things would be pretty peachy for AOL, who defers the cost of subscriber acquisition over a two year period. As long as their growth rate is in the stratosphere, this isn't a problem, but if growth doesn't continue to soar or, AOL doesn't find a way to reduce churn, this could catch up with them in a big way. If you look at the chart below, you'll see some interesting trends. Overall, it looks pretty good for AOL. It is tricky though, because the stock prices are adjusted for splits. AOL has traditionally split when it hits around $70-$80/share. From October 1994 to October 1995, the stock split 3 times, or once about every 6 or 7 months.
Earlier this month, AOL hit $70 and it looked like they were poised to keep the pace. But then a funny thing happened. Wall Street reacted nervously to AOL's new pricing plan. Then Wall Street got nervous when Morgan Stanley's Mary Meeker suggested that maybe the stock needed to take a breather. And then Wall Street got nervous when Merrill Lynch analyst, Lou Kerner revised his earnings estimates for AOL's next fiscal year slightly downward. As if that wasn't bad enough, it continued this week. Wall Street got nervous once again about AOL stock based on CompuServe's move to the Web. And then, and the other ones puzzle me somewhat, but this one downright confuses me, Wall Street got nervous yet once again when AT&T proclaimed its WorldNet Internet service the second largest Internet provider. (AT&T is claiming 150,000 subscribers, but they aren't saying how many of them are on the "Free" 5 hour plan, further, of the 600,000 requests for software, AT&T has only distributed 300,000 or so. One might suggest that AT&T turn to AOL for disk distribution, but I believe AT&T is deliberately slow rolling the distribution so they can ramp up to handle that many subscribers.)
Net Subs
Date Subscriber Base Growth/Day* Stock Price**
==== =============== ========== ===========
05/29/96 6.0 Million*** 8,474 $51.25 (May 24)
03/31/96 est 5.5 million 9,435 $56.63 (April 1)
02/06/96 5.0 million 12,822 $47.38
12/28/95 4.5 million 10,000 $41.00
11/07/95 4.0 million 8,334 $41.00
09/07/95 3.5 million 7,938 $35.50
07/05/95 3.0 million 7,520 $23.25
05/03/95 2.5 million 7,142 $22.50
02/21/95 2.0 million 8,196 $16.63
12/21/94 1.5 million 4,545 $12.34
10/26/94 1.25 million 3,571 $ 7.86
08/16/94 1.0 million --- $ 8.88
* Average per day based on growth and number of days between
announcements
** Adjusted for stock splits
*** If they announce on 5/29.
At this point, the 5/29 estimate is simply a shot in the dark. If they announce on 5/29 or so, the above numbers are a pretty good indicator. If they don't announce this week, I'll keep posting "best cases" for the downward spiral in AOL growth, and we'll see that number drop off until they actually do report. This week, Newsweek's Wall Street Editor, Allan Sloane yet again predicted trouble for AOL. Sloane has long been an AOL critic, but with the stock now down 26.8% from its $70 high closing price almost 3 weeks ago, Sloane must be having some fun now! First off, nothing personal, but Sloane seems confused when it comes to understanding the services themselves.
"But the world is moving toward open systems, in which anyone can access anything. For instance, Motley Fool, a hip stock-market-oriented service, used to be available only to AOL customers. These days you can get it free on the Internet," said Sloane in his Newsweek piece. That kind of commentary doesn't sit well with me. I agree that the world is moving to open systems, and even that there is a version of the Motley Fool on the Web now http://fool.web.aol.com/. But the Fool on the Web is different than the Fool on AOL. The Fool on the Web has content, and considering it's free, pretty good content -- most of the same content that's available on AOL. The one place that most people actually spend their time on the AOL version of the Fool, however, does not exist on the Web. That's the message boards, which generate considerable traffic and interest on AOL. To me, the message boards
themselves are what makes the Fool the Fool. Sloane correctly points out that the stocks recent performance spells trouble for AOL, who traditionally has
offered new shares to raise cash. AOL isn't likely to offer new shares at the current price. If they need cash, it could get problematic. It's also potentially a huge problem for AOL employee morale, as many of the employees have options and a considerable amount of the compensation, often most of their compensation, comes in the way of stock. If the stock doesn't perform well over a consistent period of time, they'll probably need to hire a morale officer! Sloane suggests that AOL will ultimately have to show real profits or make their money by selling the service. Sloane ends his piece by cracking, "Know a good, hungry phone company?" Scary as it is for me, I agree with Sloane on that one, too. I've always envisioned golden voiced James Earl Jones (Bell Atlantic's pitch man) pitching AOL. If nothing else, I'd really like to have Jones for my "Welcome" and "You've Got Mail" sounds...
Newsworthy Notes
================
GENIE AND IDT Partner to for Genie Interactive. Like Microsoft Network, Genie Interactive will be available over the Internet for a flat-fee. The first 3 months will be free. After that it's $10 a month. The service will offer the typical news, weather, sports, much of the content currently available on Genie, as well as access to multi-player games and business databases. For more info, see http://www.genie.com.
--
JUST SAY NO? The Federal Election Commission (FEC) told CompuServe they couldn't go forward in their plan to give political candidates free accounts on the service so they could debate and interact with members. The FEC ruled giving the accounts away would be considered a donation, which is a violation of the Federal Election Campaign Act. CompuServe still plans to offer free accounts to state level candidates and hopes to work out a legislative solution on the federal level.
--
HI,HO IPO - the initial public offerings this week for Open Market and Security First Network Bank were received in grand Internet tradition (if such a thing exists yet!) Open Market, developer of Web/commerce server software IPO'd at $18/share on Thursday and got as high $42+ on the open market before settling down to $36.50 to close the week. Security First Network Bank IPO'd at $20 on Thursday and got as high as $45 before closing the week at $40.25. A pretty memorable start to the Memorial Day holiday weekend, indeed! Both companies have been added to the stock watch.
--
AOL AND EXCITE TEAM UP on a co-branded version of the excite search tools on the America Online service. You may wonder why AOL would do this given that they bought WebCrawler. For those who may have missed it, AOL is an investor in Excite.
--
ZONA RESEARCH SAYS that Netscape still owns the browser market within companies, but that most companies " have yet to develop an unshakable loyalty to any one brand of Web browser," according to the press release. Netscape was the primary browser in 87% of the respondents with Internet Explorer coming in at 4%. "Netscape's dominant market position is a reflection of their success at being the first widely available and promoted Web browser," said Stephen Auditore, president of Zona Research. "We see Netscape remaining strong, but expect Microsoft to gain ground as Windows 95 with Internet Explorer starts
shipping," he added. For more info see: http://www.zonaresearch.com/.
--
OTHER SEARCH ENGINE?is time it's HotWired's HotBot http://www.hotbot.com, which is currently in Beta. It's powered by Inktomi Corporation, a company founded by UC Berkley "scientists and academics" who plan to "introduce supercomputing power to commercial Internet applications." Inktomi is at http://www.inktomi.com. So far, HotBot is pretty good...
Stock Watch for the Week Ending May 24, 1996
============================================
This % 52 52
Week's Change Week Week
Company Name Ticker Close 1 Week High Low
============ ===== ====== ===== ====== ====
@Net Index IIX $273.13 -0.7% $263.12 $185.76
America Online AMER $51.25 -4.4% $71.00 $16.75
Apple Computer AAPL $26.75 -3.2% $50.94 $23.00
AT&T T $62.88 2.7% $68.88 $49.13
BBN Corporation BBN $27.88 -2.2% $48.75 $16.50
CMG Information Svcs. CMGI $26.25 -13.2% $50.25 $5.63
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.
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