Price War Erupts Among On-Line Computer Services
Phone lines, computers and credit cards are the unlikely weapons, but what’s happening is a war nonetheless--a price war.
The combatants are America’s leading computer dial-up services, which increasingly serve as a combination shopping mall, soap box and mail service for growing legions of personal computer users.
In an aggressive response to last week’s price hike announcement by Prodigy Services Co., rival America Online came back Tuesday with what amounted to a price cut. Both moves come on the heels of last month’s price adjustments by industry leader CompuServe, which now offers an $8.95-per-month flat-rate basic service, with hourly charges applying only to extras.
The escalating battle is for subscribers. All three companies are leaders in the booming field of on-line services. Using a modem, which lets personal computers connect by phone, subscribers can dial into a service and get stock quotes and financial data, read a weather map, use an encyclopedia, play computer games or participate in discussions of virtually any subject. They can usually also send faxes and personal messages.
Driven by lower prices for modem-equipped personal computers, which are selling at a record clip, revenue for the fledgling on-line industry grew 27% last year, and the intensifying price competition is a signal of the explosive growth analysts are forecasting for the next few years.
There are already 66 million PCs in use nationwide, and 30% of them have modems. As more and more Americans discover the ease with which they can communicate via bulletin boards and electronic mail, industry executives say, their customer base will increase rapidly, with revenue expected to swell from $502 million last year to $1.6 billion in 1997.
What is not clear is which of the existing services will emerge as the dominant force in the market or whether any will drop out. Some analysts say the industry may be radically changed someday by new entries from Hollywood. If the entertainment industry recognizes the potential for growth in the market, its slicker sensibilities could shake up the entire industry.
“What’s missing now is the element of magic,” said Joshua M. Harris, president of Jupiter Communications, a consulting firm in New York. “If Disney puts up an on-line service, it would be fun and exciting and there would be some glitter. Right now, these guys are just gearheads.”
If so, they have plenty of company. There are nearly 4 million on-line subscribers in the country today and their ranks are growing.
Price is one reason the services are so widely attractive. America Online said Tuesday that it will now charge a flat rate of $9.95 a month for five hours on its service and $3.50 for each hour afterward. Previously, it charged $7.95 a month for two hours and $6 for each additional hour.
Prodigy changed its fees from a flat rate of $14.95 a month to a usage-based fee of $14.95 for two hours a month and $4.80 for each extra hour.
America Online and its ilk are widely viewed as a testing ground for the emerging technologies spawned by the convergence of the cable TV, telecommunications and computer industries. But the question that has plagued the developers of all this--whether consumers will care to use them--has proved a sticking point for the on-line industry as well.
Prodigy, for example, a joint venture of Sears, Roebuck & Co. and International Business Machines Corp., expected to have 10 million to 16 million users by the mid-1990s. Right now it has about 2 million users in about 900,000 households, a miscalculation that has led to massive losses and speculation that Prodigy won’t survive.
Prodigy’s recent decision to charge extra for four of its services, including bulletin boards and its airline reservation system, has not gone over well with subscribers. Some called for a boycott of the system’s bulletin board service. Others urged fellow users to drop their subscriptions.
One participant on the Arts Club bulletin board wrote: “Prodigy has betrayed us. And we’re not taking this lying down. We’ll do whatever we can to fight this STUPID price increase!!!”
Geoffrey Moore, director of market programs and communications for Prodigy, said the company, which grew 40% last year, maintains the crucial size advantage over America Online, which boasts only 219,000 subscribers.
“There may by only 100 Prodigy subscribers whose lives revolve around cross-stitching,” Moore said, “but it’s better than having only one-tenth of that. The proportional size of our membership makes a big difference on bulletin boards.”
Moore was keeping a close watch on America Online’s stock price yesterday--through Prodigy’s on-line service, of course--as it fell to $17.75 in NASDAQ trading and then rebounded to close at $22, down 62.5 cents for the day. The stock had been as high as $30 earlier this year.
But some analysts praised fast-growing America Online for its price cut.
“It’s a gutsy move,” said Steve Eskanazi, an analyst with Alex. Brown & Sons. He added that “it may hurt profitability in the short term, but long-term I think they’ll see a big increase in subscribers.”
America Online has been shaking up the industry for some time. It went public last year and recently licensed its much-praised interface to Apple Computer for an Apple on-line service.
It has done likewise for a forthcoming Tandy hand-held personal communicator.
The Well Connected:
On-line services for personal computer users are booming. Compuserve: 1,100,000
Prodigy: 900,000
Genie: 300,000
America On-Line: 219,000 Subscribers, year-end 1992
Source: Link Resources
