Will the Savvy Amateur Inherit On-Line Gold?

Misdial a phone number these days and there is a good chance you won’t just hear a voice mail message or the telltale beep . . . beep . . . beep of a fax machine, but the buzz-saw whine of a computer bulletin board or on-line service.

The number of amateur bulletin boards--computerdom’s cousin to ham radio--is spiraling into the hundreds of thousands. Hundreds of organizations are hooking up to the Internet every month. Apple Computer, AT&T; and Microsoft all promise to move into on-line consumer services in a big way. Rupert Murdoch and General Electric are already there with Delphi and GEnie.

Practically every other week, “content providers” (multimedia bafflegab for organizations that own their own data) leap into the on-line El Dorado hoping to mine digital dollars. Newspapers like the Washington Post and Los Angeles Times have cut on-line distribution deals with Ziff Interactive and Prodigy, respectively, while NBC announced it will join publications like Time magazine and the New Republic in cyberspace via America Online.

With on-line industry revenues of more than $500 million last year accompanying a 25% growth in paying subscribers, the computer cognoscenti are already predicting a “shakeout in cyberspace.” There is a growing glut of on-line services, they contend, and the market can’t support them all.

A shakeout may be coming, but not because of any on-line gluts. That’s a bit like saying there’s a glut of telephone numbers and the market can’t support them all. While it’s undeniably true that the rush to on-line has a lemming-like quality mixed with equal parts of greed and fear, it’s also true that the economics of on-line services are being radically and fearsomely transformed.

This shakeout will instead shatter the very notion of an interactive “information utility” that got Prodigy, CompuServe and America Online launched in the first place. Their business model is being ruthlessly undermined by the rise of cheap memory, cheap software and cheap telecommunications. They’re begging to be bypassed.

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Once upon a time, Information Age industrialists thought you had to invest millions in the hardware, software and telecommunications technologies necessary to launch a national on-line service. IBM and Sears have reportedly poured more than $1 billion into their Prodigy over the last decade. CompuServe and America Online have spent tens of millions. On-line services were seen as capital-intensive businesses that required tons of money for software and systems development.

In reality, it turns out that on-line services don’t have to be capital-intensive at all. If you’ve got half a mind to launch an on-line service, that’s all you need. An agile entrepreneur or intelligent content provider can start up and maintain a dial-up on-line service for a few thousand--not a few million--dollars.

If you are on the Internet, the barrier of entry to offering on-line information and interaction globally is practically zero. The issue is whether you offer the sort of information and interactions people want. If you do, the real challenge then is creating a billing system to collect your money. Convincing a few advertisers to sponsor your wares might also be nice.

Of course, you need software that is compatible and user-friendly for the people who log on to your service, but increasingly, that kind of network interface software is becoming as accessible and affordable as spreadsheets and word processors. Prediction: Microsoft will make more money selling interface software to on-line services than running one.

The folks at America Online, Prodigy and CompuServe should be terrified. Right now, their content providers pay big bucks to be on their network.

In market terms, however, a Time magazine or NBC needs them like the proverbial fish needs a bicycle. There is absolutely no inherent economic or technological reason why Time needs to go electronic via an America Online versus having its own on-line service for subscribers. In 1994, the cost to Time is marginal. Just wait. Instead of “information providers” paying on-line services to carry their content and support their chat lines, the on-line services will be bidding to keep the content on the network, just as networks pay affiliates to carry their television programming.

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Sure, an America Online has an “installed base” of personal computer subscribers. But there is nothing that prevents a Time or a Newsweek from giving their readers the option to call in directly. In other words, these media providers will bypass the on-line resellers of their information.

Don’t be surprised when magazines and newspapers begin to disintermediate existing on-line services and offer toll-free (advertiser-sponsored) access to their own on-line services. Of course, you’d still be able to do all the electronic mail and bulletin board communications functions that the on-line services now provide.

Similarly, expect financial service firms like American Express, Fidelity and Merrill Lynch to offer their own “free” on-line advisory services off toll-free numbers. Again, given that the bulk of their data is already digitized, launching these services will represent--at most--a marginal cost.

The catch? You might have to make four or five toll-free calls on your personal computer to network to your favorite media instead of just one toll call to the service. Sending e-mail might be more difficult--although you can be sure these new services will negotiate Internet access to other on-line services.

This trend toward on-line disintermediation doesn’t mean there will be a cyberspace shakeout; quite the contrary, it implies that consumers will have a very crowded and competitive marketplace from which to choose.

The critical observation is that the larger on-line services like Prodigy and CompuServe can no longer rely on other people’s information to lure new subscribers. They’ll need to offer new kinds of interactive programming. So what will the Howard Stern and Rush Limbaugh of on-line services interact like?