Date: Sat, 4 Mar 1995 23:36:02 -0500 From: "Robert D. Seidman" Subject: In, Around and Online, Issue 2.9-- W/E 3/3/95 To: Multiple recipients of list ONLINE-L In, Around and Online- Issue 2.9-- Week Ending 3/3/95 ======================================================= Copyright (C) 1995 Robert Seidman (robert@clark.net). All rights reserved. May be reproduced in any medium for non-commercial purposes. In This Issue... ================ - From The Editor - Microsoft's Online Plans (or Microsoft gets bashed at Online Show) - Editorial on Microsoft Style Pricing - America Online and Bertelsmann Cut International Deal - CompuServe Reports Earnings - Some Quick Thoughts on Prodigy's P2 Interface - Delphi Reorganizes - Finishing Touches - Stock Watch - How to Get This Newsletter >From The Editor =============== Please say a very special get well wish for my best Cyber pal, Rich, who suffered a stroke on Friday morning. He's a stubborn old coot (and we're talking OLD), but he's really into computers and online/interactive services. If he were here he would point out that while he is older than dirt, he does have more hair than me. My life has been enriched by harassing him electronically on an almost daily basis. Get well soon you scrawny kneed old man! Microsoft's Online Plans (or Microsoft gets bashed at Online Show) ================================================================== I'd love to tell you that Microsoft Network GM Russell Siegelman laid out detailed plans for the Microsoft Network, but he didn't. Instead, he made a good case for a new pricing model and spoke extensively of the "death spiral" of current online service pricing. The "death spiral" occurs as a result of continually lowering online prices while lining up more and more content that is made available at that same low price. In this model, the consumer benefits, but the content provider doesn't necessarily make much money. Siegelman proposed a pricing model that combines the model already in use by CompuServe (basic and extended services) and the plan in place for Interchange, where the customer subscribes to services separately and the content provider sets the pricing for each service. This isn't anything new and no specifics were given as to what the basic service pricing would be. Siegelman did say that the service will launch when Microsoft's Windows '95 launches in the third quarter. In a separate announcement, Microsoft stated that they are still on track for August. Additionally, Siegelman advised that at launch, the service would be available internationally in 43 countries, in 26 languages and would accept 19 different currencies. Siegelman went on to add that at launch, the only Internet access available would be e-mail and newsgroups, but that the rest would come (including the WWW) in the fourth quarter. Siegelman, discussing the issue of revenue splits between Microsoft and content providers did say that the content providers would get the lion's share of the revenue generated. While he didn't give specifics, he said that the content providers would receive "over 50%" of the revenue. This is very different from the model that exists today where the online services get most of the revenue. Siegelman also pointed out that Microsoft would become the first in the industry to offer a software developer's tool kit (SDK) to work with the Microsoft Network and that Microsoft Network would host developers' conferences. The real fun began following Siegelman's keynote speech when Don Tydeman, Publisher of CMP's NetGuide Magazine, hosted a panel of Online executives including Mr. Siegelman; Ted Leonsis, President of the America Online Service company; Barry Berkov, Executive Vice President, CompuServe; and Scott Kurnit, Executive Vice President, Prodigy Services Co. The three grizzled online veterans were a little smug about being seated with the new kid on the block and at times it seemed like it was a group mugging of Microsoft. The execs from the big three didn't hold anything back and went back and forth slinging arrows at Siegelman. Siegelman got beat up pretty badly and genuinely seemed surprised at times at the abuse he was taking. However badly it might have appeared for Mr. Siegelman-- the rest of the panel, the audience, Siegelman and the rest of the world knew one thing: Microsoft will be a player in this industry. There are lots of reasons for this, but simply saying "because they are Microsoft" really does sum it up quite well. AOL's Leonsis started the barbs by directing a comment to the conference host (Jupiter Communications) asking them to consider having a rule that they would only invite keynote speakers "who have at least one paying customer." Berkov said that it was flattering to hear such terms as "forums" and "basic and extended pricing" that CompuServe has used for years. Then he indicated it would have been nice if Siegelman had brought something new to the table. Scott Kurnit of Prodigy offered that allowing Microsoft to do all customer billing (in a scenario where they would handle billing for subscriptions to a content providers' service) was "somewhere between drug-dealing and suicide." One questioner in the audience asked about anti-competitive tactics Microsoft was using where they would not allow content providers that competed with Microsoft to put content on the Microsoft Network. Siegelman categorically denied this saying that Microsoft was open to everyone. "In no way, shape or form are we going to block content providers from getting on the Microsoft Network because they compete with some other part of Microsoft," Siegelman said. A couple of more audience questions were taken and then came the most dramatic moment of the conference. Elliot Dahn, Vice President of Compton's New Media stood up and said, "I was told they viewed my encyclopedia as competitive to Encarta and they weren't really interested in putting it on the network." Siegelman again denied this, saying that Microsoft Network was open to everyone and would be willing to discuss a proposal. Dahn shot back with, "I haven't been able to reach you." Siegelman replied with: "That's right, I'm very busy." At this point Leonsis quipped, "I had breakfast with Elliot," earning a big round of laughs from the crowd! Siegelman indicated that while they were open to all content providers, there were constraints of time and volume. "Saying we welcome content providers doesn't mean we can handle everyone," Siegelman said. Prodigy's Kurnit addressed the issue of "a level playing field" asking, "Is the level playing field made by crushing the other buildings down?" This led, not surprisingly, to a bit of "will you package our software with your operating system" barbs. Kurnit expressed displeasure at Microsoft for bundling the Microsoft Network within Windows '95. Because of this, Prodigy is losing an exclusive bundling agreement that it has with Packard Bell. Kurnit said that Packard Bell hasn't been able to remove the Microsoft Network portion from the Windows 95 program, thereby endangering the exclusive arrangement. "I may have lost a valued customer," said a somewhat agitated Kurnit. At one point someone remarked on Ted Leonsis' now famous quote that "online would be Microsoft's Vietnam." "I wear my flak jacket everywhere I go," Siegelman shot back. I don't see the encyclopedia issue as a case of Microsoft saying: "We will only present our own information." Some may worry that Microsoft will set about turning itself into a content publisher and only promote their own stuff heavily. If that happened, it would be a genuine concern. If they venture into creating their own content, it is the consumers who will decide if Microsoft's content is better than the others. If I am AP and Reuters, I wouldn't worry about a fledgling effort by Microsoft to staff their own news room. (On a panel about online newspapers, panel moderator Steve Outing said that there were reports that Microsoft has hired 80 people to start its own news room). On the other hand, if I am CMP or Ziff-Davis, I would be a little worried at the thought Microsoft might start their own computer publications about the Windows operating system. I don't get the impression that Microsoft has an interest in getting into the Print and Publishing biz. As a company, they will continue to line up as much specialized content as they can (for example, Encarta or the rights to the art collection Mr. Gates recently purchased) and then leverage this specialized content with their online service. It seems to make good business sense. I would have handled the encyclopedia issue differently. That's easy for me to say since I wasn't up there getting pummeled!. If I were Siegelman, I simply would've said, "There is only one encyclopedia on America Online (Compton's). There is only one encyclopedia on CompuServe (Grolier's Academic American Encyclopedia). We think Encarta ( K-III's Funk & Wagnalls) is an outstanding source and we don't see a need for providing additional encyclopedias." Editorial on Microsoft Style Pricing ==================================== As an editorial aside, I don't believe that the subscription based pricing employed by Interchange, used on Prodigy to some degree with their newspaper services (TIMESLINK and Newsday Interactive, for example) and now suggested by Microsoft, will work. The reason is that the current state of the art does not provide the user with an experience that would make it worthwhile to pay $5/mo. to receive the Washington Post electronically vs. $9/mo. to receive the paper version. Sadly, this isn't a function of software design but more a function of hardware and the user experience. Electronic news isn't portable enough. Even if someone designed a 2 page tablet based portable computer, the experience of curling up on the couch with the Sunday paper is not replicated. It is true that these services provide some nice value added services, like searchable archives. Still, there is no historical data to suggest that these services are compelling enough to attract a large user base to stand alone services priced at $5/mo. and up. The pricing at AOL and Prodigy may not be great for the content providers, but it is better for the consumer. Even better will be the day when you can get all the services offered on America Online and Prodigy for $10-$30/mo. flat fee (a la the cable TV model). This could work, but advertisers have to figure out how to advertise in a way that is no more annoying than print and broadcast advertising. Not only that, it must be as effective (if not more so) than current print and broadcast advertising. What about people that would buy an individual story rather than an entire subscription, on an a la carte basis? That's an interesting proposition, but is this a service with wide consumer appeal? At $1 each story, forget about any mass market appeal. What if the stories were only $.10 each? Even in a "pie in the sky" vision where 50 million consumers were buying 100 stories per year for $10, you're only looking at $500 million in revenue. If the content providers get the bulk of that revenue, it is reduced to at least $250 million per year. Cut that among all the various content providers and it turns into even less. $25 million/year may sound like a lot of money to you and me, but would the New York Times consider that a revenue Bonanza? I doubt it. Considering today's technology, an effective marketing strategy might be to offer the electronic versions of publications at very low prices. Or offer both print and electronic versions for only a little more than a regular print subscription. I wouldn't pay $9.00 a month for the paper version of the Washington Post AND $5.00 a month for the electronic version, but I'd be willing to spend $10/mo. for both. But if they got 1 million customers, would the Post would be happy with the $12 million/year in revenue? On the other hand, if they can find a way to generate $100 million/year in advertising revenues for those same users... I doubt if Microsoft really cares if anybody uses the extended services very much as long as those services lure users into signing up for the basic service. If MS charges $5/mo. for unlimited basic services and they get 50 million users in five years, all of the sudden they're looking at most of $3 billion in annual revenue. America Online and Bertelsmann in Joint Venture =============================================== In an increasingly heated battle among online service providers to gain a foothold in the international market, America Online this week struck a deal with German media conglomerate, Bertelsmann AG, to launch interactive online services in Western and Eastern Europe. The first services are expected to launch later this year in Germany, France and the United Kingdom. In a previous edition of this newsletter Steve Case remarked that AOL was looking for a partnership in Europe rather than simply a licensing/royalty agreement, such as the one Interchange struck with Europe Online. Looks like Mr. Case got his wish in a big way. The agreement with Bertelsmann is a 50-50 partnership. Additionally, Bertelsmann will contribute $100 million to fund the launch of the service. This announcement sent Wall Street on a wild ride, pushing America Online stock as high as $94.75 (it had closed the previous week at $70). On Friday, the stock settled down a bit, closing at $85.25 for the week. As a part of this new alliance, Bertelsmann acquired a minority (5%) interest in America Online for $50 million and will receive one seat on the board of America Online. Bertelsmann has an option to acquire up to 10% of the company. This option will last for one year. AOL will issue new shares to Bertelsmann to enable it to take the %5 stake. The venture expects to break even by 1999. Bertelsmann and America Online will offer up to a combined 10 percent stake of their joint venture to other European partners, according to a story by Reuters. "We want to have at least one partner in each country and give them a little stake with the total of around 10 percent for all our European partners," said Thomas Middelhoff, a member of Bertelsmann's board. Middelhoff stressed the importance of quickly providing comprehensive services throughout Europe in order to prevent European market domination by Microsoft. "We can't leave the future to Microsoft alone. Bertelsmann and America Online will compete with Microsoft worldwide," Middelhoff said. While Microsoft is perceived as the guy to beat, the venture faces competition from Europe Online who is licensing the Interchange platform, and CompuServe who already has a foothold in Europe. Michael Kolowich, head of AT&T's Interchange Online Network, suggested the alliance between Bertelsmann and America Online is "an effort to play catch-up" and said the new partnership will face stiff competition, according to a story in the Wall Street Journal. "The America Online platform is essentially an icon-assisted navigation of plain text databases," Mr. Kolowich said. "The Europe Online platform is designed from the ground up to be an interactive multimedia platform, which means that it incorporates text, graphics, sound and video." I was curious what America Online chief Steve Case thought of Mr. Kolowich's comments. "Interchange is a year behind schedule," quipped Case. "Only high-end Windows users with "loaded" PCs (at least 8 MB of memory and a high speed modems) have been invited to be beta testers. Nevertheless, the testers continue to complain about system slowness. This suggests to me that the Interchange platform may not be quite ready for prime time," Case said. Mr. Case added that AOL already has over 2 million customers (the implication being they have proven success, while Interchange doesn't have a single paying customer). He further added that AOL is rapidly growing its membership base, and that they're constantly adding new features. Case summarized his thoughts by saying, "So I doubt Mike Kolowich would have claimed that AOL is playing catch-up to Interchange. He must have been misquoted." This joint venture appears by all counts to be a great deal for America Online as they will be able to leverage the massive power Bertelsmann has in the film, television and publishing industries. Among its better known North American properties are: RCA Records, Arista Records, the Bantam Doubleday Dell Publishing Group, the BMG Music Clubs, the Doubleday Book & Music Clubs, and Family Circle and McCall's Magazines. Potentially, not only will this deal enable America Online to gain a foothold internationally, but it will allow them to strengthen their marketing grip in the U.S. For example, America Online software could potentially be packaged on RCA CD's in the "blank space" existing on some audio CD's. BMG could send America Online packages to its members, packaging deals with Family Circle, etc. CompuServe Reports Earnings =========================== CompuServe reported earnings of $41.2 million for the quarter ending 1/31/95, a 40.6 percent increase over the $28.3 million reported for the quarter one year ago. Revenues were up 35.5 percent to $154.2 million. I couldn't find out how much of this was related to the online service vs. the network service. Still, 41.2 million in earnings for the QUARTER did earn Barry Berkov the right to feel good during the Jupiter conference panel, where he said that CompuServe had bigger earnings this QUARTER than the combined total historical earnings of the rest of the companies represented in the panel. Of course, these earnings are based on the old CompuServe hourly rates. CompuServe dropped the hourly rate for 9.6 and 14.4 access from $9.60/hr. to $4.80/hr. in February. It should be interesting to see what happens next quarter. Some Quick Thoughts on Prodigy's P2 Interface ============================================= I had the chance to see a pretty extensive demonstration of Prodigy's forthcoming P2 interface. I don't want to give a lot of space to something that isn't even in wide Beta yet (especially one I haven't used myself). Still, P2 looks like it took lots of the best of America Online and Interchange features and rolled them into one package. P2 demos extremely well. If it ends up working anywhere near as well as it demos and gets out of the block on schedule (scheduled to be released by 6/30/95), P2 could help Prodigy win back some of the customers it lost in the great debacle of 1993. For those of you who weren't around then, Prodigy changed its pricing structure and significantly raised prices for most members. In a feat of most excellent timing, AOL lowered their rates at the same time Prodigy made their announcement. Result- lots of members flocked to America Online. Since then, Prodigy has added many great services (TimesLink, Newsweek, chat, etc.), but users are turned off by a clunky interface that doesn't allow them to multitask within the system. As great as a feat as it has been for Prodigy to be the first online service with WWW access, users can't go from the WWW browser to e-mail without first exiting the WWW browser. Similarly, user's reading news can't go to chat without losing access to the news screen. Users in chat can't do e-mail without leaving chat, etc. The P2 interface solves this problem very nicely, offering a truer multitasking capabilities. Will P2 save Prodigy? It can't hurt. Delphi Internet Reorganizes =========================== You could see it coming a mile away. It was simple, if Delphi didn't turn the corner soon, major changes were going to take place. They haven't turned the corner yet, and a major reorganization was announced this week. The first personnel changes announced since Alan Baratz took over as chief of Delphi Internet last July. From the press release: "Under the reorganization, Delphi Internet named Mark Benerofe, executive vice president and general manager, consumer services; Jaan Torv, executive vice president and managing director, Delphi International; Bharath Kadaba, executive vice president, Worldwide Operations; Susan D. Goodman, executive vice president, Worldwide Marketing; Ben Feder, executive vice president and general manager, business services; and Jerry Lyons, chief financial officer." Except for Susan Goodman and Ben Feder, all are new to Delphi Internet. Mark Benerofe was previously Director of Interactive Media at Microsoft, and according to the press release a key player in the development of the Microsoft Network. Bharath Kadaba was formerly director of internetworking and multimedia services for Advantis, IBM's commercial computer network service. Many in the industry have written Delphi off, giving them no chance for success in the online services industry. I wouldn't be so quick to dismiss anything Rupert Murdoch is behind. Murdoch is chief executive for media conglomerate, News Corporation, which owns Delphi Internet. While Delphi is the first service to have offered full Internet access, it has all been text based. According to a story by Dow Jones News Retrieval Service, end users consider text based services "pedestrian" compared to graphical front ends such as America Online. Rest assured somewhere behind the scenes Murdoch has insisted on a flashier front end so he can show off the wares of News Corp. (TV GUIDE, Fox Broadcasting Co., Twentieth Century Fox, HarperCollins Publishers, Times Newspapers Ltd., British Sky Broadcasting, STAR Television among them) and leverage these services via Delphi. Remember, we're talking about a guy who was willing to spend (and lose!) a heck of a lot of money to win the rights to broadcast NFL football on Fox. Just so he could put Fox on the map. While this industry is currently witnessing astonishing growth, it is still somewhat in its infancy. To steal a line from Yogi Berra, it ain't over till it's over. Finishing Touches ================= America Online chief Steve Case, in his March letter to the members, expressed his disappointment in delays getting the WWW browser up on AOL and stated that it would likely be delayed until May. We're disappointed too, Steve, but I personally appreciate your honesty and am glad to see that you've gone back to the "Warm Regards" closing. It's your trademark.....Prodigy wised up and dumped their confusing cost/byte strategy for uploading and downloading e-mail and bulletin board messages. Way to go!.....CompuServe announced a new program that allows multimedia publishers integrated access to CompuServe via CD-ROMs.....IBM reduced prices for its dial-up access service to the Internet in the United States, Canada and Australia. In the United States, registration charges dropped to $27.50 from $35 previously. Hourly access charges are now $3 instead of $4 on the "Getting Started" plan and down to $2 from $3 on its "Comprehensive Plan." In Canada, the registration price dropped from $40 to $25. Access charges on the "comprehensive plan" dropped from $3 to $1.50 per hour. Price changes are retroactive to 2/1/95.....AOL's recently acquired ANS CO+RE Systems and Sprint agreed to interconnect their Internet networks for direct exchange of traffic. The agreement is effective immediately.....At Jupiter Communications Online Service Conference during a presentation on "Consumerizing The Internet," Jim Kinsella pitched Time Inc.'s PATHFINDER site as a full blown online service that is interested in lining up content providers. With the weight the Time name carries, it is already one of the most popular sites on the net and probably the most popular site that doesn't offer pictures of naked individuals. It is an interesting model and Time can certainly make an excellent case for wooing content providers.....A beta version of Netscape 1.1 is now available at: ftp://ftp.mcom.com/netscape1.1b1/ .....America Online says they are adding about 8,000 customers per day.....A special thanks to Jupiter Communications, especially President Gene DeRose (for putting on such a great conference) and Editorial Director, Adam Schoenfeld (for giving me a press pass)! Also, thanks to CMP's NetGuide and Interactive Age magazines for sponsoring the conference. The panels hosted by NetGuide Publisher, Don Tydeman and Interactive Age Publisher, Charles Martin, were excellent! Thanks to all the other speakers, panel moderators and guests for making this the most enjoyable conference I've attended to date. More information on Jupiter Comm. is available via the WWW at: http://www.jup.com/jupiter/ or via the telephone at: 212-941-9252. Videotapes of the conference will be available- contact Jupiter Comm. for more information. For more info on CMP's NetGuide and Interactive Age check out CMP's "TechWeb" at: http://www.wais.com:80/techweb/docs/list-o-pubs.html . Stock Watch =========== Last This 52 52 Week's Week's Week Week Company Ticker Close Close High Low ------- ------ ------ ------ ------- ------- America Online AMER $70.00 $85.25 $90.88 $25.13 Apple AAPL $39.00 $40.25 $48.06 $24.63 Netcom NETC $28.38 $26.88 $31.75 $16.75 AT&T T $51.75 $51.25 $57.13 $47.25 General Elec. GE $54.75 $53.00 $56.00 $45.00 H&R Block HRB $36.25 $39.63 $48.75 $33.00 IBM IBM $74.88 $79.88 $79.88 $51.38 MCI MCIC $19.88 $19.75 $26.00 $17.25 Microsoft MSFT $61.25 $63.63 $65.25 $39.88 News Corp NWS $18.13 $18.00 $26.94 $14.38 Sears S $48.88 $50.38 $52.38 $42.13 How to Get This Newsletter By E-Mail ==================================== Send an e-mail to LISTSERV@CLARK.NET and in the BODY of the message type: SUBSCRIBE ONLINE-L YOUR FULL NAME Example: SUBSCRIBE ONLINE-L Robert Seidman. See you next week.