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Prodigy Installs A New Program

Information Processing


Karen and Brad Perkins seem like ideal customers for an on-line information service. They're suburban knowledge workers: She's a patent lawyer; he heads a high-tech startup. Both have an insatiable appetite for all kinds of information, and they log on to check stock quotes, get science news, and consult an electronic encyclopedia when their six-year-old son blurts out a tough question.

But customers such as the Perkinses have been a vexing problem for Prodigy Services Co., which operates the nation's most popular on-line service. Why? Prodigy says the $12.95 that the Perkinses pay each month doesn't cover the costs of delivering service to them. So Prodigy counts on advertising revenues for goods and services sold on Prodigy--as well as commissions from those transactions--to make up the shortfall. But even though Prodigy vendors sell everything from airline tickets to designer jeans, the Perkinses haven't bought a thing in the nine months since signing up. Says Karen: "I'm sure I'm on their bad-consumer list."

EXPANDED MENU. With too many "bad" consumers among its 1.75 million members, the White Plains (N.Y.) company is revamping its business model. Prodigy, a joint venture of IBM and Sears, Roebuck & Co., has nearly half of the $500 million annual market for consumer on-line information services, but it's still losing money--despite the estimated $1 billion investment its parents have made since 1984. By contrast, No. 2 CompuServe, a unit of H&R Block Inc., has about 1 million subscribers and has been profitable since 1981. To meet its own deadline of profitability by the "early 1990s," Prodigy must change its ways.

Thus, a new Prodigy is emerging. It should come into sharper focus on Sept. 10, when the company is set to unveil a slew of new features (table). Instead of simply charging one low price for the basic service and hoping to make up the difference with ads and commissions, Prodigy is adding extra-cost options, similar to a cable-TV company's premium channels. New premium services include action games for kids and the ability to download public-domain software. Also, for an extra fee, customers will soon have the option of using 9,600-baud modems to speed up Prodigy's on-screen graphics, which many consumers say change too slowly.

CARTOON CLOTHES. In addition to boosting revenue, the new premium services may help fend off growing competition. Rivals such as Sierra Network, which specializes in games, and America Online Inc., which caters to specific markets (page 100), are carving out profitable niches. They have gotten unintended help from Prodigy, which has spent about $50 million in advertising and promotions since 1990 to get ordinary consumers to log on.

Still, Prodigy hasn't turned enough people into electronic shoppers. One reason: Prodigy displays cartoon-like graphics, not photographic images of merchandise. That's not a problem if you're selling a mutual fund, but "people won't buy a designer dress this way," says Jerry Schillinger, business development manager for Spiegel Inc., one on-line merchant.

In time, new technology should "open up the market" for interactive home shopping, says David Waks, Prodigy's director of business development. Waks is testing new ways to enhance Prodigy with photos, video, and sound. One possibility, he says, is to transmit the service to television sets rather than to PCs, using interactive cable systems. Another idea is to mail members CD-ROM disks that can store handsome electronic catalogs. But neither technology will be in widespread use anytime soon, Waks notes.

In the meantime, Prodigy is eliminating many of its on-line merchandisers. Instead of having dozens of retailers doing a little business, says Geoffrey E. Moore, Prodigy's director of market programs, "it's better for us to have a smaller number of happy retailers." Spiegel says it's staying because it's content with the business it does selling sheets, towels, and such. Among the merchants that have already left are Contact Lens Supply, Sharon Luggage, and Buick, which had offered brochures. In general, says Moore, successful Prodigy merchants sell known entities such as magazine subscriptions or compact disks.

Dropping marginal merchants is just one cost-cutting move. Another involves telecommunications, where Prodigy is the victim of its own success. As its marketing effort has lured more and more customers, the phone bill has skyrocketed. Customers, who only pay for a local phone call, sit around for hours writing electronic messages to each other. But Prodigy pays the long-distance costs from local "nodes" to its Yorktown (N.Y.) data center. Says Moore: "We didn't anticipate such an explosion in communications."

MESSAGE MANIA. But an explosion they got. Each day, Prodigy's members now send out about 65,000 private electronic-mail notes and post an average of 80,000 messages to bulletin boards. Members have unlimited access to bulletin boards dealing with every topic from cooking tips to the TV show Northern Exposure. One current hot subject is the Presidential race. Both the Bush and Clinton campaigns are using Prodigy to field questions and gripes from voters. More than 10,000 members wrote notes within a few days after President Bush's statement on the economy was posted on Aug. 26.

To reduce its telecommunications costs, Prodigy will be encouraging subscribers to write and edit their messages and memos before logging on. Previously, you had to be on-line while you wrote. If enough members cooperate, Prodigy may be able to put off further expansion of its already massive, nationwide network. Big capital projects are getting harder to fund because IBM and Sears have been cutting their annual investment in Prodigy since 1990.

On the revenue side, there are positive signs. On-line enthusiasts, it seems, are willing to pay for additional premium services. The Perkins family, for instance, thinks nothing of running up monthly bills of $45 to $85 for information services. Most of that money, however, doesn't go to Prodigy, but to rival CompuServe, which the Perkinses also use. CompuServe has a $7.95 monthly fee but charges for lots of extras. Even though they use Prodigy more often, Karen and Brad turn to CompuServe to send electronic mail internationally and to download software.

Now, those premium features are available on Prodigy. That could make the Perkins family good Prodigy customers yet--and might even pave the way to profits.PRODIGY'S NEW LOOK AND FEATURES

FASTER GRAPHICS 9,600-baud modems speed things up--for an extra fee

OFF-LINE EDITING By letting users send prewritten electronic mail, Prodigy

should cut its telecommunications costs

BULLETIN BOARDS Subscribers will be offered more choices of topics

ASK THE CANDIDATES Bush and Clinton campaigns have agreed to field questions

EASIER INTERFACE New commands should make it easier to find features that

members commonly overlook

INVESTOR SERVICES New financial data bases and services expand ene of the most

popular parts of Prodigy


Evan I. Schwartz in New York

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