By the end of the year, some 2.3 million American families are expected to bring home a new personal computer. This will make the 1994 holiday season the most joyous ever for PC makers. It should also warm the hearts of executives at CompuServe, Prodigy, and America Online, because recorded on the hard drives of most of those PCs will be software for logging into on-line services. It's a new twist on the gift that keeps on giving: Thousands of new subscribers will pay month after month to browse news, engage in on-line chats, shop, and swap E-mail.
But a happy holiday may be followed by a sobering new year. While the big three of consumer on-line services have done the spadework to cultivate the market and are beginning to enjoy the rewards, none has a truly dominant position. CompuServe, the venerable pioneer, has nearly 2.4 million subscribers worldwide, but most of them are professional or business accounts. Prodigy, a joint venture of IBM and Sears, Roebuck & Co., has 2 million subscribers but is still running up losses. And while AOL has doubled to over 1 million subscribers this year, it's still a distant third.
"TOO EXPENSIVE." Now, all three are scrambling--cutting prices, adding features, dressing up their appearance, and generally getting ready for a rougher road ahead. Why? Only 20% of the U.S. households that have PCs use on-line services, estimates Odyssey, a San Francisco market researcher. "The playing field is open to competition," says Odyssey President Nick Donatiello.
And the competition is coming, big time. Next year, PC industry superpower Microsoft Corp. is expected to launch its first on-line service, which is being developed under the code name Marvel. The company isn't saying much, but one software executive who has seen a prototype says: "Marvel is going to be very competitive." Because it's written for the powerful new Microsoft Windows 95 operating system, which should be out next year, Marvel will let consumers download a file while continuing to browse, for example. And on-line rivals fear Microsoft will undercut them on price. "Generically speaking, on-line services are probably too expensive today," says Nathan Myhrvold, senior vice-president of Microsoft's Advanced Technology Group. "Assuming we do something, our prices will reflect that view."
Microsoft also has a potentially overwhelming advantage: It can build Marvel into Windows 95. In fact, software developers say some test copies already have a Marvel button. Some 6 million PC owners are expected to adopt Windows 95 in the first year, and rivals fear they'll automatically use Marvel. "Distribution channels and the advantages [Microsoft] has there are something to be concerned about," says Barry Berkov, vice-president of CompuServe Information Service, based in Columbus, Ohio. "We'll be out there with others to push for a level playing field," he says.
Microsoft isn't the only new player. Ziff-Davis Publishing Co. is getting ready to launch Interchange, an on-line service under development for more than two years. Ziff, which publishes a string of computer publications, including PC Magazine, is focusing on delivering magazines on line, a hot growth area for the three leaders lately. Its initial partners include Digital Ink, a subsidiary of Washington Post Co., and Cowles Media Co.
THE NET THREAT. Unlike the other services, says Michael Kollowich, president of Ziff-Davis Interactive, Interchange from the outset will let publishers display all the text and graphics from their printed products. Word of mouth for Interchange has been so strong that the company already has requests from 77,000 people to sign up for it.
Interchange could become a major player quickly, depending on what happens to the parent company. The Ziff family has put the entire company up for sale, but the nascent on-line service could be sold separately. "Interchange itself is a very sought-after business," says Kollowich. One possible bidder is billionaire Paul Allen, a co-founder of Microsoft. Previously, Allen had sought a major stake in AOL but was stuck at 24.9% by the company's poison-pill antitakeover provision. He has since sold all his AOL holdings, and his multimedia publishing startup, Starwave Corp., is already working with Interchange to develop a sports-oriented section of the service. Kollowich's only comment: "Interchange will be in new hands shortly."
Another force to contend with could be Apple Computer Inc. The PC maker launched its eWorld service last June. But despite rave reviews for its entertaining and accessible cityscape metaphor for navigating the network, the system has not generated much traffic and only has about 50,000 subscribers. One big hang-up is that it only works with Apple Macintosh computers. But by yearend, every new Mac will have eWorld software built in, and next year, Apple plans a version for IBM-compatible PCs.
Of course, the biggest threat to the on-line empires is the Internet, a quasipublic network of computer networks reaching 20 million people worldwide. Hundreds of thousands of people are joining every month, and scores of startups are creating software and services to make the Net almost as easy to use as its commercial cousins.
Feeling the heat, the commercial services are scurrying to expand their connections to the Internet beyond basic E-mail. They're adding access to the Internet's bulletin boards, on-line libraries, and World Wide Web--a subnetwork of computers that can dole out information in slick, graphical "pages."
So the big three keep retooling. Last month, Prodigy announced a new basic service: $9.95 a month for five hours of use. That's the same offer AOL makes. For the mld $14.95 price, subscribers get unlimited use of any service except the newly added chat lines, the Eaasy Sabre airline-reservation system, and daytime access to Dow Jones News Service. This month, Prodigy plans to offer the service to Canadians as well as a World Wide Web site for Internet users. By mid-1995, the company says it will deliver software to take full advantage of Windows graphics.
Meanwhile, AOL has announced its own price cut. As of Jan. 1, the company will slash hourly fees--what a customer pays after exhausting the five-hour monthly limit--by 16%, to $2.95 per hour. And to attract owners of new multimedia PCs, AOL on Oct. 24 began shipping new software that uses photos and sounds to guide cybernauts around the system. The company, based in Vienna, Va., is also adding more content and publications such as BUSINESS WEEK.
Even CompuServe, the grandfather of all on-line services, is spiffing up its act. The 15-year-old service has a new software release with "hyperlinks" that let subscribers click on a highlighted word to jump to another part of the service. In addition, it is adding magazines, including Forbes and a bunch of Time Inc. publications. It also is producing a multimedia CD-ROM to teach consumers the basics of CompuServe and sign them up for the service. The disk will come bundled with some multimedia computers and upgrade kits.
All these efforts should make cyberspace a friendlier place for consumers. But with the new rivals looming, it may never again feel homey for the big three.
The On-line Scoreboard COMPANY STRATEGY/FEATURES AMERICA Has scheduled a 16% price cut for Jan. 1 to make the service more ONLINE competitive. Strategic alliances with media companies have helped to double its membership base. APPLE Its radically different interface uses buildings to create the atmos- eWORLD phere of a virtual town. So far, there's not much content be hind the pretty face, and it's limited to the smaller Macintosh audience. COMPUSERVE Will try to leverage its huge database of information and vast international network to woo new subscribers. ZIFF-DAVIS Ziff is a household name among PC owners who read its maga- zines. INTERCHANGE In development for the past two years, Interchange is expected to go live by yearend. MICROSOFT The much-rumored service that will supposedly come as part of the MARVEL new Windows 95 operating system next year. Analysts speculate the service will start small, offering mostly product support. PRODIGY Has cut prices and added features such as real-time "chat" and magazines such as Newsweek. A new interface closer to the "look and feel" of the Windows operating system is due out by next year. DATA: COMPANY REPORTS, BUSINESS WEEK