For America Online, Nothing Is As Nice As A NicheMark Lewyn
While Prodigy has spent an estimated $1 billion to create a mass market for on-line information services, tiny America Online Inc. has created a profitable business by mining niches. "The others are like Time magazine or USA Today," says President Stephen M. Case, America Online's co-founder. "We see ourselves as a series of specialized magazines catering to specific interests."
For instance, when the Vienna (Va.) company wanted to expand into Chicago last year, it hooked up with Tribune Co., owner of the Chicago Tribune. Using stories from the paper, America Online created a local news-and-information service customized for the Windy City. Now, thousands of Chicagoans log on to talk about local sports teams, politics, and other issues. Tribune Co. also bought 9.5% of America Online for $5 million.
That investment has already paid off. In March, America Online went public. Since then, its stock has shot up about 22%, to around 14. That's partly because of a rosy outlook: In the year ending next June 30, analysts expect earnings to jump 56%, to $3.4 million, on revenues of $36 million, a rise of 40%.
Unlike Prodigy, America Online became profitable just two years after its launch. Originally known as Quantum Computer Services, the company started with a service called Q-Link for users of Commodore computers.
METERED SERVICE. Case then gradually added services for owners of other computer brands, including Apple Macintoshes and IBM PC clones. With only $2 million in venture capital, he had to move more cautiously than deep-pocketed competitors such as Prodigy Services, CompuServe, or Genie, which is operated by a division of General Electric Co.
Last year, the company changed its name to America Online and began consolidating its separate services. Since then, aggressive marketing has helped double the number of subscribers, to 180,000. The service operates largely on a pay-as-you-go model: $7.95 a month for the first two hours and 10 a minute after that.
Deals are now key to America Online's growth. One of its best has been with SeniorNet, a group that encourages older consumers to use computers. SeniorNet promotes America Online to its 5,000 members, collecting a sales commission for each member who signs up. In return, America Online has added special services for older subscribers, including bulletin boards with news and information on special topics, such as health care and sex over 50.
With its niche strategy, America Online will probably never catch up in size with Prodigy or CompuServe. But its market-building approach has endless possibilities. It's already working with Tribune Co. to customize its service in parts of Florida where Tribune owns papers. Eventually, all those parts may add up to an impressive whole. Already, America Online's little niches deliver more profits than Prodigy's mass-market push.