Prodigy Is In That Awkward Stage

This should be the best of times for Prodigy Services Co. Suddenly, millions and millions of consumers are using their home PCs to vault into cyberspace--to browse for information, chat about their favorite topics, shop, trade stocks, take a dip in the vast reaches of the Internet. At last, a decade after Prodigy owners IBM and Sears, Roebuck & Co. made a daring bet on what had not yet been dubbed the Information Superhighway, Prodigy looks to be in the right place at the right time.

Maybe. But only if slick new graphics, a revised business and marketing plan, and a strategy to make Prodigy the most popular, most user-friendly gateway to the mysterious Internet succeed. Despite an early start in bringing a mass audience into the online world, Prodigy is rapidly losing ground. It stuck too long with a clunky, dated interface, and worse, its big plans to generate profits from online shopping and advertising never paid off.

Meanwhile, America Online has leapfrogged Prodigy. AOL--which carries an electronic version of BUSINESS WEEK--is in a virtual dead heat with No.1 CompuServe Inc. Both reach more than 1.6 million U.S. households, according to New York-based market researcher Jupiter Communications Corp. But Prodigy has remained relatively flat this year, at 1.35 million paying accounts. Despite cutting 550 jobs through attrition and two rounds of layoffs, the White Plains (N.Y.) company is still not profitable. And the outlook could dim later this year with the arrival of formidable new competition: Microsoft Network and AT&T's Interchange. "It's getting close to sink or swim for Prodigy," says Michael Rinzel, a Jupiter analyst.

But Prodigy's backers are far from giving up. The partners have "been very consistent and supportive," says Prodigy President Ross S. Glatzer, dismissing recent rumors that IBM wants to buy out Sears. IBM won't comment, and both companies decline to discuss their plans for the venture. However, Prodigy execs say the current corporate structure will remain. Furthermore, Prodigy officials promise profits in 1995--on revenues of approximately $200 million.

BILLION-DOLLAR BABY. It's not hard to see why Prodigy lost its way. IBM has been focusing on corporate customers, while Sears has sold or spun off most of its nonretail businesses. Analysts estimate that the pair has poured more than $1.2 billion in--with nothing to show. "In the last several years, it probably has not fit within the IBM strategy," admits IBM Senior Vice-President G. Richard Thoman.

Glatzer, formerly a marketing manager for Sears, may just have the plan to keep Prodigy in the race. Step One: Bring the Prodigy user interface into the '90s with a good-looking, easy-to-navigate design. Step Two: Instead of supporting costly and time-consuming efforts to develop its own services, Prodigy is aggressively wooing outside content providers. Step Three: Scrap the proprietary Prodigy technology, which made it slow and cumbersome to create content for the network, and switch to industry-standard software, such as the hypertext markup language (HTML) used on the Internet. That will take Prodigy out of the software development business and make it easier to add services.

The new Prodigy interface, internally code-named P2, is expected this spring. More than just a pretty face, it is a complete reworking of the Prodigy software. It will feature true compatibility to Microsoft Windows and the Apple Macintosh, giving the service the same "look and feel" of other Windows and Macintosh applications. What's more important, however, is that now content providers--such as Newsweek--can put up their services using common industry software rather than relying on Prodigy technology. "Now, I can go out and make services the way I want," says Joshua Harris, president of Jupiter Interactive, which is developing Prodigy forums and "chat" areas that appeal to the 20- to 30-something crowd.

EMPIRE BUILDER. Prodigy's boldest move, however, is its strategy to co-opt the Internet movement. "Our actual operating philosophy is to be totally intermingled with the Internet," says Prodigy Vice-President Scott Kurnit. This month, Prodigy became the first commercial service to offer a so-called Web browser that lets subscribers tap into the World Wide Web, the Internet's fastest-growing segment. Some 110,000 folks have used this feature, making Prodigy the most popular way to reach the Web.

What's more, by moving over to a completely "open" system, Kurnit says, Prodigy can become a service bureau, helping others to develop so-called Web pages and services--on the Internet or on Prodigy. With its nationwide computer system and communications and billing systems, Prodigy could offer any content provider the opportunity to develop its own network. "If there are entities that want to come on the Internet--as part of Prodigy or not--we will work with them," says Kurnit.

There are risks to the Internet strategy. For starters, the other services plan similar Internet "gateways." And the whole plan could backfire if customers find they don't need Prodigy or anyone else to help them onto the Net. Still, Prodigy is getting credit for plotting a plausible rebound plan. "Eighteen months ago, they were in a bad position," says Mary Modahl, an analyst with Forrester Research. And now? "They are the sleepy company that has been goosed," she says.

In the past few months, Prodigy has come out swinging. In addition to offering the Web browser and popular chat features, there's a new online version of the Yellow Pages for the entire Nynex region, and next month, a new kids feature called Homework Helper will debut. The result: Usage is up, say Prodigy officials. If the rest of Prodigy's efforts pay off, this could finally turn out to be the best of times.

The Best And Worst Of Times At Prodigy

SEPT. 1990 After three years of development, service begins. Aimed squarely at the consumer market, Prodigy was the first online service that featured a flat monthly membership fee and advertising.

SEPT. 1992 Its 2 million members are spending all their time E-mailing instead of shopping its online stores. Prodigy is forced to change to a more conventional pricing plan and begins charging for E-mail. Members start to revolt and head

for rivals CompuServe and America Online (AOL).

JAN. 1993 To reduce operating costs, Prodigy cuts 250 from its 1,100-member workforce, citing the need to "streamline the company." Marketing groups are consolidated and customer service outsourced.

NOV. 1993 The member revolt settles, and Prodigy begins to develop new

areas and services. Live TV ads are used to to try and woo back members who have been disappointed with recent access problems at fast-rising rival AOL.

NOV. 1994 New features such as Internet access and slicker graphics help lure back subscribers, but the venture has yet to produce a profit. Another 100 employees are axed.

JAN. 1995 Prodigy Vice-President Scott Kurnit says the company has been completely refocused and will introduce a new interface--dubbed P2--that follows Internet standards.

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