H&R Block Gets All Snarled Up In The Web

The tax-return specialist is betting big on the Net, but so far is finding only problems

It was Valentine's Day when Mark A. Ernst, president of H&R Block Inc., the nation's best-known name in tax preparation, experienced Internet heartbreak. One of the company vice-presidents brought him the news: Block's month-old Web-based tax service was going through a horrifying glitch. Consumers were calling in, saying they could see one another's tax info. It was, Ernst says, "our worst-case scenario."

The problem, which took a week to fix, is emblematic of the kind of Internet debut Block is having. While Block, with revenues last year of $1.5 billion, dominates the traditional tax-preparation market, filling out one of every seven tax returns in 1999, it has had a bumpy ride on the Net. In its first 10 weeks, it has been plagued by site outages, software bugs, and the knowledge that Net-born rival Intuit Inc. has a year's head start and an estimated three-quarters of the market. All this before the real crunch of last-minute tax filers hits in earnest.

Like other traditional companies trying to make it in the New Economy, Block feels pressure to take its brand online. For one thing, consumers are demanding it. Online filing is surging. While around 400,000 people filed their taxes on the Internet in 1999, Forrester Research Inc. expects the number to reach 1.25 million this year, or 1% of all returns filed. Experts say Block puts its position as the leader in tax preparation at risk if it doesn't get its Net strategy right. What's more, Block is depending on its Web tax service to lure new customers to its broad array of Net-based financial services. Block is hoping that online tax filing will convince consumers to look at the expanded H&R Block Web site, which offers such new products as mortgage services and online stock trading.

Block's Web tax service, launched in January, is based on TaxCut, its five-year-old do-it-yourself software product. To promote the Web site, Block partnered with 14 Web portals including Yahoo! and the Microsoft Network. And it incorporated the site, hrblock.com, into its seasonal television advertising. Consumers log on from their own computers, and services are billed by credit card. The pricing structure of $9.95 for filing a federal return and $4.95 for a state is similar to Intuit's. But Block customers who want a refund right away can also pay an extra $19.95 to secure a refund anticipation loan for up to $5,000.

Taxpayers are clicking in at a steady rate. Block won't release usage figures until after the Apr. 17 filing deadline, but Media Metrix reports that hrblock.com received 323,000 visitors during January alone. February's visitors to hrblock.com topped 650,000. "For Block's first year in this market, they seem to be pulling in impressive numbers," says PC Data Internet analyst Cameron Meierhoefer.

But leader Intuit is hardly sweating. Its TurboTax Web site drew more than 1 million visitors in January, and more than 2 million in February. "We know we have a good product and a loyal following. Block's a good company but we're confident we'll be successful," says Elizabeth Dougherty, product manager for Intuit's TurboTax for the Web.

USER WOES. Block's network of franchisees, which was initially wary of the development of an online service for fear it would cannibalize their businesses, now feel less threatened. "In some ways, [the Web] has generated business for us," says David Walls, owner of an H&R Block franchise in Dover, Del. "We've had people start their forms using the Web or software and get stuck and then come to us for help."

That, however, doesn't say much about the site's user friendliness. Even experienced Net-heads found Block's site troublesome. Leigh Palmer, a retail office manager in Lincoln, Neb., has filed her taxes online for several years. This year, she decided to try Block. But, "it was incredibly slow and it was not equipped to handle my state returns," she says. Then came the glitches: A surge of traffic on Feb. 1 shut down the site for three days. Eventually, Palmer used the site to file her federal return, but its pokiness was aggravating, she says.

THE REAL TEST. For Block, there's a lot more at stake than losing once-a-year tax-time customers. Hooking new customers with the tax service, then selling them on an array of new products, is key to Block's Internet strategy. Its SmartVest offers online trading, real-time quotes, stock and mutual-funds research, and online planning tools for building a portfolio or planning for retirement. The site's mortgage center offers rates, information, applications, and lending.

But the marketplace for such online financial services is already crowded. And what is worse, a bad online tax experience may turn folks away from even trying any of the new products. Especially worrisome: The Valentine's Day breach of privacy protections. "People have to believe [Block] has the expertise to handle all of their financial dealings and transactions and trust that it will handle their information with care," says Elliot Ettenberg, CEO at Customer Strategies Worldwide, a marketing consulting firm. "When you get a breach of trust," he adds, "all of your online businesses are going to suffer."

The real success or failure of hrblock.com debut won't be known until after April 17. It's no secret that most Americans--Net users included--like to wait until the last minute before filing their tax returns. Will the Block site come out a winner? Ernst says Block has added computing power to handle as many as 30,000 simultaneous users. That's impressive. But the site's collection of snafus is equally impressive. "If Block goes down again, it could be catastrophic," says Jupiter Communications Inc. analyst Robert Sterling. And it would be the latest heartbreak for Block executives eager to make it in the online world.