Hooked Up to the Max

By Philip Elmer-DeWitt

For the big three online services -- CompuServe, Prodigy and America Online -- this was the year it all fell into place. The computers were cheap. The modems were fast. The infohighway buzzwords were on everybody's lips. "It's like Mars and Jupiter coming into alignment," says Maurice Cox, president of CompuServe, the largest (2.25 million subscribers) of the field. Upstart America Online grew at such a rapid clip -- an extraordinary 200% in the past 12 months -- that subscribers complained of busy signals and its stock was whipsawed by takeover rumors (the most recent: that cable-TV mogul John Malone wants to buy a big stake). Even Prodigy, the troubled online service that has reportedly swallowed $1 billion of its co-owners' (IBM and Sears) shrinking capital, seems to have turned the corner and is finally showing a profit.

But wouldn't you know, just when the money is starting to roll in, the foundation on which the Big Three built their empires is starting to look a little shaky. Tough new competitors are looming on the horizon, some 40,000 small local and regional systems are coming from behind, and -- most ominously -- the whole idea of competing commercial computer networks is being undermined by the network that connects them all: the Internet. "Don't look now," warns the headline on an Internet article in the current issue of Wired magazine, "but Prodigy, AOL and CompuServe are suddenly obsolete."

Until quite recently, the Internet offered no serious competition. Developed as a research network with no central management system, it was sprawling, unruly, disorganized and almost impossible to navigate. Getting around the Net was like trying to find your way in a foreign city where the streets have no signs, maps are nonexistent, and the locals don't much cotton to strangers' asking questions.

The big online services, by contrast, are the shopping malls of cyberspace. They are designed to provide all the goods and information services any paying customer might want -- under one roof. CompuServe, for example, offers hundreds of news and information sources, thousands of databases, tens of thousands of free computer programs and plenty of gathering places where fellow subscribers can get together to chat. With a single telephone call, you can read the news, look up a stock quote, give some advice, make a friend, book a flight, check the weather, buy a raincoat and order a bunch of flowers.

You would find a lot of the same things on the Internet, but you would have to know where to look. And because the Internet is a decentralized network rather than a single computer system, you have to make a fresh connection to a remote machine every time you want to get something done. As long as getting around the Net required memorizing computer addresses and mastering programs with names such as FTP and Telnet, most computer users preferred to window- shop at the online malls.

But the Internet has become a lot more user friendly over the past few years, the result in large part of the emergence of such well-organized services as the World Wide Web and programs like Mosaic that take much of the pain and suffering out of navigating the Net (see box). And mainly because so many universities and research organizations now give students and staff free Internet access, it is growing even faster than the commercial networks. Measured by the number of users who can exchange electronic mail, the Internet reaches 25 million to 30 million people -- five times as many as the big computer networks combined.

The rise of the Internet has not gone unnoticed by the online services. Whereas in the past they were content to wall off their users from the Internet hordes, Prodigy, CompuServe and America Online are moving quickly to break down the barriers. All three permit E-mail exchange with the Internet. America Online and CompuServe allow partial access to the network, and both have announced plans to go the other way: to allow people from the Internet full access to their services. "We think most people would rather subscribe to one service, where they can get everything they need through one interface," says Steve Case, president of America Online. "I think companies like AOL are well positioned to be the way most Americans connect to the Internet."

That could change. Much of the growth during the past year at CompuServe and America Online can be attributed to clever deals made with newspapers and magazines to get exclusive access to their copyrighted material. The alliances with the publishers served several purposes. Not only did they enrich the content of the online services and bring hundreds of editors and writers onto their message boards, but in addition they enabled the computer services to piggyback on the print media's marketing clout. TIME, for example, began putting the full text of its weekly magazine on America Online a year ago this month. And as a part of the deal, it agreed to run in the magazine half a dozen free, full-page ads for the computer service -- a mass-marketing campaign that reached millions of readers and brought more than 10,000 new subscribers to America Online.

But as analyst Tom Morgan points out in the current issue of Technology & Media, these deals are structured in such a way that the networks take home the lion's share of the revenue from online tolls -- typically 80% to 85%. What's to stop publishers from striking out on their own, using the new improved Internet as their online kiosk? Some of them are doing just that. The San Jose Mercury News, for instance, which has been on AOL for 18 months, is planning to open an Internet site as well.

The success of these independent ventures is by no means assured. The mechanisms for charging admission to sites on the Internet are still under development. And without the support of the big online shopping malls, Internet publishers will have to find new ways to bring readers to their doors. "Anyone can start a newsstand," says Scott Kurnit, a vice president at Prodigy, which has negotiated deals with Newsweek and Sports Illustrated for Kids. "But the one with the best lighting, the best selection and the best checkout counter is the place you'll go."

The battle among competing online newsstands is about to get even fiercer. This summer Apple opened a slick service, eWorld, and publisher Ziff-Davis is expected to launch its powerful new Interchange Online Network before the end of the year. But the most fearsome competitors may be ones that are still in the wings. Next year Microsoft is expected to introduce its own online service, code-named Marvel, which it could bundle into every copy of Windows it sells. Even more formidable would be an online service from AT&T, which can market directly to its 80 million customers.

How big can the online services grow? Given the state of technology today, there are limits. For one, only homes with computers and modems can plug in. And since sending photos and movies over phone lines is still relatively time consuming, the market is pretty much restricted to users who like to read and write. Yet the online services are not standing still. CompuServe has begun supplementing its offerings with CD-ROMS, combining the interactivity of a live, online connection with all the sound and animation that can be squeezed onto a CD. Prodigy plans to deliver its service to 200,000 cable-TV subscribers in San Diego -- which would let it transmit data 100 times as fast as the fastest modem. And America Online is attempting to figure out how to put them all together: cable TV, CD-ROM, online services and the Internet. "We're trying to find a way to reach 98 million households," says Case. "We're 1 million down and 97 million to go."

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CREDIT: [TMFONT 1 d #666666 d {Source: SIMBA Information Inc., LINK Resources}]TIME Graphic by Steve Hart

CAPTION: Consumer Online Services Subscriptions

With reporting by John F. Dickerson/ New York and David S. Jackson/San Francisco