The rebirth of CompuServe

Earlier this year AOL described CompuServe as the brand for older, more affluent, and "serious" Internet consumers. AOL executives made the analogy that its flagship service resembled USA Today, while CompuServe was more like the New York Times.

That was before the popularity of "free PCs" rattled the market. Today, CompuServe might be described as the Main Street Gazette.

Deals offering free PCs often require consumers to subscribe to an online service for three years. With AOL running at $22 a month, the company needed a way to compete on this new front without compromising this premium service. So it enlisted CompuServe, whose subscriber base had languished since AOL acquired it about two years earlier.

"From [AOL's] perspective, they can use that brand to experiment," said James Preissler, an equity analyst at PaineWebber. "They can do all the dirty work with something else other than AOL."

Adjusting to new forms of competition is nothing new to AOL, which has managed to dominate the ISP market with a subscriber list that totals 18 million at last count. But the prospect of free PCs or Net access has complicated the marketplace more than ever before.

Of particular concern are recent reports indicating that Microsoft--which is headed on a crash course with AOL for Web dominance--may introduce its own low-cost or free Internet access. Already, Microsoft's MSN has introduced a low-cost Internet access deal available to customers of warehouse retailer Costco.

In addition, computer manufacturers such as Dell and Gateway have begun bundling Internet access with their systems. Other companies, including Gobi and DirectWeb, are offering free PCs with Internet service for as low as $19.95 per month.

In response, AOL has linked up with several manufacturers--it even bought an equity stake in Emachines--to offer consumers a $400 rebate if they sign up for three years of service with CompuServe.

According to David Simons, managing director at Digital Video Investments, AOL had little choice but to downgrade CompuServe as investors demanded that AOL address the wave of discount deals that were stealing potential customers.

Simons added that CompuServe's subscription rolls have remained at a steady 2 million since AOL acquired it in 1998. Although still considered one of the top ISPs, CompuServe's efforts to attract the "busy professional" bore too little fruit. "After a year of trying to pursue this in terms of the CompuServe heritage, they found it wasn't working," Simons said.

Discount or bust
That made CompuServe's recent comeback all the more impressive: It added 300,000 customers in the three-month period that ended September 30. Audrey Weil, CompuServe's general manager, said yesterday that "CompuServe is in the midst of a dramatic turnaround. We are finally in the black and are growing members, revenue and profits."

In an earlier interview, Weil said the consumers being targeted today typically seek out discounts and purchase goods that include incentives, such as a rebate on a PC. She added that the target market generally shops at stores such as Wal-Mart or Target.

"These consumers are new, first coming into the marketplace looking for a low-cost way to jump in, and less likely to join our premier brand, which is AOL," she said.

So much for the New York Times comparison.

The strategy is similar to that of countless large corporations that sell products to different demographic groups. Cosmetically, AOL and CompuServe are different. But under the hood, they are almost identical.

After the acquisition, AOL folded CompuServe's network infrastructure into its own facilities in Northern Virginia. That means AOL and CompuServe members now dial into the same network, share the same email software, and can communicate with each other using the same instant messaging.

To the consuming public, however, AOL has tried to maintain CompuServe as a distinctly separate brand--much the same way, for example, that Quaker Oats retained the Snapple brand after acquiring it.

The tactic is old hat for AOL. When it acquired instant messenger firm ICQ, and its now 40 million registrations, it kept the service distinct from AOL Instant Messenger. The separation adds an international footprint for AOL that it would not get by converting ICQ users over to AIM. It also cuts down on customer defections.

And with its Netscape acquisition earlier this year, AOL intends to use the Netcenter Web portal to tap daytime users who access the Net from work. AOL also wants to attract teenage and college-aged users with its acquisition of Web radio service Spinner and Nullsoft, which creates an MP3 playback device.

The problem with CompuServe was that it failed to grow as a premium brand positioned up the food chain from AOL. So the parent company bumped it down the chain as a bargain buy.

"CompuServe was a brand looking for a place to go," said Keith Benjamin, an analyst at BancBoston Robertson Stephens. "It was the nerd brand, and that wasn't exactly a scalable brand."

There goes the neighborhood

But repositioning CompuServe could be trickier than it looks. The service has maintained a core group of loyal, experienced followers who may not stick around if they perceive their new neighbors as being technically challenged.

"If CompuServe is pared down from an offering standpoint to really a fighting value brand, I think affluent users will leave," said Bruce Kasrel, an analyst at Forrester Research.

There would also appear to be a threat to AOL's bottom line. But according to PaineWebber's Preissler, offering discounts to gain subscribers will barely affect AOL revenues. Because both services run on the same technology, AOL does not incur costly infrastructure costs.

With that headache out of the way, Preissler suggests that CompuServe can focus on growing its subscribers and tapping advertising and e-commerce revenue.

"There's almost no incremental cost right now for AOL to run CompuServe," Preissler said. "The subscription business is essentially a zero gross margin."  

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