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AOL the last of online service breed

CompuServe's move to the Web leaves behind the question: Whither America Online?

CompuServe's big announcement last week that it will move a significant portion of its content to the Web by the end of the year leaves a big question hanging in the air: Whither America Online?

The number-one online service, with its approximately 6 million subscribers, AOL is now the only major private network to remain within its own proprietary boundaries. CompuServe, the second largest service, and third-place Prodigy are joining the rush to the Internet, and Microsoft has already started moving its Microsoft Network service to the Web. Even small-fish Genie, with 30,000 subscribers, is launching a Web-based service.

AOL has stayed away from embracing the Web so far, but judging by some of its actions, it has already started to move in that direction in a big way. The most striking case: AOL owns GNN, a Net access service that maintains a Web site offering content that increasingly resembles AOL's, including forums, events, and AOL stalwarts like iGolf and Hecklers. (GNN lists AOL as a "marketing partner.")

GNN is also beta testing Virtual Places, a new chat service that promises to let subscribers communicate with each other no matter where they are on the Web. By summer, the service plans to link AOL chat room denizens to the Web as well, said David Gang, AOL's vice president of product marketing. Once that's done, GNN will have matched one of the principal advantages of proprietary online services over the Web.

AOL is also adding content to its own service that blurs the boundaries between the Web and its proprietary environments. Both Disney and Netscape Communications host areas on AOL that feature what Gang calls "hybrid windows," areas that allow users to explore an AOL-exclusive Web site fenced off from the rest of the Internet.

AOL officials, however, strongly deny that any of this indicates a major shift in strategy to carry on as a proprietary online service. "We're focusing on building a very large service subscription based on mixing the best of technologies. We don't want to turn into a large Web site. It's a totally different business," Gang said.

Furthermore, the company is determined to paint CompuServe's decision to move to the Web as an AOL victory, rather than a sign that it is clinging to an outmoded model. "If you move to the Web, you're just like everyone else," Gang said, gloating over rival CompuServe's decision. "Maybe they realized that it's a waste of their time to compete against us, that it's better to fight a battle where no one has won yet."

Gang proceeded to tick off a list of reasons AOL wouldn't be jumping the proprietary ship any time soon: "We're blessed with good technology, a large audience, and we produce our own content." As for the overlapping content between AOL and GNN, Gang said that's simply to make sure that AOL has a marketing message for users who don't want to hear about AOL.

But some AOL watchers say such statements bely a behind-the-scenes strategy not so different from CompuServe's and the rest of the club.

"AOL is a big ship, and you have to turn the rudder pretty slowly," said analyst Emily Green of Forrester Research. "If they made big, dramatic announcements, it would have a negative effect on their stock prices, so they're going about it in a subtle, less public fashion...They're finding ways to incorporate the Internet without making a big deal out of it."

One of the motivations to do that is that Web-based services can save money on infrastructure compared to proprietary networks that have to do everything themselves. Infrastructure is one reason CompuServe cites for its decision to migrate to the Web. "Seventeen years ago, we had to build everything," CompuServe spokesperson Jeff Shafer said when asked about the advantages of moving to a Web architecture. "Now that there's a critical mass in marketplace, the nuts and bolts are being built for us."

Keith Benjamin, an analyst with investment firm Robertson Stephens in San Francisco, believes that a series of deals AOL has inked with both browser makers and Internet service providers like AT&T's WorldNet have more to do with AOL's desire to tame this infrastructure beast as well.

The cost of infrastructure is a major expense for online services--so the less spent on modems and routers, the more they can focus on content. By adding a doorway to AOL via other access providers, the online service is slowly but surely slipping free of the connection business.

With so many indicators pointing toward a greater Net presence, why does AOL downplay what seems to be the inevitable? Observers cite several possibilities.

"AOL has lots of happy customers. They're prepared to [move], but they don't need to," said Benjamin. AOL's stiffest competitor now is CompuServe, but its move to the Web has confused the competitive landscape, leaving the number-two service "nowhere," according to Benjamin.

And if that is how CompuServe is perceived, AOL doesn't want to do anything to make itself look like it. "Compuserve and AOL have a similar attitude," said Forrester's Green. "They recognize the Internet not as competition but as a technology platform to incorporate. However, since they're sworn enemies, [AOL] has to find ways to strike a [contrary] pose."

But AOL will certainly be watching CompuServe's Web experiment and is prepared to adopt a similar approach if the tide turns decisively away from the last of the proprietary holdouts.

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