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CompuServe back to basics

CompuServe's decision to close its flagging Wow service marks the end of its attempts to get a foot in the door of the consumer online market.

CompuServe's (CSRV) announcement today that it is closing down its flagging Wow service January 31 marks the end of the company's attempts to get a foot in the door of the consumer online market.

Instead, CompuServe, the second-largest online service with 5 million users worldwide, plans to refocus itself on its original mission: serving business customers.

"They're throwing in the towel in the consumer market," said Mark Mooradian an analyst at Jupiter Communications. "That's the bottom line here."

Some had been expecting CompuServe to join the three other major online services in a move to flat rate pricing, and they may have been caught off guard by this move in the opposite direction.

But they should not have been, Mooradian said. "I feel like the writing has been on the wall for a long time now. You have a marketing budget cut more than half; you had a bunch of executives leave," he said. "They were losing subscribers at the core base. I think they had no choice but to do this. It was their tacit admission that they could not keep up with subscriber acquisition costs that AOL was spending and that MSN was intending to spend."

CompuServe agrees. "Wow has been swept up in a wave of new competitors with deep pockets," said Scott Kauffman, vice president of interactive services for CompuServe. "We discontinued it in part because we needed to focus our resources. Although it was growing, we were not able to run it profitably."

Wow, which launched earlier this year as a service aimed at families and new Internet users, had 102,000 users.

Kauffman, who characterized the decision as "difficult" but "logical," said that the company would not and could not "match the current pricing initiative that competitors have taken in recent weeks."

America Online, which has a growing subscriber base, is expected to pick up customers as a result of the move to end Wow. Other companies, most notably Walt Disney, also are planning to move into the family online service market. (See related special report)

CompuServe, the first online service, now intends to return to its core mission serving business, technical, and professional users in the United States and Europe.

"This is about getting back to basics and focusing in on the core strengths of the company and looking at how we got to be where we are," Kauffman said.

The strategy is not a bad one for CompuServe, according to Mooradian. The company, in fact, could not have gone on following its current strategy. But "it does mean it wasted a lot of money these past few years trying to get into the consumer market and then changing its mind," he said.

It does mean, however, that CompuServe will have to get busy signing strategic partnerships with online services geared to businesses, he said.

The interactive service, which is used primarily by business executives, middle managers, and the self-employed, will get an "enhanced business menu" starting next month. Wow's users will also receive invitations to join the service.

The company plans to continue growing its CompuServe Network Services, which offer outsourced data communications, intranet, and hosting applications to companies in several countries, it said.

Under the major reorganization, which was first reported by Reuters news service last night, CompuServe will continue to expand in Europe, where the company has a growing consumer market presence. It also plans to launch CompuServe for Business, a service catering to small and home office users, Kauffman said.

CompuServe will take a one-time charge of $4.9 million for terminating Wow, according to the company's second quarter earnings release.

The online service reported a loss of $58 million, or 63 cents a share, for the quarter ending October 31, compared with net profits of $16.7 million for the second quarter a year ago. The recent quarterly loss also includes a $28.6 million acquisition charge.

Revenues, meanwhile, rose 14 percent to $214.3 million for the quarter, compared with the same period a year ago. CompuServe reported it had 3.3 million subscribers as of October 31, virtually flat compared to the previous quarter.

Wall Street analysts said that such a move could entail some layoffs at CompuServe.