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Prodigy going global

As previously troubled Prodigy molds itself into a new company, the international market is key to its strategy.

It's been a tough year for Prodigy. The 13-year-old online service has been sold, relaunched, and reorganized from top to bottom since it was bought for $250 million by International Wireless 12 months ago.

Now, the company says, it's recharged and ready to expand into territories far from its headquarters in White Plains, New York. It's newest conquest: China.

"One could ask why we're doing that, but we did it to get access to particular partners and to build a customer base that ultimately will converge with the rest of our business," Prodigy CEO Paul DeLacey said in an interview yesterday. "We're not expecting to cash in in the next couple of years. We're in this for the long haul."


 
An international focus may be Prodigy's strongest hope for growth and success as the U.S. market has become saturated.

Prodigy's international plans may serve as a blueprint for other online services and ISPs. Even the largest services have not ventured far beyond Europe in their global expansion, perhaps wary of international restrictions on content passed over their networks and potential liability for that material. CompuServe, for one, has learned a hard lesson in this subject, having been investigated repeatedly by German authorities for objectionable material.

While the move is risky, it may be Prodigy's strongest hope for growth and success as the U.S. market for Internet access providers has become even more saturated.

Already, the company has fundamentally changed its business model, offering a simpler service to provide reliable Internet access with some key enhancements, rather than focusing on original content in its latest incarnation as Prodigy Internet. "The real competition is AT&T's WorldNet and MCI, but we are much more than just an ISP," Prodigy spokesman Mike Darcy said.

Two factors are key to this new model. "Prodigy is focusing on two things: early investments and long-term growth markets, China specifically," said Scott Ehrens, an analyst at Oppenheimer & Company. "They are focusing on foreign markets that aren't hyper-competitive."

By the year 2000, Prodigy expects international business to account for 40 percent of its revenues. In addition to China, the company has begun ventures in Africa and is considering a Spanish-language service in Mexico. (Mexican corporation Grupo Carso is a major investor in Prodigy's parent company.)

 
"We're not expecting to cash in in the next couple of years. We're in this for the long haul."
Paul DeLacey, CEO, Prodigy
Still, the ambitious scope of Prodigy's plans surprises many familiar with its recent history. Just last year, industry observers were wondering whether there would be a short haul for Prodigy, let alone a long haul.

"They are at 1 million and falling," said Keith Benjamin from investment banking firm Robertson Stevens. "Prodigy doesn't seem to have died yet, which just mystifies me."

Indeed, even those within the company acknowledge that Prodigy's new management team must counter years of stagnation. Before joining the company, its own former chief executive, Edward Bennett, had described Prodigy as "slow, lame, and ugly" in an interview with the New York Times a year ago.

Once dominant in the field of subscription-based online services, Prodigy has seen its market share steadily decline with the onslaught of competition by America Online, CompuServe, and Microsoft Network. Now, Prodigy ranks a distant fourth.

In an effort to reverse that trend, the company has launched a $100 million ad campaign to trumpet Prodigy Internet, as opposed to the old proprietary service, which is now called Prodigy Classic. As part of that drive, the company also scored a coup with its recently announced marketing alliance with the National Basketball Association.

"We truly are a 'super-ISP,'" DeLacey said. "We bring all the fundamental access facilities of a true ISP and all the value-added capabilities of terrific navigation, personalization, and customer services."

In the same breath, however, the chief executive acknowledges that Prodigy may need to raise significant financing to realize its dreams. "We are likely to go public in the next year or so," he said.

The financial health of the privately held Prodigy--often rumored to be on the brink of fiscal disaster--is difficult to diagnose. The company's claim to 1 million members is the source of some controversy, as analysts say Prodigy counts all users of its service, rather than those who are named as paid subscribers, as the other online services do.

"This is likely to be vastly inflated," one analyst said of the online service's subscriber claims. "We suspect it is quite a lot smaller. The Prodigy Internet numbers may be cannibalized from Classic."

Privately owned Prodigy is under no obligation to release membership and financial statistics. Industry analysts say Prodigy's membership claim is vastly overstated and estimate the number may be 30 to 40 percent lower.

Industry research firms estimate the service's rolls to be closer to 600,000 to 700,000. That number is also crucial to the company's hope to attract more advertising as a source of revenue: The more subscribers it has, the more it can charge for its ads.

The issue is of paramount importance for the company, which must rely increasingly on such revenues to help subsidize the service's $19.95 flat-rate monthly charge, the industry's going rate.

With financial and competitive pressures continuing to squeeze its business, Internet analysts wonder whether Prodigy can really make a go of it in the international market, particularly in places as unpredictable as China.

"China is a very strange place to do business," Benjamin said. "We have some people who work for us in Beijing, and it was hard to even get on the phone. Any online service will have trouble getting off the ground in China."

And Erhens doesn't rule out the possibility that Prodigy's rivals will enter the Chinese market and others that it has targeted. AOL, AT&T, and others may actually profit from any early successes by Prodigy, overtaking its share with far more resources, as they have in the United States.

But DeLacey said he is particularly optimistic about the China venture because he had established business contacts there from previous positions with other companies, including International Wireless. As a result, he also seems confident that he will be able to negotiate the sensitive terrain of policymaking in Beijing, which has taken one of the most draconian approaches toward the Internet of all foreign governments.

"We're taking a pragmatic view: We have complied and cooperated with the government, ensuring content blocking as best we can," DeLacey said. "The Internet is the most powerful communications vehicle to come down the pike in years, and it's more positive for China to participate in it than not." 

Reporters Suzanne Galante and Jane Black contributed to this report.