Prodigy makes a run for the border

On Monday, Prodigy and Telefonos de Mexico signed an agreement under which Prodigy will serve as a consultant for the giant telco on its ISP business, as a possible prelude toward merging the two services in that country. News of the agreement was filed with the Securities and Exchange Commission yesterday.

The agreement is a step back from earlier announcements, under which the two services were slated to merge more definitely. Telmex also had tentatively promised to send an additional 300,000 subscribers to a joint ISP service over three years.

But the scaled-back agreement still is a sign that Prodigy is establishing a foothold with the biggest company in the Mexican ISP market, and may be a sign that the struggling ISP can rebuild itself as an international player.

Nevertheless, it's a tall order for the ISP, which once competed for consumers on an equal footing with America Online and Compuserve.

But it has an ally in its corner that may help it catch and hold a second wave of Internet users more successfully than it did the first. Both Prodigy and Telmex are now are controlled by Mexican financial giant Carso Global Telecom, a link that could eventually give Prodigy unparalleled access to Mexican consumers, a link to Spanish-speaking customers in the United States, and a source of badly needed capital.

Meanwhile, Prodigy is shedding its old proprietary interface and moving all of its customers to a more traditional ISP service, and says its future lies with the open Internet.

Company executives are in a federally mandated quiet period due to the upcoming IPO, and declined to comment on their plans for the service. Prodigy's IPO is slated for early February.

But analysts said the service still has a long way to go to prove it can recover from the fall of its online fortune.

"The international focus is certainly encouraging," said Ron Rappaport, an industry analyst with Zona Research. "But it takes more than awareness of international markets to succeed. Otherwise we'd all be millionaires."

Watching the account books bleed
Prodigy has suffered in recent years, as subscriber figures that once numbered over a million dwindled while rival AOL shot past 15 million.

As of December, the company had 671,000 total subscribers. Its Prodigy Internet service, which is essentially an ISP with personalized home pages filled with Excite content, had risen to 505,000 subscribers, more than doubling since the end of 1997. That number is rising quickly, driven in part by distribution deals with Packard Bell and Microsoft.

But the Classic service, which the company early this week announced it would phase out altogether by October, still had more than 160,000 subscribers. The company said in its SEC filings that it has had a difficult time moving many of these Classic customers over to the ordinary ISP service.

In the three-month period before September, the company said that it had lost 44,000 Classic subscribers, but seen an increase of only 2,000 in the number of people migrating from the Classic service to its regular ISP offering. Both of Prodigy's consumer services are $19.95 per month.

Meanwhile, the company has started to stem the red ink flowing from its account books, but is still posting losses. In 1997, the company lost $134.2 million, and lost another $101.8 million during the first nine months of 1998. The company says it expects to stay in the red at least through the end of 1999.

Hope for Mexico
Since being acquired by the Carso group in 1996, the company has consistently moved toward a business model that resembles mainstream ISPs like EarthLink Network or MindSpring.

Prodigy plans to keep moving in this direction, adding business products such as Web hosting, intranet, and extranet services, and co-branded telecommunications services, as well as keeping its consumer platform strong.

But it is its association with the Mexican telephone giant--which still maintains a virtual monopoly on Mexico's telephone market--that serves as a glimmer of real hope for the company's future, analysts say.

"As a pure ISP business, Prodigy does not look very good," said Jupiter Communications analyst Adam Schoenfeld. "[The Mexican agreement] is one of the first signs I've seen from Prodigy that they're executing on their strategy."

As a part of the agreement with Telmex, Prodigy will advise the telco on establishing relationships with other access and content providers for its own ISP service, which currently has about 110,00 subscribers. For these services, Prodigy will get a 15 percent cut of the net subscriber revenue from Telmex's ISP business on its first 200,000 subscribers, and a 10 percent cut on the remainder.

The two companies also are continuing negotiations for creating a co-branded ISP service, and will engage in an exchange of technical services and joint subscriber acquisition efforts. The deal will last for the next five years, unless Prodigy's ownership changes, according to the SEC documents.

The growing link to the most powerful telecommunications company in Mexico is a strong factor pointing to Prodigy's survival, analysts said.

"Yo quiero Prodigy service," Rappaport said, alluding to Taco Bell's TV ad campaign. "Who knows. It might work for them."

Nevertheless, the potential for a repeat of its U.S. experience is lurking in the wings. As part of its announcement that it had reached 3 million international subscribers this week, America Online said that Mexico would be one of the markets it would target most heavily in the future.

"It's not like it's a wide open playing field," Schoenfeld said. If Prodigy does wind up establishing a foothold in the Mexican market with Telmex's help, it will be a point in its favor.

"At least it's not a playing field where [Prodigy] is the fifth horse in a four-horse field," he added.