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CompuServe losses narrow

The online service gets a bit of good news, for a change: It took less of a financial beating this expected.

The good news for CompuServe (CSRV) is that the company took slightly less of a financial beating this quarter than it did in the last--in spite of the fact that it lost its chief executive just three days before reporting its third-quarter earnings.

The bad news is that the relatively higher earnings don't mean the second-largest online service is doing well.

The company today reported a narrowed loss of $14.2 million, or 15 cents a share, on revenues of $211 million for the quarter that ended January 31. That compares to a loss of $58 million, or 63 cents per share, in the prior quarter.

Analysts expected better earnings this quarter, at least in part because the company slashed a reported $15 million from its marketing budget. Yet as CompuServe cuts back, other leading online services America Online and The Microsoft Network, are pouring hundreds of millions of dollars into advertising and marketing their services to gain a foothold in the increasingly competitive market.

Likewise, while the other services have been enticing consumers with flat-rate fees, CompuServe pulled out of the mainstream consumer market. It killed its family-oriented Wow service to refocus on business customers.

And so went two years of hard work and millions of dollars. The failed mission couldn't have come at a worse time. For the last year, it clearly was unable to adapt to the rapidly changing market, said Peter Krasilovsky, an analyst with Arlen Communications.

"It's not a company really designed to adapt quickly," he said. "The market has left them far behind and today the only truly satisfied CompuServe users are the core users who are addicted to their forums and bulletin boards."

Those users obviously won't be enough to sustain the service forever, although no one's predicting CompuServe's imminent death.

While its foray into the consumer online business was a major flop, CompuServe still has several strong points. It is still the leader, by far, in the overseas markets. While the company continues the bleed customers in the United States, it has around 900,000 members overseas and by far the greatest name recognition. It also has a strong network services division, the division where departing chief executive Bob Massey came from.

"Somewhere down there, there's a profitable company," said Lisa Thompson, an analyst with the Prudential. "I just don't know where they have to go."

The fact that Massey was from the network side of the business also points to his inherent problem as a leader, some analysts say. Although Massey is very well liked and very good at what he does, he wasn't able to adapt to the changing market.

"He was tone-deaf when it came to consumer marketing, threw good dollars after bad with the Wow service, and was also caught in a very unfortunate timing problem with the rapid growth of the Internet," Krasilovsky said.

CompuServe insiders say H&R Block, which owns 80 percent of CompuServe, had been looking for a replacement for Bob Massey for several weeks and decided to pull the plug this week before earnings were released.