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Author: TMFNico Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 31  
Subject: CSRV, AOL, and MSN Date: 7/11/1997 12:31 AM
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Chen4073 << AOL looks like they can pick up these subscribers or grow within themselves to achieve 10 million, their choice. >>

Their choice, indeed. It's a very odd situation. Hard to know how to read it. On the one hand, HRB acknowledges being in talks as recently as April, and declines to say those talks have been discontinued. Yet in mid June when they reported their 4Q97 earnings, (see post #9 in this folder) they spoke as though they have been reinvigorated in a strategy to pull it together. As just one example:

<< "We believe the U.S. online/Internet market has reached the stage where one-size-fits-all approaches will become more difficult to sustain and successful segmentation will be rewarded. CompuServe is taking this step by focusing on more sophisticated and demanding U.S. consumers... Historically, this attractive segment has been our stronghold, but until now we were not focusing sharply on it.' >>

Well, whatever the reason statements like this, let's discount it for the moment at least, and assume that in the end HRB doesn't have the long term will to stay with CompuServe. Seems that the longer they wait to sell, and the more time that goes by without the domestic consumer service being upgraded and tended to, the less it will fetch.

Also, the more time that goes by, the less attractive or strategically "necessary" it will be to companies like AOL or Microsoft, who in the interim are moving forward each in its own way. CompuServe's domestic consumer service is thought to be the least attractive part of the package, and the barrier to progress in negotiations with AOL.

CompuServe's total subscriber count grew by about 30,000 in the last reported quarter. But the domestic service numbers are declining. AOL's sub count is growing in all areas. So while AOL might want the CompuServe subs, they don't really need them. And they will wind up with some portion of them anyway. They can afford to bide their time, while CompuServe does whatever it is they are doing. (Remember, most people are not online at all. So 3 million more subs would be great. But 3 million more subs are also inevitable: The total subscriber universe is growing, so it is not as necessary for AOL to get Compuserve's subscribers, as it is, say, for Reynolds to get Phillip Morris's smokers.)

As TMF News pointed out, Bertelsmann wants to both expand it's global online and multimedia operations and increase US sales. And CompuServe could help them do that, via Bertelsmann's AOL connection. But I would guess that Bertelsmann would probably defer to AOL's assessment of the value of a CompuServe deal, while at the same time, AOL probably feels freer to negotiate knowing that Bertelsmann is there with the checkbook. The AOL-Bertelsmann relationship is an important one. And it seems pretty solid, based on what I've read.

My guess is that for AOL, getting CompuServe would be nice, but that they don't feel it's a big deal in itself. I would think that MSN feels more or less the same way, although for different reasons. Presumably the biggest concern for AOL would be MSN going for CompuServe. But I think it is possible to over estimate how big a blow that would be to AOL. Besides, I suspect AOL assesses the situation and isn't convinced that MSN really wants CompuServe. FWIW, I don't recall ever reading anything about MSN negotiating with CompuServe that was a fraction as convincing as the reports of talks between AOL and CompuServe.

The direct and circumstantial evidence mounts that Microsoft is not really trying to operate a competitive online service on an ongoing basis. I believe that Microsoft has, in its own thinking, positioned MSN as a real-world laboratory for developing web and networked presentation technology, and billing and transaction systems. These play to Microsoft's's core strength, and are more credibly exploitable in dealing with other companies. Microsoft is about defining the standards that the online world will dance to, down the road, when it is far larger than it is today, rather than dabbling in programming and content — messy stuff that they have no feel for.

I also think the thought of the customer service resources required to hand hold a real live and growing dial up subscriber base paying $19.95 a month and demanding that the thing actually work makes the Redmond gang ROTFL. Yet, if they can get a couple million paying subscribers to taste test their concoction, why not?

Right now, I think MSN mainly a poltergeist that Microsoft keeps visible to rattle the various subsets of the online industry. That however does not mean Microsoft is without power and influence over that industry. On the contrary. In this case, power's just another word for nothing left to lose, and 10 billion in cash. MSN is not going anywhere fast. Which is what Microsoft's been saying all along. (I'm tempted to say that when Microsoft is ready to get into the online content services business for real, they'll just buy America Online. But I won't. Mostly because that could be some years down the road, and the situation and relative position of the players then will be very different than they are today.)

TMF Nico
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