Personal Business

High-tech dinosaurs?

The Internet is threatening the survival of commercially operated on-line services

Ross Laver November 11 1996
Personal Business

High-tech dinosaurs?

The Internet is threatening the survival of commercially operated on-line services

Ross Laver November 11 1996

High-tech dinosaurs?

Personal Business

Ross Laver

The Internet is threatening the survival of commercially operated on-line services

The age of digital technology, for many consumers and businesses, is also an age of confusion, fear and financial insecurity. But anyone who feels overwhelmed by the frenetic pace of the silicon revolution can take solace in the fact that the dislocation in long-established industries is nothing compared to the upheaval experienced by high-tech companies themselves.

The rise and fall of Apple Computer is one illustration of the computer industry’s turbulence, but there are many others. A few years ago, Digital Equipment, AST Research and Packard Bell were thriving PC manufacturers. Today, all have been pushed aside by mail-order outfits like Dell and Gateway 2000. Another example is the seesaw battle for word-processing supremacy between Bill Gates’s Microsoft and WordPerfect, now owned by Ottawabased Corel Corp. In an industry that measures product life cycles in months, rare is the company that can remain on top for more than a few years.

The latest evidence of the high-tech sector’s rough-and-tumble nature is the shakeout among commercial on-line networks, including America Online and CompuServe. As recently as three years ago, these proprietary information services were the undisputed rulers of the on-line world, offering a mix of news, entertainment services, chat rooms and forums on everything from attention deficit disorder to tropical fish. At the time, the Internet was still in its infancy as a consumer medium. Most people considered it too forbiddingly technical to attract a mass audience.

By 1995, however, the ground was shifting thanks to a new programming language that gave birth to the World Wide Web, an Internet service that mixes text and graphics in an easy-to-navigate format. Almost overnight, the Internet became flashier than the commercial services and, in many ways, a lot more fun. The Net was also cheaper for heavy users. Most proprietary services levy a monthly membership fee plus hourly charges of $2.50 or more for service beyond five or 10 hours a month. By contrast, flat-fee Internet accounts run about $20 a month— no need to watch the clock.

For the commercial networks, the Web’s burgeoning popularity has been more a curse than a blessing. True, the explosion of interest in the Net has sharply increased the on-line audience. But much of the excitement focuses on the Web itself, which can be reached either through a proprietary service or through a direct Internet provider. Many computer users start out by subscribing to a commercial service but later switch to a direct provider to save money.

As a result, the commercial on-line networks have become virtual dinosaurs. In the past year, Apple has shut down its eWorld online service, News Corp. pulled the plug on Delphi Internet Services, and IBM and Sears, Roebuck & Co. walked away from their billion-dollar investment in Prodigy. CompuServe, which until last year was the largest commercial network, announced in August that its subscriber base had fallen from the previous quarter and that it expected to lose money in the first half of the current fiscal year. In a bid to halt the slide, the company cut 150 jobs at its head office in Columbus, Ohio.

The worst, however, is almost certainly yet to come. America Online, the current leader among on-line providers, told analysts last week that it was taking a $615-million charge for restructuring—an amount five times greater than the company’s total pretax earnings over the past five years. Hoping to stem the number of subscriber defections, America Online is also offering members unlimited access for $27 a month—in effect, matching the competition. The problem is that both America Online and CompuServe incur far higher costs than other providers because of their need to operate separate networks with a wide range of original content. As young as they are, both services are going to have to fight hard to avoid extinction.