The On-Line Services: Profit Pipeline or Dead End?

In this bonus edition of FutureBanking (our regular December issue follows in two weeks) we take a ride on the rollercoaster of on-line service networks.

In their best light, with 10 million to 15 million personal computer users on their subscriber lists, America Online, Compuserve, Prodigy, and the relative upstart Microsoft Network are the on-line world. They are ready conduits for banks and other organizations that want to sell into what seems a burgeoning market.

Along came the Internet - less than three years ago in a consumer context, thanks to the advent of Netscape and its Navigator for browsing the World Wide Web - and the on-line services had to face some hard questions. If the Internet became the ultimate destination for the wired society, what role would be left to these relics of the hobbyist era and their more limited, self-selected audiences? If the Internet adage is true that "content wants to be free," while telecommunications costs fall and broadband access alternatives proliferate, how long would it take for computer owners to bypass the intermediaries and hook more directly into the Web?

Not long at all, we now know. The market data was incontrovertible, showing up repeatedly in research by firms like Find/SVP and Odyssey Inc.

Computer Intelligence Infocorp of La Jolla, Calif., which surveys PC activity in homes, workplaces, and by self-employed people, said on-line service users increased by 25% last year. Virtually all the growth was in the home segment, as companies and small businesses moved in big numbers to the Internet and intranets, which are internal networks built to Internet standards.

Within this year, the preferred means of connecting to the Web turned around. Internet service providers like Netcom, UUnet, and PSInet got bigger numbers than AOL and its brethren. Even in the best times, the on-line networks faced a fickle and volatile public that tends to switch programs at the drop of a hat. When the Internet presented itself, many stopped using the on-line services, even if they remained at least temporarily on the subscriber rolls.

"Internet use hurt the on-line services," said Computer Intelligence Infocorp industry analyst Dave Tremblay. While the commercial on-line networks had a gain of four million users in 1995, regular Internet users soared by 10 million, or 115%.

Early this year, Forrester Research predicted that on-line service users would peak at 15.8 million in 1998, just half the number with direct Internet access.

"The distinction between the Internet and the on-line services has become meaningless," said Adam Schoenfeld, the analyst from Jupiter Communications in New York, which recently published an extensive consumer survey with Find/SVP.

Both access methods have millions of adherents, Mr. Schoenfeld pointed out, and together with personal finance software like Intuit Inc.'s Quicken and Microsoft Corp.'s Money they are "a wedge driving financial services into the home."

The on-line companies are not to be denied. They have set out to reinvent themselves, not ready to be written off quite yet. America Online, with the heft of its $1 billion of revenue and more than seven million subscribers, made a big splash this fall by moving to flat monthly pricing (see page 4A) and adopted the advertising slogan "the Internet and a whole lot more."

No. 2 Compuserve is clearly in the running, with what it claims is more of a business- than consumer-oriented subscribership of 5.3 million worldwide, and the backing of a well-heeled parent in H&R Block.

The title of the No. 3 player, Microsoft Network, speaks for itself (see page 7A).

Meanwhile, Prodigy (page 6A), which fell into stepchild status with founders IBM and Sears, has a new life under new ownership. Though it still wallows in last place among the big four interactive networks, it hopes to build on a strong nucleus in banking and financial services.

Banking may not be the killer app for these companies, but it is certainly a common one - and in the wake of AOL's September introduction of a glitzy "Banking Center" with software from Intuit, a significant competitive battleground.

"Banking is the core financial on-line service, and that's an opportunity," Mr. Schoenfeld said in a recent speech to a banking group. But it also poses a threat, because on-line consumers are capable of transferring their loyalty to nonbank brand names like American Express, Fidelity, Quicken, and Schwab all well established in on-line spaces.

Those few dozen banks that seem to be everywhere networks go - from BankAmerica and Barnett to Sanwa and Security First Network Bank - are at least testing the on-line services as never before. AOL, for example, has customers who are "there and waiting" for what banks can offer, said BankAmerica senior vice president Catherine Graeber.

If PC-owning households are attractive to marketers of electronic services, it follows that on-line services are a way to reach them. The American Banker/Gallup annual consumer survey, conducted in September and being released this month, indicated that 48% of all financial households - those with any kind of asset or liability account - have PCs. That percentage rises to 77% of those with incomes above $75,000.

In a year when those PC households rose four percentage points, the PC owners who are on-line service subscribers jumped by 13 points, to 36%. The AOL subset rose by eight, to 21%, and the over-$75,000 households within that group went from 20% to 32%.

The on-line service subscribers have been increasing at a faster rate than PC-banking customers - a reason for bankers to take note.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER