The future of the large Internet service providers
I had the privilege of listening to a semi-arbitrated, mostly spirited discussion between Ted Leonsis, Vice President of America Online’s (AMER) online services, and Scott Kurnit, former head of Prodigy and the MCI/News Corp. online venture, at a recent industry conference. I left that venue with some very mixed feelings about the future of the large Internet Service Providers (ISPs), and in particular about how America Online intends to grow its business.
Leonsis spoke with the conviction that comes from early success in a market. America Online (AOL) adds another million subscribers every six months or so. All other ISPs combined have about a million-and-a-half total subscribers. AOL is primarily a service provider today but their vision is to become a “premium channel” on the Internet, offering content and creating brands that can be merchandised to subscribers and the mass market as well. The Motley Fool, one of AOL’s investment areas, has spun off a book and a wide following as an example of this metamorphosis.
Scott Kurnit parried with two key points about ease of use and economy of scale. First, AOL relies on ease of navigation and structure provided by their own browser. They reduced the problem of fetching data over the Internet to one of clicking on icons. As AOL migrates their browser to Netscape Navigator and Microsoft Internet Explorer, they lose this cozy user environment. Kurnit’s second point was that IBM didn’t lose its PC business to HP or Compaq at the outset; it was the dozens of clone manufacturers that mounted a combined attack on Big Blue’s marketshare. AOL can’t dismiss Microsoft Network, AT&T WorldNet, CompuServe, Prodigy, and the regional ISPs on the basis of size, as this is likely to become a cost-driven business like long-distance telephone service.
AOL’s desire to become a premium channel, and to benefit from a string of Motley Fool-type successes, disregards the ability to create new brands cheaply and quickly on the Internet. Leonsis claimed that he didn’t think 10,000 brands would survive on the Internet. However, consider the trend in my husband’s favorite industry — beer — toward regional microbrews. The large players are under marketshare pressure from the hundreds of local breweries who, deep down, would probably like to be the next Sam Adams. People who enjoy a taste of local color or technique will try whatever the regional favorite may be; there’s brand loyalty to the more expensive beers, but also a sense of armchair adventurer in sampling multiple brands. And here we have the basic dichotomy between premium channels and mass communication. Ted Leonsis says his biggest competitor is the TV show “Seinfeld,” attracting 100 times as many viewers as AOL in the same time slot. Basic question: Would “Seinfeld” enjoy such a lead over AOL if it was carried only on the JerryChannel, for a few dollars a month? If you want the user to pay a premium, you need to offer some kind of individualized or highly value-added service. That’s the attraction of a microbrew; it competes on taste and flavor instead of price and uniformity.
Premium channels also have to be sensitive to the total cost limit imposed by the users; 0 a month doesn’t seem like much for one service, but when you add up the individualized content services a typical Internet surfer enjoys, it’s a hefty monthly payout. Disney learned this lesson, as we learned in the July column, and has rolled the ABC broadcast operations under the Mouse ears to play in both the mass market and premium spaces. Assuming that AOL won’t play the microbrand game, and will focus on larger vehicles with broad appeal, here are some potential pitfalls they’ll face:
Premium channels need a first-rate data delivery mechanism. Again, this is an issue of ISP-vs-ISP, but it’s also a customer service and ease-of-use issue. Wondering how Java fits into this? Java applets may actually reduce the bandwidth required for interactivity, since they render images locally instead of downloading pre-drawn frames from the server. Java also addresses the installation, integration, and robustness issues that weigh heavily on ease of use. Certainly, AOL users will be able to run Java applets with the new AOL browsers, but doesn’t that reduce AOL to a service provider once again?
A premium, mass-market brand has to play in a mass-appeal area: finances, sports, gambling, or sex. I think we can strike gambling and sex at the outset. There have been rumblings from the National Basketball Association that they consider mid-game summaries and scores a broadcast property that must be licensed, making it harder to out-do ESPN’s SportsZone (http://espnet.sportszone.com) or specialized sites like the one CBS set up for the NCAA College Basketball Tournament last year. What about repeat Motley Foolery? One of the big problems with building a financial services brand is establishing a track record (to wit, the poor results of yours truly) that separates the one-hit wonders from financial writers like Peter Lynch and Andrew Tobias.
- Java-enabled browsers can also become “branded browsers,” a phrase coined by Sun’s James Gosling in reference to the first implementation of HotJava. If the browser delivers an immersive world in which to experience, interact with, and absorb the content, it’s likely to build a following for the content. Take a gander at Dimension X’s online worlds for an example. Good news on the surface for AOL, but how will they Java-tize their content? They don’t create a large portion of the content, so they can’t dictate how it’s delivered. Content owners willing to do the Java development and integration on their own may not need the on-ramp to the masses provided by AOL.
Does this mean America Online is going to fail? Certainly not. Four million customers don’t vaporize because the Next Really Clever Idea doesn’t materialize and create a merchandising revenue stream on a weekly basis. However, I believe there are serious risks in their vision and mission, and those perceptions are treated less kindly by stockholders. As the adage goes, you’re buying a stock, not the company, and I am avoiding this strange brew of an issue as detailed in this month’s portfolio commentary.
