06/17/96 COMPUSERVE: PLENTY OF PAIN. ANY GAIN?

COMPUSERVE: PLENTY OF PAIN. ANY GAIN?
Its hard choices have yet to pay off
Last July 31, the board of H&R Block Inc. swallowed hard and blessed a reversal in strategy for its CompuServe Inc. subsidiary. It authorized an ambitious, costly, and long overdue expansion plan to counter surging rival America Online Inc. (AOL). There would be price cuts and hundreds of millions of dollars for marketing, network upgrading, acquiring content, recruiting members, and launching services.
Nearly a year later, CompuServe is well into its big push, fueled by the $480 million raised in an initial public offering. But so far, it has succeeded mainly in changing from the stodgy, conservative, and profitable No.2 in online to a higher-profile No. 2 that, for the first time, is losing money.
While it has added 1.2 million customers in the past year (chart), AOL has added 3.2 million. And the rate of sign-ups has slowed to around 65,000 per month--from 100,000 a year ago. Launching Wow!, a new family-oriented service, has been so costly that on June 18, CompuServe is expected to report a $4 million loss for the quarter ended Apr. 30. For fiscal 1997, Merrill Lynch & Co. analyst Lou Kerner figures CompuServe will earn $28 million, down from about $46 million on revenue of $796 million for the year ended Apr. 30. CompuServe stock, which came out at 30 on Apr. 18, is trading at 263/4.
GAMBLER. Now, the company is going even further to match AOL and survive the onslaught of the World Wide Web. On May 21, it unveiled Red Dog, a plan to stop using proprietary software and switch to a Web programming format. On June 4, it announced an alliance with Microsoft Corp. CompuServe and Wow! will get a place on Microsoft's Windows 95 software--a deal AOL won last April. In return, CompuServe will be the first customer for Microsoft's Normandy, software for running Internet servers. This approach will make it easier for CompuServe to grab hot new Web content, but it also means that the service risks losing the edge that its proprietary software and content now provides.
CompuServe Chief Executive Robert J. Massey insists that the company has to take risks now. ``America Online was in the passing lane, focused on marketing, on subscriber acquisition. CompuServe was focused on profitability. We changed all that,'' he says. With Block's blessing, he cut rates last fall, reducing the average monthly bill by $2, to $16.30. Meanwhile, he invested in content, paying an estimated $3.5 million to woo Time from AOL, for example.
Another gamble: Aping an AOL practice, CompuServe now capitalizes much of the cost of recruiting members rather than treating them as current expenses. In the nine months ended Jan. 31, it deferred $65 million in such costs, which are being written off over two years. The risk is that subscribers won't stay that long, potentially planting charges against future earnings. Indeed, one factor in the quarterly loss was a ruling by the Securities & Exchange Commission that certain advertising costs must be expensed now.
But if Massey's plan works, today's gambles will look like prudent investments. Now, the dice are still rolling. Sprynet, the Net-access service it bought for $102 million last year, has garnered 130,000 customers since February--compared to the 150,000 AT&T snatched in three months with WorldNet. Wow!, launched in March, works only with Win 95 and has gotten so-so reviews. Only 50,000 subscribers have signed up, estimates Mark Mooradian, an analyst at New York-based Jupiter Communications Inc. ``Wow! wants to be the next AOL,'' says Mooradian. ``Unless they show the same [nerve], it's not going to get there.''
Massey's biggest challenge is to breathe new life into his bread-and-butter service. For years, CompuServe was where PC geeks traded tips and serious cyberfolk looked for data. ``You've got to have a buzz, an aura,'' says David Simons, managing director of Digital Video Services, a New York investment research firm. ``CompuServe never really developed any pizzazz.''
On Wall Street, CompuServe certainly retains its dowdy image: While other cyberstocks command massive valuations, CompuServe shares have traded as low as 22. Even so, Block officials say they plan to to sell the 80% they still own to the public by next April.
The jump to the Web could be key to giving CompuServe some glitz. The prospect of snagging 3.4 million customers should persuade content providers to locate on the CompuServe site. In April, CompuServe cut a deal with Time Warner Inc. to offer its customers free access to the Pathfinder Web site, including the forthcoming Pathfinder Personal Edition. That service, which will carry a separate charge on other networks, will pull Time Warner content tailored to a consumer's specific interests. ``Personalized service will differentiate us,'' says Dennis D. Matteucci, president of online services.
BIG CHANCE. The move to Web standards is all but inevitable. Rivals Prodigy Services Co. and Microsoft are converting their services now, and AOL says it may do so, too. There's a great opening for CompuServe to bring a mass audience safely onto the Web, argues Paul Sagan, president of New Media at Time Inc. ``That's what a successful aggregator will do--say to members: `Trust us to guide you to the way to find the information you want,''' he says.
Whether CompuServe can pull off its Web plan remains to be seen. But one thing is sure: The sleepy company of a year ago is on the move. And it retains considerable hidden strengths. It's the leading online service overseas. And it gets a quarter of its revenues from corporate customers who use its network to move transactions, including 1.2 billion Visa credit-card authorizations per year. That may not make it the king of cyberspace, but it could ensure that CompuServe survives in the Web era.
By Zachary Schiller in Columbus, Ohio, and Paul M. Eng in New York, with Peter Elstrom in Chicago