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CompuServe tests flat rate
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July 21, 1997: 5:00 p.m. ET
Online service is conducting trials of unlimited-service pricing plans
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NEW YORK (CNNfn) - After watching America Online weather busy signals and frustrated users when it went to unlimited pricing in December, rival CompuServe is now testing the same strategy itself.
CNNfn.com has learned the online service has offered an unspecified number of randomly selected customers the opportunity to sign up for trials of unlimited pricing. The tests are split into two groups: one group is paying $24.95 and the other $27.95 a month.
CompuServe spokeswoman Teresa Owens said no decisions have been made on whether unlimited pricing actually will be implemented. She also said the actual end price could be somewhere between $24.95 and $27.95 a month.
At least for the trial, services that currently carry extra fees, such as the executive news service newspaper archives, newsletters and health databases, will continue to charge their normal fees.
"We're testing several factors. One is profitability and another is what members think is a fair price for the content and access we provide. Neither is set in stone and the price may end up being a midpoint," Owens said.
She said the trials, which began last week, are scheduled to run for at least 90 days. Beyond that, there is no set time frame for analyzing increases in usage and other results to determine if a flat rate actually will be implemented.
"This is a request we have noticed and we're testing it to see how it works out," Owens said.
CompuServe has wavered a bit when it comes to its target audience. When AOL was experiencing busy signals as a result of going to a flat rate in December, CompuServe went as far as to run an ad during the SuperBowl touting its network availability.
At the same time, CompuServe said it was refocusing itself on professional and technical users, which to many seemed to indicate it was getting out of the consumer access game.
In April, word surfaced that AOL was considering an acquisition of CompuServe. However, those talks were shelved because of the difficult tax and legal considerations a buyout would have brought.
Analysts, who hadn't heard of the trials, also expressed surprise at the turnaround.
"I'm surprised to see them doing it. I don't know if I'm thrilled with it. While it would make them more price competitive and generate greater subscriber growth, I think they tried to be an AOL before and failed," said Alexander Paris Jr., vice president and senior investment analyst at Chicago-based Barrington Research.
"At the time AOL went unlimited, CompuServe deliberately chose not to follow with the point being how can you charge a fixed rate for something that has variable costs? There is a cost to someone dialing and just sitting on the system. That was what AOL ran into."
Josh Blackmon, director of New York-based FIND/SVP Worldwide Consulting's Internet advisory group, said he was surprised at the move, given the fact that CompuServe closed its Wow! consumer online service.
"With Wow!, they tried to attract the consumer market and blew it. AOL made a bid for the company and the result was they're not going to buy it. It sounds like CompuServe is trying to be bottom-line oriented," he said.
Among the pluses CompuServe has going for it, Blackmon said, are a better interface and higher dependability, which is important to business users
"They could create a good reputation for themselves if they would focus on the business market. They need to learn how to promote themselves," Blackmon said.
He believes the prices CompuServe is testing are too high for unlimited service.
"The standard price is $20 (a month) although business users might pay a little bit more. CompuServe does have very dependable e-mail going for it. It's also pretty simple, especially for neophyte business users. I respect CompuServe for that, even though they've lost most of the market," he said.
Owens said CompuServe is making the moves in response to clamoring from users who thought neither the super value or standard plans gave them enough access time.
"We need to meet members' needs, although I don't think members have left because of pricing issues. Most members seem to feel that content and access quality outweigh pricing.
"We watched the fallout some of the national providers went through. We may not experience that problem since we own our own network, but we also determined a price under $20 a month wouldn't be profitable. We had to come up with a price point that would work and still allow profit," Owens said.
Paris said it is possible to make money at $24.95 or $27.95 and not $19.95 when you have 3 million customers.
"I don't really know what the point of going to flat pricing is if you're going to be 40 percent higher than the competition as is $27.95. If they're competing with AOL, they need to get closer to AOL," he said.
Paris said CompuServe's average revenue per customer for its 1996-97 fiscal year, which ended April 30, was about $15 a month.
"If you got everyone up to $27, you'd obviously be making more money. If you put it at $19.95, you're making more money, but might be encouraging people to stay on the service longer," he said.
One of the most profitable areas for CompuServe is its network services division, which currently has more than 1,400 customers. CompuServe rents space to these customers, such as banks, who use it to provide other dial-up services like online banking.
Owens said a move to flat-rate, unlimited pricing wouldn't affect that business.
"The online and network services units work well together, so online customers taking away from corporate customers isn't an issue. We continually watch our network to ensure there is enough (capacity)," Owens said.
Both analysts believe that CompuServe will end up implementing flat-rate pricing.
"While I would like to see the company start generating profits sooner, I think (flat-rate pricing) is the way the industry is going. CompuServe will need to make its revenue through advertising or transaction fees," Paris said.
As to whether a move to unlimited pricing might enhance the changes that H&R Block Inc. will find a buyer for its portion of the service, both said that could have a positive effect.
"If I was H&R Block, I would want to do everything I could to get rid of it," Blackmon said.
--Cyrus Afzali
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