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February 22, 1996

Sears Moves to Shed Stake in Prodigy


And now it is Prodigy's turn.

In the latest sign of upheaval in the computer on-line industry, Prodigy Services, the nation's third-largest consumer on-line information service was put up for sale Wednesday -- at least the half that is owned by Sears, Roebuck & Co. IBM, Sears' longtime partner in Prodigy, declined to comment on its own plans for the service, which has 1.7 million subscribers.

Sears' move came just a day after H&R Block Inc. announced it planned to spin off its Compuserve division, the second-largest service.

It might seem odd that these market leaders would want to leave the field, in light of phenomenal growth that saw total on-line subscribers in the United States nearly double last year, to 11.3 million.

But with the market booming, analysts say, now may be the best time to sell out for companies not fully committed to the increasingly competitive and volatile business of putting consumers in cyberspace.

Sears, which analysts say had pumped about $600 million into Prodigy, indicated Wednesday that it remained a retailer first and foremost, and H&R Block said Tuesday that it wanted to focus on its tax-return business.

America Online Inc., the country's largest on-line service with more than five million subscribers, has no other lines of business. But even it has been forced to scramble full-time to keep up with the needs of increasingly sophisticated, ever more demanding consumers.

Among other changes, America Online recently set up a separate company to provide direct connections to the global Internet for subscribers who choose to bypass America Online's own, proprietary lineup of information and entertainment services, discussion groups and other offerings.

As hardly a week goes by without a new alliance, acquisition or rumor of yet another change in the on-line industry, analysts acknowledge that the millions of Americans with computers and modems could become confused. But the upheaval, driven by competition, will ultimately be good for consumers, many analysts say.

"There's an ever-increasing number of options for consumers, in both the on-line services and the Internet," said Adam Schoenfeld, vice president of Jupiter Communications Inc., a research company specializing in Internet and on-line businesses. "The breakneck pace of innovation will lead to lower prices and more variety."

And what happens if your on-line company should change owners or disappear altogether? "I don't think users should concern themselves with the business tribulations of these companies," Schoenfeld said. "If your company goes out of the business, there are plenty of others waiting to take you."

But certainly, the on-line lineup is in flux. Since the beginning of this year, Rupert Murdoch's News Corp. has effectively shelved what was left of the former Delphi on-line service; AT&T has pulled the plug on its Interchange Network; General Electric Co. has unloaded its Genie service; Apple Computer Inc. said it was re-evaluating its support for eWorld; and Microsoft Corp. told developers of information services for its Microsoft Network to redirect their efforts and create offerings for the Internet's World Wide Web.

Analysts cite a variety of reasons for the tumult, including intense competition, the high cost of development, competition from Internet access providers who bypass consumer services like Prodigy and America Online, and recent passage of the Telecommunications Act of 1996.

"It's not a coincidence that these announcements happened right after the passage of the telecom bill," said Rod Kuckro, editor of the Information & Interactive Services Report, a newsletter based in Washington. "It gave a lot of companies the ability to start planning for the future in the new environment."

The Telecommunications Act, recently signed by President Clinton, allows the big telephone and communications companies to expand beyond their traditional businesses and begin developing their own on-line information services.

"It's cheaper to buy a system with established customers than it is to build one from scratch, and the only companies that can afford to buy a stake in these on-line services and develop their infrastructure are the big telecom companies," Kuckro said.

Kuckro also noted the attractive demographic profiles of on-line service subscribers, who tend to be affluent and well-educated, the kind of people who are likely to buy advanced telecommunications services.

AT&T has been rumored as a possible buyer of Sears' share of Prodigy.

"Prodigy does not fit into Sears' long-term strategy for growth," Arthur C. Martinez, chairman and chief executive of the world's second-largest retailer, told financial analysts in New York on Wednesday.

Executives from both Sears and IBM praised the evolution of Prodigy under its chief executive, Edward Bennett, a former cable TV executive at Viacom Inc. who was hired last year by Prodigy.

Bennett made Prodigy the first of the big on-line services to offer its subscribers access to the Internet and the World Wide Web, an Internet service that reduces formerly complex computer commands to a point-and-click navigational system.

Since 1993, when the Internet's World Wide Web service suddenly became popular, analysts have been suggesting that the wide-open, global Web would overtake and overwhelm the smaller, proprietary services like Compuserve and Prodigy.

The consumer services differ from the Internet in that they require special software, unique to each service, to tap into that service's private data bases of news, features, discussion groups and other on-line offerings.

Even with the Web, though, many analysts say the Internet is still too difficult to use. Services like Prodigy, Compuserve and America Online hide the Internet's complexity behind their own, easy-to-use software and back it with customer support systems that the Internet lacks.

"We remain convinced that the most compelling choice for the mass market consumer is still on-line services," Brian Oakes, an analyst with J.P. Morgan Securities Inc., wrote to investors last month.

Sears' decision to sell Prodigy may be partly to capitalize on the potentially high value that an on-line system might command in the marketplace today. It is also, however, the culmination of a three-year program to return to its retailing roots.

Sears has already spun off Allstate and Dean Witter Discover & Co., its former insurance and financial services subsidiaries, and even sold the Sears Tower building in Chicago. Selling Prodigy is the last step in that process.

In a three-hour meeting with industry analysts, Martinez did not make a single reference to electronic commerce, which many companies believe is going to emerge as a multibillion-dollar business by the end of the decade. Martinez said that he had concluded that Sears could better spend its capital on revamping its traditional mall-based stores.

But speaking to reporters afterward, Martinez said that if Sears were to become involved in selling over the Internet, it would be better for the company not to be tied to a single service like Prodigy.

Earlier this month, the nation's biggest retailer, Wal-Mart, announced an alliance with Microsoft to develop Internet-based retailing systems. And on Tuesday, CUC International of Stamford, Conn., disclosed plans to spend nearly $2 billion to acquire software companies that will help its electronic commerce plans.

Sears, like H&R Block, may also be eager to unload its on-line venture in what has become an increasingly hostile legal environment. Prodigy was sued for $200 million last year by a Long Island investment bank that accused it of libel, based on comments posted on the service by a subscriber. The suit was dropped, but a judge left open the question of whether Prodigy was liable in any future cases.

Compuserve, meanwhile, is under fire in Germany for providing children access to the Internet, which carries some pornography and hate literature. And all on-line services are challenging the Communications Decency Act, part of the new telecom law, which sets heavy fines and prison terms for the transmission of "patently offensive" material over computer networks.

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