CompuServe Interactive Services, Inc.

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CompuServe Interactive Services, Inc.

5000 Arlington Center Boulevard
Columbus, Ohio 43220-2913
U.S.A.
(614) 457-8600
(800) 848-8990
Fax: (614) 457-0348
Web site: http://www.compuserve.com

Wholly Owned Subsidiary of America Online, Inc.
Incorporated: 1980 as CompuServe Corp.
Employees: 3,050
Sales: $842 million (1997 est.)
SICs: 7375 Information Retrieval Services; 7372 Prepackaged Software; 7374 Data Processing & Preparation

One of the world’s leading online information services, CompuServe Interactive Services, Inc. provides personal computer users in the home or office with a wide variety of online information services, communications opportunities, and software products. With approximately two million subscribers in 1998, CompuServe specializes in online services for small businesses and professionals, maintaining a separate niche from parent company America Online, recognized for its more mass-market approach. An important portion of CompuServe’s business comes from Europe, where in 1998 it boasted some 850,000 subscribers.

Early History

CompuServe was established in 1969 by Jeffrey Wilkins to computerize his father-in-law’s insurance company. In 1977, he expanded into computer time-sharing services. Through its pioneering efforts in videotex technology, CompuServe introduced an online service, the CompuServe Information Service, two years later. This network initially represented an extension of its core business; starting the information service was simply a matter of offering existing hardware to about 1,200 nighttime users in its first year. The following year, CompuServe became a wholly owned subsidiary of H&R Block, Inc., which provided the financial support to foster CompuServe’s rapid growth through expansion as well as research and development.

Through videotex, CompuServe enabled users to perform banking and shopping transactions and access a wide variety of information from their homes. Using CompuServe, individuals could make travel reservations and order tickets for cultural or sporting events in the convenience of their homes, or access databases offering current news, weather forecasts, sports scores, and stock prices. The usage rate for many of these services initially fell below the company’s expectations, however, as it proved difficult to change consumer behavior; many simply preferred to use the telephone or other conventional channels for acquiring their goods and services. Nevertheless, as personal computing and home office environments became more common in the United States, Americans became more willing to explore videotex transactions. CompuServe reported that sales made through its home shopping service, the Electronic Mall, rose 76 percent in 1990.

Other, more popular videotex applications involved communication networks facilitated by e-mail, electronic bulletin boards, and forums. These services, which allowed users across the country to communicate through their computers, quickly became the most popular of CompuServe’s offerings. CompuServe played a particularly important role in developing online forums—its most heavily used service—that offered users the opportunity to share information on areas of common interest. The company’s earliest forums consisted largely of shared information on personal computing technology and thus appealed primarily to specialists and technology buffs. As the concept gained popularity, however, forums for a wide variety of subjects and hobbies emerged, allowing users to electronically discuss music, gaming, auto racing, and science fiction, or more serious topics, such as law and medicine. By the early 1990s, CompuServe had become famous for its more than 450 technical support forums; every major software developer and computer manufacturer, including Borland, IBM, Microsoft, and 3Com Corporation, began hosting its own bulletin board to share information and entertain questions from their users. Forums also began serving as a point of access to the thousands of valuable public domain software programs in circulation.

Steady Expansion in the Late 1980s

In 1986, the market research organization LINK Resources published a report in which it characterized CompuServe’s growth as “slow but steady.” This reflected the company’s marketing strategy of focusing on the enhancement of its popular services, while avoiding “quantum leaps” into new and untried areas. This strategy proved successful, as CompuServe was one of just a few profitable videotex companies by the early 1990s.

In 1987, CompuServe entered into a joint venture with Nissho Iwai Corporation and Fujitsu Limited to offer Nifty-Serve, a version of the CompuServe Information Service, in Japan. Licensing and distribution agreements were also made during this time to bring the CompuServe Information Service to Argentina, Australia, Chile, Hungary, Hong Kong, Israel, New Zealand, South Africa, South Korea, Taiwan, and Venezuela. After establishing access and support centers in the European population centers of Bristol, Munich, and Paris, CompuServe doubled its membership on the continent between 1992 and 1993, while Nifty-Serve claimed over 350,000 members.

In March 1989, CompuServe Information Service became the first general videotex service to garner a half million U.S. subscribers. Later that year, CompuServe completed the acquisition of Source Telecomputing Corporation, thereby expanding its membership by as many as 40,000 subscribers and eliminating a competitor. The following year, CompuServe acquired MicroSolutions Inc., a Dallas-based reseller of local area network and connectivity products. By 1991, CompuServe boasted over 620,000 subscribers and annual revenues of over $200 million. That year, CompuServe introduced new software providing colorful windows and icons to help users recognize and quickly select the service of their choice.

During this time, CompuServe was a litigant in a precedent-setting case involving censorship, liability, and libel in the electronic information age. The case involved Don Fitzpatrick, the coordinator of CompuServe’s Rumorville forum for journalists, who was accused of posting defamatory remarks about Skuttlebutt, a rival forum. CompuServe was named as a co-defendant, but in November 1991, Judge Peter K. Leisure of the U.S. District Court likened CompuServe’s responsibility to that of the owner of a bookstore, noting that the bookseller could not possibly be responsible for the editorial content of every book sold. Two years later, CompuServe was again involved in a lawsuit and was ordered by a federal judge to pay $4 million in compensatory and punitive damages to two Massachusetts businesses for breaching an agreement in connection with the purchase of a database system by CompuServe.

Competition Increases in the Early 1990s

In the early 1990s, lower costs for computing and telecommunications technology made online services less expensive to operate. The savings were passed along to users, who were offered limited groupings of services for a single flat rate per month, regardless of the time spent using them. Spearheading flat-rate pricing, the Prodigy online service soon surpassed CompuServe as the leading videotex service in terms of active members. Moreover, the Internet, a nonprofit, global network of more than 34,000 public and private computer networks, was becoming a potential threat to CompuServe’s share of the market. Subsidized by the government and managed by volunteers, the Internet derived operating revenues from its members, who paid connection fees.

Although for-profit information services did not yet consider the Internet a direct competitor—and relied on a wider variety of services and appealing color graphics to maintain their market share—the issue of cost remained a factor in subscription rates. Dave Bezair, a senior product manager at CompuServe, Inc., told the Wall Street Journal in September 1993 that although “everyone wants to jump on this price issue … the reality is accessibility, ease of use, customer service and worldwide access.” In fact, the company made major strides towards accessibility and ease of use by becoming the first in the industry to offer user interface software compatible with the popular Microsoft Windows operating system. Nevertheless, CompuServe did announce a subscriber fee reduction of as much as 40 percent, effective early in 1994. Hourly connect fees, which had ranged from $12.80 to $22.80 were dropped to between $8 and $16.

During this time, CompuServe also developed new products and services to meet competition. The Executive Service Option (ESO) was introduced, featuring business data enhanced by financial, demographic, and editorial information. Communications services designed especially for business users included online brokerage firms and electronic conferencing via computer. ESO also offered stock quotes and commodity information; historical market information; major market and industry indices; and national and international business news wires. In other fields, CompuServe created a public, online forum to help find missing children, which it made freely available to both customers and competing online services. Early in 1994, Vice-President Albert Gore, Jr., an avid promoter of the “information superhighway,” gave CompuServe one of the first online, interactive interviews by a major political figure.

Company Perspectives:

Our mission is to serve those people who are serious about all their activities … work, family, and leisure and who can improve their lives with the time-saving benefits of the Internet online world.

CompuServe’s revenues stood at $315.4 million in fiscal 1993, rising 12.3 percent above the previous year, while its membership increased 40 percent during the year, reaching 1.5 million. The CompuServe Information Service won the PC Magazine Editor’s Choice Award in 1993 and was selected as the leading provider of public data network services in Network World’s reader survey that year. Billed in advertisements as “The Information Service You Won’t Outgrow,” CompuServe focused on developing and implementing new technologies to stay competitive in a rapidly changing marketplace.

In 1994 CompuServe made two Internet-related acquisitions. The first was Network Publishing, which specialized in creating Internet sites for corporations. The second, SPRY, developed Internet software, including Internet in a Box. By mid-1996 CompuServe had fully embraced the Internet, providing its subscribers access to the World Wide Web using Netscape Navigator software and committing itself to creating all new content with Internet technology.

The Late 1990s: Troubled Finances

In April 1996 H&R Block sold 20 percent of CompuServe in an initial public offering. The IPO generated less cash than H&R Block had hoped: only $454 million. In 1996 revenues rose 36 percent to $793 million and net income more than quintupled, from $9 million in 1995 to $49 million in 1996. With more intense competition from industry leader America Online and the increasing popularity of direct Internet providers, however, the growth of the company’s subscriber base had ground to a halt by the end of the year. In addition, CompuServe’s introduction of its WOW! online package generated such a poor response it was pulled before the year was out. Repeated delays in introducing its CompuServe 3.0 software also hurt the company, though the company managed to release it by the end of 1996.

Early in 1997 president and CEO Robert J. Massey resigned, after only two years at those posts. Soon after, CompuServe agreed to provide its content to the subscribers of germany.net, an Internet access provider in Germany.

CompuServe’s financial performance plummeted in 1997, with the company reporting a loss of $120 million. By late 1997, however, H&R Block had sold its controlling interest in CompuServe to the telecommunications company WorldCom. WorldCom split the company, keeping CompuServe’s networking infrastructure and using its online content and subscriber base in a deal with America Online. AOL agreed to exchange its own network infrastructure for the CompuServe online service, $175 million in cash, and networking discounts from WorldCom.

Rather than swallow its nearest competitor wholesale, AOL chose to maintain CompuServe Interactive Services as an independent subsidiary. America Online’s service was known as user-friendly and extremely easy for even novice computer users to navigate. AOL planned to keep CompuServe’s identity as a more sophisticated service that catered to small businesses and professionals.

In 1998 CompuServe’s subscriber base remained fairly steady at approximately two million. Although it still operated at a loss that year, it came close to breaking even. It introduced a service upgrade in 1998, CompuServe 4.0, and a revamped shopping service. The new Shopping Channel featured more than 100 retailers, including Eddie Bauer, FTD, and Barnes and Noble. Late in 1998 CompuServe announced a partnership with Time Inc. News Media that would provide CompuServe’s subscribers with content and information from the online editions of the Time Inc. publications Money and Fortune.