New Media, page CompuServe cuts set off alarm bells

Staff departures, loss of worldwide dominance, increased competition and a weak stock market flotation have left former leading online service provider CompuServe in a very shaky position.

CompuServe is haemorrhaging key marketing staff at an alarming rate, while cutting its worldwide marketing budget by $100m (66m).

In the past eight weeks, senior vice-president for marketing Cynthia Vahlkamp, based in the company’s headquarters in Columbus Ohio, resigned, UK marketing director Alan Lawson left after just three months, and last week European marketing communications director Michael Williams joined the exodus. On Monday CompuServe’s president international Steven Stanbrook resigned after six months. Stanbrook had been the most senior CompuServe representative in Europe. It leaves the company without any senior marketing personnel in Europe.

With new players like Virgin Net, BBC Online, and the joint BT/News International venture Springboard all queuing to enter the UK market, brand differentiation has never been more important. And yet CompuServe, easily the market leader, has never been so vulnerable as after the cuts that were first reported in Marketing Week (October 11). To paraphrase Oscar Wilde: to lose one senior marketing executive is a misfortune, to lose three begins to look like carelessness.

It has been a tough 12 months for CompuServe outside Europe. Last year it lost its worldwide dominance in online services to America Online (AOL). It now has 5.2 million users, compared with AOL’s 6.2 million. In the US, the company is currently losing more members than it is gaining, partly because of AOL’s marketing and its success in portraying CompuServe as the “establishment”.

By contrast, CompuServe has experienced unrivalled success during its eight-year presence in Europe. It has enjoyed year-on-year average growth of 150 per cent and its current membership stands at 850,000, of which about 400,000 are in the UK. However, since the start of this year, the European operation has been put under increasing pressure because of the failings of the US arm.

Things began to go wrong for the company in March this year when CompuServe’s parent company, tax consultancy H&R Block, which had wholly owned the online business for 16 years, floated 20 per cent of the company on the stock market. The money was intended to finance the next stage of the company’s development. Priced at $33 (21) per share in April, the company raised an estimated 150m on the expectation of immediate profits. The shares now stand at $10 (6.50).

CompuServe reported losses of 13.2m on its first quarter figures from March to June and expects second quarter losses of between 6.8m and 10.2m. The company blames low customer growth.

As a result, the planned investment in upgrading its private network into an open Web-standard system has been curtailed. Further plans to increase its worldwide marketing and branding, including a 10m marketing budget in the UK, have also either been cut or scrapped.

The reaction of CompuServe’s US-based president Bob Massey and the board was to apply those cuts across the board in both Europe and America, even though Europe is still growing. In the US, 150 jobs were cut from all levels of the company.

One former senior CompuServe UK employee says: “The pressure was immense from the US. The target for the number of new members in the UK is 800,000. But our 10m (marketing) budget was halved in May and then it was cut by a further 25 per cent in September. Yet all the while they still expected to double the membership in the UK.”

Alan Lawson, who quit as UK marketing director last month (MW September 13) confirms that he went because of disputes over the budget. Hired to create brand values around the CompuServe name, he had planned to support and retain the existing membership base with American Express-style promotions, while developing advertising to attract new consumers.

Lawson says: “I was disappointed that there was not enough budget to do the things that needed to be done. The job that I was brought in to do didn’t really exist anymore.” He will not be replaced, underlining CompuServe’s withdrawal from its previous marketing ambitions. Sources suggest that the reduced ad budget will be exhausted by February unless there is a change of mind and more cash is made available.

Former CompuServe staff predict that more senior staff will leave. “CVs are definitely flying about,” says one source. Another former staff member, who has since joined a rival online provider, adds: “I have had a number of people call to offer their CVs.”

However, CompuServe is still a strong proposition. It dominates the British online market. At 400,000, it has more members than the rest of its UK rivals combined. Demon Internet, an Internet service provider, comes next with 70,000 customers. Data research body International Data Group says that CompuServe is the first name people associate with the Internet, followed by Microsoft and Netscape.

But some observers think that the company may be about to lose that pre-eminent position because it is doing very little to support its position or build its brand.

The strongest challenge may come from the telecoms sector. AT&T joined the UK market this summer. When it first entered the market in the US last year it gave its customers free Internet access for a year as a special offer. This won it a large chunk of business. AT&T, or perhaps BT, is believed to be preparing to make the same offer in the UK.

Few observers believe things will stay the same at CompuServe. As one senior former employee puts it: “The management in the US has been outmanoeuvred by other players. Things simply can’t remain as they are – something radical has to happen.”

Some say that the sale of the company is a serious option. Originally H&R Block, which still owns 80 per cent of CompuServe, had planned to float the whole company by February 1997. But that has now been postponed.

One reason being suggested is that the tax consultancy operation is now considering selling the business.

Even with its current problems, it would be attractive to a number of suitors – its 5.2 million users and 27 years of experience could be worth as much as 1bn. That may appeal to a large telecoms company looking to make an instant impact in this market.

Others suggest that the US arm could be sold off separately but this is a less likely option. However, a change in the US management, and a concentration on the growing European market, seem inevitable. The last option, the least likely, is that the company will fold if it fails to address its problems.

CompuServe is still powerful but has been knocked off course by growing competition and a less than impressive stock-market debut. The management has seemingly lost its nerve and panic has spread through all levels of the company.

In many ways, CompuServe can be seen as a victim of the dramatic growth in a sector it has championed. But, as with many pioneers, it now faces a period of uncertainty.

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