Prodigy hits a strategic crossroad; nation's largest interactive service fails to convince the masses to shop online - Prodigy Services Co - includes related article on using interactivity in advertising

Nation's largest interactive service fails to convince the masses to shop online

Prodigy begins its third year as a national interactive service next month. Its current strategy sharply differs from its origins as a flat-fee online family service that would make its money from advertising and transactions.

"We now expect the bulk of our revenues to come from our members, rather than other sources," admits spokesman Steve Hein. "Fewer of our members shop online than we had expected."

Much like the cable industry, instead of paying just $12.95 a month for a basic service, Prodigy subscribers can now pay additional fees for its "Custom Choices." The addition of a new tiered information service, ZiffNet, enables Prodigy subscribers to download software for the first time. Other Custom Choices offer enhanced investment services and the opportunity to manage a baseball league.

Prodigy, a joint venture of financially strapped partners IBM and Sears, says it has about 200 advertisers online - close to 70 of them national - spending between $20,000 and $30,000 a month. Robert Paltos, national advertising sales manager, says six of every seven renew. Analysts refute that, saying the number is down more than half. Ads for automobiles, travel and financial services dominate. All are information-heavy products with a need to find qualified leads.

The company views advertising as a separate classification from online merchants, such as J.C. Penney or Sears. The current list of roughly 35 merchants is down nearly 40% from its peak, says Edward Sessler, Prodigy director of merchandise marketing.

"Now that we understand the economics of the Prodigy business, and the investment needed on the part of commercial participants, we believe we need merchants who will generate a minimum of $1 million in merchandise volume a year," Mr. Sessler says. (Prodigy's cut is about $100,000 per merchant.)

One high-profile merchant that is no longer on Prodigy is The Disney Catalog. Mr. Sessler says Disney "lost focus," and suffered from inventory problems. Jon Roman, former marketing manager for Childcraft Inc., the parent company of Disney's catalog, says it was hard to meet Prodigy's production lead time and Childcraft lacked the manpower to maintain the program.

Mr. Sessler admits that more people might shop on Prodigy if a better breadth of merchandise and good deals were offered. Through Prodigy's affiliation with the fledgling Air Miles program, a frequent-shopper scheme could be offered. But merchants aren't interested if the action isn't there. Still, Lands' End has signed on for the fall.

Chris Elwell, an analyst with Simba Information Inc., in Wilton Conn., says H&R Block's CompuServe and smaller services GEnie, Delphi and America Online, have been forced to react to Prodigy's pricing. "Prodigy is responsible for 50% of the growth of subscriptions in the entire online business in the past two years," he says.

CompuServe, a favorite with computer aficionados for its expert forums and bulletin boards, has a new print and television ad campaign with a clear allusion to Prodigy. Its tag line: "The information service you won't outgrow."

Interactivity Is Two-Way Street

Advertisers looking to reap the rewards of interactivity must first meet the challenges, attendees of the Interactive Services Assn. annual conference were told last month in Minneapolis. "Just as radio ads don't work on TV and a print ad doesn't work on radio, nothing you currently do works interactively," says Mark Walsh, vice president, general manager of CUC International's Interactive Services Division. So don't expect good results unless your message is enhanced by interactivity. Read-only copy wastes the medium.

As product and service marketers move from mass to niche to personalized marketing strategies, the appeal of interactive services is obvious. It costs little to deliver a message, yet the ability to track response - and product usage - is high.

Mr. Walsh estimates that interacting with customer on a computer screen costs about one-fifth what is costs to talk to the person on the phone.

"The delivery of value is cheaper [to the advertiser] and more apparent to the customer," he points out.

But two-way communication also spawns an unfamiliar intimacy with the consumer that compels advertisers to be straightforward and responsive. They can't afford to confuse their customers with rhetoric, and they won't get away with shabby service.

Once consumers get on an electronic network their expectations grow exponentially. They "grow long nails and hair on their hands," warns William Tobin, president of PC Flowers, which launched its floral delivery business on Prodigy. "They tell you when you really didn't do a good job, and they want your firstborn back for it."