A Match From Hell?

WHEN IT COMES TO CYBERSPACE, where you hang out says loads about you. Take netizens of America Online, the country's largest service. Its patrons, many of them teenagers, go by screen names like "joe-cool" or "jerseygrrl" and hang out in "chat rooms." When AOL recently dropped its price to $19.95 a month, they chatted so long that phone lines were jammed. Contrast that with the sophisticates who subscribe to CompuServe, the nation's No. 2 service. They're mostly professionals who have no problem using unhip e-mail addresses like "73261.1457." CompuServe members don't "chat" or "browse" - they participate in forums and do research. As for costs, they don't much care, since most of them are corporate types who put their charges on expense accounts anyway.

So when rumors last week had AOL in talks to acquire CompuServe, it was like the guys at Animal House were thinking of taking over the Honors Society. It's unclear whether the culture-clashing deal will really happen: AOL dismisses the talk as "market rumors," and H&R Block, which owns 80 percent of CompuServe's stock, says only that it's discussing a "business combination" with an unnamed suitor-and observers say competitors from Microsoft to AT&T might enter the fray. Analysts say an AOL-CompuServe linkage would make strategic sense if they can agree on a price, which could reach $2 billion. But bridging the membership gap between the two could take some cyber-magic. Jerry Michalski, managing editor of Release 1.0, says: "There are a lot of members on CompuServe who hate AOL viscerally."

CompuServe's members are just a small piece of what AOL would be buying. Its most valuable property is its network-the 133,000 modems and phone connections that run both its online service and a separate data network for big business users like FedEx and Visa. Its overseas members are also worth something: with 900,000 subscribers in Europe, Compuserve leads the pack abroad. The rest of its business is no gem. Its latest expansion effort, a new service called Wow, folded in just 10 months. In the last year it has lost 200,000 members in the United States and has repeatedly missed earnings estimates, causing its stock price to drop from last year's high of $88 to $8 before last week's news. Says one analyst: "Wall Street has lost faith in management."

At AOL, meanwhile, managers seem to be intentionally testing the Street's faith. First came the fiasco in which AOL converted from per-hour pricing to a flat rate without anticipating the boom in demand; the resulting busy signals will cost it $24 million in refunds. The Refund Department will also be kept busy by last week's news that AOL had been charging users $6 per hour when they connected via a toll-free number, even though many users hadn't a clue about the charges. The missteps raise questions about how well AOL's team could handle the mammoth job of integrating CompuServe's 8 million members onto its own 8 million-member service. Some potential newcomers--like John Haverty, Webmaster for Washburn University in Topeka, Kans.--are already planning their exit. "If they try to take us off of Compuserve and move us to AOL, I'll probably quit," Haverty says. Whoever buys the service had better hope he's not at the head of a stampede.