Whatever happened to America's first cutting-edge online service?

REMEMBER Prodigy? When it blasted onto the national scene in 1990, it was touted as the network of the future, the reason millions of Americans would ultimately power on their PCs. At its peak, it had 2 million subscribers and innovative services that even today would be considered cutting edge. But soon after its debut, Prodigy pulled one of the dumbest marketing moves in digital history

Tired of members running up costs by sending too many emails, New York-based Prodigy announced that anyone sending more than 30 messages a month would have to pay 25 cents per email. Outraged, some Prodigy subscribers established the Cooperative Defense Committee. The dissident group, which grew to have 18,000 members, according to organizers, lobbied the company to change its policy.
The company's response? Boot the troublemakers. "These [email] charges are fair and going to go into effect," said Prodigy's communications manager at the time. "Enough is enough."

Prodigy failed because Sears and IBM peppered it with inept executives.
In an online world that then, and now, is mostly about chat, Prodigy's move was insane and suicidal. But sadly, it was not the company's last bad decision. Its corporate owners, Sears and IBM, delayed strategic decisions because of infighting, peppered Prodigy's management with inept, slow-moving executives, and saw the company as they saw themselves: powerful and established instead of what it should have been, a gutsy startup.

Prodigy didn't even offer management the greatest of all startup incentives: options. Not surprisingly, by 1996, Prodigy had lost half its membership (most, no doubt, to the online winner, America Online). Thanks to a frustrated executive brokering the deal, a communications company, International Wireless, with financial backing from Mexican communications and industrial conglomerate Grupo Carso, bought the company. Sears and IBM lost some $750 million in the sale.

Online players that have recently taken on large corporate partners, such as CNET, should take note. Of the four big consumer online services in 1991, three were owned by large corporations: Prodigy (Sears and IBM), GEnie (General Electric), and CompuServe (H&R Block). The fourth, young, independent AOL, would ultimately beat all three.

But beyond the business lessons to be learned, there is also a moral stamina pays off and even a hopeful ending. After more than a decade, Prodigy is still alive and kicking. Last year, after apparently learning its lesson, Prodigy began to transform itself into a nimble startup. Under the direction of Russ Pillar, Prodigy has become an Internet service provider.

When Prodigy exploded on the scene in the late 1980s, it seemed to be, well...a prodigy. Sears and IBM invested more than $1 billion in building their groundbreaking product. By merely loading a floppy disk, Prodigy's members could enter into a complete and proprietary community: They could trade stocks; buy everything from airline tickets to stamps; shop for goods from J. C. Penney, Spiegel, Kmart, and Sears; keep up on important financial news from Dow Jones; and access comprehensive encyclopedias.

But what started out as an asset (Sears handling the e-commerce end, IBM the network end) soon became a liability. Bowing to the straitlaced image of its owners, Prodigy early on banned discussions about sex (which was AOL's big draw) and even prohibited discussions on less controversial topics, such as AIDS. The company was also slow to get on the world's most popular platform, Windows. "Prodigy had built its own operating system that it was intent on using," says Scott Kurnit, executive vice president at Prodigy from 1993 to 1994.

But it was Prodigy's failure to see the possibilities of the Web that best illustrates the incompetence of its owners. Prodigy was one of the first online services to offer access to the Web, but it failed to completely embrace it. If all of its content providers had been moved to the Net in early '95, the company would have distinguished itself from AOL's proprietary system and become a portal long before Yahoo gained prominence.

As an Internet service provider, Prodigy, with 466,000 subscribers, could at last succeed.
In 1995, Ed Bennett (now CEO of My-CD, a New York-based e-commerce site) was brought in as CEO to help Prodigy make the jump. "It was an impossible situation," he recalls. Prodigy had to go from a closed network to an open one, from a powerful gatekeeper to an enticing barker. Many at Prodigy did not want to give up what power they had. Says Bennett, "All the code was in the hands of the engineers, who never wanted to see themselves lose their job."

Adding to the resistance was Prodigy's structural schizophrenia. The managers tended to come from IBM and Sears, says Bennett, adding, "They were accustomed to big-company thinking, unlimited resources, lots of time to make decisions." Then there were the younger employees, who embraced technology and entrepreneurship. "I would go to management retreats and then I'd go hang out at the local restaurant with the [younger workers] and I'd think: This is not the same company."

Making matters even more complicated, by 1995, with losses mounting and the dream of an online shopping paradise still years away, Sears tried to sell its stake in Prodigy. IBM was willing to buy, but neither could agree on a price. "All my proposals were in gridlock," says Bennett. This standoff also hampered the company's marketing effortsÑat a time when AOL was carpet-bombing America with floppy disks.

"Sometimes," concludes Bennett, "it's harder to turn something around than it is to build it from scratch." Finally, in 1996 the two companies sold Prodigy.
Last year, under the leadership of Russ Pillar and CEO Samer Salameh, Prodigy began to transform itself into an Internet service provider. In January, it decided that it would no longer develop its own content and struck up a deal with the portal Excite.

To many of Prodigy's ex-executives, including Bennett and Kurnit, the move makes sense: Prodigy's best asset always was its robust network. Plus, with the ISP arena only now consolidating, Prodigy Internet, with 466,000 subscribers, is one of the biggest ISPs in the country. It becomes, in Pillar's words, "a big fish in a little pond." This is a good position. Prodigy's well-known brand could play well south of the border at the moment Latin America is becoming wired and the Internet long-distance phone market is emerging.

As of press time, more changes were rumored to be afoot at Prodigy, perhaps an IPO or a management shake-up. But whatever transpires, if Prodigy wants to succeed in the future it will have to learn lessons from its past, such as Scott Kurnit's adage: "There are big benefits to being a little company."
 

Source: Eric.  W. Pfeiffer, Forbes, May 5, 1998