Prodigy Communications Corporation

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Prodigy Communications Corporation

44 South Broadway
White Plains, New York 10601
U.S.A.
Telephone: (914) 448-8000
Toll Free: (800) 213-0992
Fax: (914) 448-3467
Web site: http://www.prodigy.com

Public Company
Incorporated: 1996 as Prodigy Inc.
Employees: 313
Sales: $189.04 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: PRGY
NAIC: 514191 On-Line Information Services; 51331 Wired Telecommunications Carriers

Prodigy Communications Corporation provides its subscribers with Internet access and related value-added services, such as Prodigy-branded Internet content powered by Excite. With some 1.5 million billable subscribers at the end of 1999, Prodigy users included small and mid-sized businesses as well as individual consumers. Moreover, the company’s services were available in Spanish as well as English versions. After a successful initial public offering in 1999, Prodigy planned to partner with SBC Communications, Inc., the largest regional telephone company in the United States. When finalized, the partnership would make Prodigy the exclusive retail Internet service provider for SBC’s 650,000 small-business and residential consumers. This would also elevate Prodigy’s subscriber base to just over two million, making it the third largest Internet service provider in the United States.

IBM-Sears Joint Venture: 1984–96

Prodigy had its origins in a joint venture. In 1984 IBM, Sears, and CBS established a joint venture, named Trintex, to offer videotex services. In this pre-Internet era, Videotex was a system enabling subscribers to obtain information and perform other functions, such as banking or shopping, through a home terminal or specially equipped television set hooked up to a telephone.

Plans called for the service to supply subscribing PC-owners with information, news, home shopping, and catalogs. Other videotex ventures, most notably Knight-Ridder’s Viewtron, had foundered, and CBS dropped out of the Trintex project in 1986. IBM and Sears persevered, however, and by the fall of 1988 had invested $450 million in start-up costs. Their Prodigy Services Co. was established to oversee the Trintex enterprise, and in June 1988 the entire venture became known as Prodigy. Its product became the world’s first consumer-focused online service that year.

Prodigy was aimed at the estimated five million homes with IBM-compatible computers powerful enough to operate the fledgling service’s sophisticated software. First available in Atlanta, San Francisco, and Hartford, Connecticut, in May 1988, Prodigy offered a $149.95 start-up kit that consisted of a modem, software, and three months of free service. After purchasing the start-up kit, subscribers paid a monthly subscription fee of $9.95. Prodigy was supported by a national advertising campaign, including TV spots, direct mail, and the distribution of point-of-purchase materials in computer stores, software stores, and department stores. By the end of 1988 Prodigy had expanded its geographic scope to include Los Angeles, Sacramento, San Diego, and Santa Barbara, California.

By mid-1989 more than nine million home computers were theoretically capable of using the Prodigy network, but only 65,000 households were signed up. The service had added New York City during this time but was still only available in 13 markets covering a total of 30 percent of the potential subscribers. Households that did subscribe were receiving hundreds of news stories a day, complete with graphics, from reporters and editors based in Prodigy’ s White Plains, New York, headquarters.

Prodigy’s subscribers also had access to the reservations system of American Airlines for airline, hotel, and car-rental reservations, and they could order merchandise from Sears, J.C. Penney, and some 45 other direct-shipping merchants. New York’s Manufacturers Hanover Trust Bank offered banking transactions, and Wall Street’s Donaldson, Lufkin & Jenrette, stock purchases by computer. A package of improved financial services was later made available at additional cost. Prodigy also offered low-fee electronic mail, and a grocery-shopping service was also introduced but later dropped for lack of interest.

Prodigy was available nationwide by September 1990 and claimed 635,000 customers by the end of the year, ranking it second in its field to H & R Block’s (eventually America Online’s) CompuServe Inc. In addition to its monthly fee (now $12.95), Prodigy was earning revenue from add-on features and also from advertisements that appeared onscreen. However, analysts noted that after an investment estimated at between $500 million and $1 billion, Prodigy was still years away from earning a profit. One industry observer, Robert F. Kleiber, described the service to Eben Shapiro of the New York Times as a “black hole,” adding, “It does not provide the fundamental capability that people are really looking for in an on-line service,” which he described as an easy way to communicate with other members.

Although Prodigy offered both electronic mail and electronic bulletin boards, it was censoring messages that it called “obscene, profane or otherwise offensive,” a practice the company defended by saying that Prodigy was a family service. When Prodigy imposed an add-on fee at the beginning of 1991 for more than 30 electronic-mail messages a month, disgruntled subscribers called the charge a violation of the original subscription agreement.

Prodigy claimed 1.75 million subscribers in October 1992 but was still losing money. Reviewing the service in the Wall Street Journal, Walter S. Mossberg called it “seriously flawed. Its navigation system is unusual and confusing, its text is clunky and moves at a snail’s pace, its content promises more than it delivers.... It is organized more like a broadcast network than a common carrier of information ... and access to software downloads costs extra—in some cases doubling the monthly fee.” The monthly fee did increase, to $14.95, in November 1992. Prophetically, Mossberg described much-smaller America Online Inc. as “the sophisticated wave of the future among such services.”

Prodigy could boast some improvements in 1993; during the fall of the year it introduced Windows-based software and e-mail gateway to the Internet. The service’s customer base peaked at about two million in 1994. Although Prodigy was available on Macintosh computers, in mid-1994 Mac users still could not receive Internet electronic mail. Indeed, with the exception of e-mail functions, Prodigy did not offer general access to the Internet until October of that year, when it made available unrestricted access to the bulletin boards known as Usenet (and also a new chat-line service) for $3.60 an hour.

In 1995, new leadership came to Prodigy, with Edward Bennett joining the company as CEO. Bennett had come to Prodigy after heading up television’s VH-1 music channel for Viacom; he hoped to turn Prodigy around. Indeed, that year Prodigy became the first consumer online computer network to test and implement its own web browser to enhance user access to the World Wide Web. By the summer of 1995 the company boasted one million subscribers and was claiming it was on the road to profitability for the first time in its existence. However, Prodigy’s Internet service quickly fell behind America Online and CompuServe in subscriber volume. Prodigy’s losses continued to be heavy throughout this period. Prodigy lost $60 million on total revenues of $195.2 million in 1993; $52 million on $211 million in 1944; and $34.6 million on $243.4 million in 1995.

Internet Service Provider: 1996–98

After incurring at least $1.3 billion in losses, IBM and Sears sold their Prodigy Services Co. in May 1996 to International Wireless Inc., and about 40 executives from Prodigy, for $78.12 million in cash and notes. By this time there were said to be less than one million subscribers. Renamed Prodigy Inc., the company’s new management de-emphasized the company’s original services in favor of becoming what it described as a “value-added” Internet service provider by means of Prodigy Internet, introduced in October 1996.

Along with online Internet access, Prodigy Internet offered a variety of proprietary-content subject areas, such as business-and education-oriented web sites, chat rooms, instant messaging, and a lineup of computer games. A financial area, Prodigy Investor, included personal portfolio tracking, access to financial news, links to online brokers, and a database of mutual funds. Like Prodigy Internet, Prodigy Classic offered unlimited monthly Internet access and cost the same $19.95 a month for unlimited service, but it was not as strong technologically as Prodigy Internet, the first major access service to be programmed in HTML, or Hyper Text Markup Language, the programming language for Web pages.

In September 1997 Prodigy split into three divisions: the core domestic online service division, a software development unit, and international operations. While eschewing Europe, already well accommodated by other Internet service providers, Prodigy had an online presence in six African countries and had introduced service in China in two languages. A move into Mexico was imminent.

Company Perspectives:

Prodigy’s #1 goal is to provide the best possible Internet experience and tools to our members to make their lives more productive and satisfying.

In March 1998, Prodigy dropped its monthly fee to $15.75 and promised a new interface designed with Excite providing the gateway, plus a new digital 56k network. At this time the company claimed 830,000 subscribers for Prodigy Classic (which it was seeking to phase out) and Prodigy Internet. The actual number of billable subscribers was only 613,000, however, at the end of 1997, far short of the estimated 1.5 million needed for the company to break even. Moreover, Prodigy’s losses continued to mount, from $90.8 million on revenues of $98.91 million in 1996 to $132.78 million on revenues of $134.19 million in 1997.

Going Public and Allying with SBC in 1999

Prodigy’s billable subscribers increased to 671,000 in 1998, with the number of Internet customers rising from 221,000 to 505,000. However, revenues, at $136.14 million for the year, were little changed, and the net loss, although pared, remained a severe $65.08 million. Despite this woeful result, the company—renamed Prodigy Communications Corporation in August 1998—was able to attract investors after going public in February 1999. More than $160 million was raised by selling stock at $15 a share, and, in the hot Wall Street market for Internet stocks, the price rose as high as $50 a share during the year.

Mexico’s Carso Global Telecom S.A. de C.V., which had been a major investor in International Wireless, controlled, directly or through its Telefonos de Mexico (Telmex) holding, more than 60 percent of Prodigy after the initial offering. Reflecting this orientation, Prodigy launched the first-ever fully bilingual Spanish-language Internet-access service in the United States in April 1999, offering all-you-can-surf access to Hispanic customers at the same $19.95 a month as the English-language service. The company also formed a joint venture with Telmex to manage the subscriber base of Prodigy Internet de Telmex, Mexico’s largest Internet service provider. Prodigy sold Africa Online, Inc. in 1998 for $2.81 million.

In November 1999 Prodigy announced plans to form a limited partnership with SBC Communications Inc., the nation’s largest local telephone company. The transaction, pending federal regulatory approval, would make Prodigy the exclusive retail Internet service provider for the 650,000 small-business and residential consumers in SBC’s service area, thereby bringing Prodigy’s subscriber base to just over two million and making it the third largest Internet service provider. (Prodigy had acquired rival FlashNet Communications, Inc. earlier in the month for $113 million, thus adding 244,000 new members.)

SBC also pledged to deliver an additional 1.2 to 1.3 million online customers to Prodigy over a three-year period, drawn from its service-area base of some 100 million residents. In return, Prodigy gave SBC a 43 percent stake in the partnership and the right to convert that stake into a direct equity interest in Prodigy for about $1.6 billion. In addition to adding subscribers, Prodigy would benefit from the deal because it would allow the service to begin offering high-speed digital subscriber lines, in which SBC had been investing heavily.

Prodigy had revenues of $189.04 million in 1999, of which Prodigy Internet accounted for 82 percent. The number of billable subscribers reached 1.5 million at the end of the year. Still, the company incurred a net loss of $80.49 million for 1999. Through its alliance with SBC, however, Prodigy hoped to realize its role as a competitive Internet provider and turn a profit in the process.

Principal Subsidiaries

Comstar Cellular S.A.

Principal Competitors

America Online, Inc.; CompuServe Interactive Services, Inc.; AT&T Corp.; EarthLink Network Inc.; Microsoft Corporation; MindSpring Enterprises Inc.

Key Dates:

1984:: A joint venture known as Trintex is founded to offer videotex services.
1988:: Renamed Prodigy, the videotex service makes its debut.
1990:: Prodigy becomes available nationwide.
1994:: Prodigy’s customer base peaks at about two million.
1996:: Company is sold and becomes an Internet service provider.
1999:: Prodigy goes public and plans a partnership with SBC Communications, Inc.