March 26, 1997 6:15 PM ET
CompuServe quietly grows Network Services business
By Maria Seminerio

  CompuServe Inc.'s Network Services unit, which provides network integration and Internet connectivity services to a slew of Fortune 100 corporations, has been quietly nudging the much-maligned company back toward profitability for the past year, but Wall Street is not impressed.

Shares of the granddaddy of the commercial online services, which turns 28 this year, are hovering near 52-week lows, staying below the $10 mark for several weeks as investors remain jittery about the future of consumer Internet services.

But the company has been shifting gears away from the consumer space for several quarters, and some analysts say its Network Services portfolio, which combines a group of management tools that many businesses are forced to buy from multiple suppliers, is the industry's best-kept secret.

"The fact that the financial markets don't know about CSNS means that, overall, people don't know about the potential market for corporate network services," said Dan Taylor, an analyst at Boston-based Aberdeen Group.

With $250 million in sales last year, no significant debt, $176 million in cash and more than 1,100 large corporate customers, CSNS has seen revenues rise 34 percent in four quarters as corporations warmed to its combination of consulting, implementation support, Web hosting, Internet access and local support services, said Peter Van Camp, executive vice president of CSNS, in Hilliard, Ohio.

Customers include Visa International Inc., which has operated its point-of-sale network on CompuServe's backbone since 1982, Federal Express Corp. and TRW Corp.

"We sell the network as a product," added Dennis Brouwer, director of product marketing for CSNS. "That's what managed network services is all about."

CSNS kicked in 31 percent of CompuServe's total revenues during the quarter ended Jan. 31 -- a percentage officials expect to grow rapidly over the next few quarters.

Still, the online service has made big headlines with its missteps, much as America Online Inc. has.

When CompuServe closed down its ill-fated WOW! family-oriented service last year, just eight months after its launch, industry watchers interpreted it as another sign of the company's imminent demise.

Company officials conceded at the time that its efforts to market solely to the mass-consumer market were a failure. The flagship CompuServe Information Services consumer online service still exists, but membership has remained flat at 3 million for several months, as compared to AOL, which recently broke the 8 million-user mark.

When the company announced a 15-cent-per-share net loss, or $14.2 million, for its third quarter late last month, stock values remained largely static, although analysts had predicted much heavier losses. The loss compared to a net loss of $58 million in the previous quarter, so the trend is upward.

The industry tends to lump CompuServe in with AOL, the largest commercial online service, which fell victim to a spectacular debacle this year as the advent of flat-rate pricing spurred demand beyond the limits of network endurance. AOL has its own network services offerings aimed at the corporate market, but CompuServe's long-term business model is more viable, according to Aberdeen's Taylor.

"We've identified CompuServe as the best of breed in this space," Taylor said, adding he believes it offers a more complete package than telecommunications companies Bell Atlantic Corp., Pacific Bell and US West, which also play in the corporate network connectivity and services space.

Taylor and other analysts have been hard-pressed to explain the continuing low value of CompuServe's stock. According to Aberdeen's research, service companies such as CompuServe can maintain gross margins of 60 percent to 80 percent by offering network integration services to large businesses.

"The only thing that's more profitable than network services is the Mafia," Taylor said.

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