Dangerous days on the cyberfrontier

In the new world of the Internet, the best and the worst of American business is on view

For connoisseurs of business stories, the burgeoning computer market and the Internet provide the finest. The rise and fall of entrepreneurs and their companies is on a grand scale. It reminds one of the history of the city states of ancient Greece, with repeated episodes of conquest, battle, setback, regrouping and forward again.

We have Microsoft, trying to secure the hegemony of the entire area. In contrast, there is Apple, admired and even loved for many years as Microsoft never has been, now paying the price for a decade of complacency. Then comes forward a new hero, Netscape, which quickly dominates methods of browsing the Internet, but soon finds itself beset with ferocious enemies. In the past few days, all eyes have been on America Online (AOL), the largest Internet access provider in the world (eight million customers, compared with CompuServe's two million).

Even eight million customers, however, does not make a profitable business. AOL's policy has been to provide Internet access cheaply, bring in ever more customers with non-stop heavy advertising and keep expanding until it has an audience similar in size to a television network's. Then and only then would come the big reward - abundant, lucrative advertising on AOL's service. Even though its customer base has risen from 150,000 subscribers five years ago, it remains a long way short of its objective.

I first thought there was something wrong last autumn when the company was forced to recalculate its profit-and-loss account. It had not been fully counting as a running cost its heavy spending on advertising. When this was done, contrary to what had previously appeared, it turned out that this celebrated company had never made a genuine profit, not a single cent. In effect, shareholders had always made good its deficits. The share price halved.

Then last December, America Online went for broke. Much smaller competitors had introduced a new charging system that provided unlimited access to the Internet in return for a flat fee. (This remains an industry in which small companies often provide a better service than the market leaders and still survive. This is true even of assembling computers). The giant felt it must respond aggressively. AOL matched the flat fee tariff and launched an advertising blitz. Relying on the fact that local calls in the US are free, it told potential subscribers: "No more watching the clock or rushing off-line to beat the charges, you can stay on-line as long as you want."

For a week or two, it looked as if the new tactics were succeeding. Whereas last summer the company's subscribers had been spending 30 million hours a month hooked up to the service, in December 102 million hours were recorded. And an additional 500,000 customers were signed up during that month alone. Then disaster struck.

America Online was not able to handle the tidal wave of custom it had generated. Many subscribers could not get through.This was not just frustrating for Web surfers. Small businesses found that they could not retrieve their e-mail - nor could they quickly switch to a rival service because the business cards they had been handing out carried their AOL e-mail address. They lost orders. They became desperate. The chairman of the company, Steve Case, had to write to subscribers to retreat from the recent advertising message. He said that many users were so worried about not being able to get on the network that they were simply staying on all the time. "While that is understandable at one level", Mr Case wrote, "it is obviously problematic at another."

AOL's attempt at stabilising the situation deservedly failed. What happened demonstrates both the worst and the best of the American way of doing business.

The company's first response was hard-nosed to a fault. It would suspend its television advertising campaign; this saves America Online lots of money but is literally of no interest to existing subscribers. It would increase its spending on system capacity from $250m to $350m; this will take months to make a difference. And it would add a further 600 customer support representatives to the 3,900 already in the field - so customers are more likely to find somebody to whom they can complain. As for compensation for losses - that would be considered on a case-by-case basis. In other words, the company was going to make it as hard as possible for subscribers to get any money back.

This miserly response was quickly swept aside. Frustrated customers reached for their lawyers. They swiftly brought the company to a more reasonable position. The attorneys-general of more than 30 US states worked together to secure a settlement. They made it plain that, in their view, AOL's aggressive marketing campaign, combined with the frequent failure to supply the advertised new service, amounted to deceptive business practice.

Faced with this the company agreed to make refunds on a specified basis, and it accepted that for the time being any company advertising must "clearly and conspicuously" state that customers may encounter delays when going on-line.

Thus without much ado, without fresh legislation, legally enforced consumer protection was swiftly brought into the frontier territories of cyberspace. It is fashionable here to decry the litigious nature of American business practice. But it is inconceivable that UK law could have been brought to bear on a similar problem of consumer abuse so swiftly and effectively.

As for America Online, its chairman remains unrepentant: "When the dust settles, I believe America Online will be recognised as a service that can handle millions of people and that millions want to use. And pricing for unlimited use is part of reaching a mainstream audience". That's chutzpah, Yiddish for shameless audacity or gall. The ancient Greeks also had a word for it - hubris.