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Why Are IBM and Sears Selling Prodigy?

News Background:

"International Business Machines Corp. and Sears, Roebuck & Co. are near agreement to sell Prodigy to its management for less than $200 million... The price is less than half the $500 million that Sears was said to be seeking for its half interest alone last year and well below the more than $1 billion that IBM, Sears and original partner CBS Inc. have invested since they founded Prodigy Services Co. in 1984," according to the WSJ on May 9, 1996.

Analysis

I like to use this example to make the following points regarding the potential success of a merger or acquisition:

1. The acquired company needs to be in a "similar" line of business as the acquiring company. However, defining the "line of business" is not a trivial matter.
2. Being first to come up with a great product does not necessarily guarantee success.

Let’s consider the first issue. It is not always clear whether two companies are in "similar" lines of businesses or how their business activities can complement each other. Here is a good example.

Pacific Telesis, one of the Baby Bells, decided in 1994 to make its cellular business a separate entity and thus spun off that line of business as AirTouch Communications. However, what seemed in 1994 like a different line of business turned out to be not so different. It turned out that Pacific Telesis had to see itself as a provider of "telecommunication" services with wireless communication as one component. With the changing environment, Pacific Telesis had to accept a merger proposition from CBS, another Baby Bell, in order to survive in the telecommunications "line of business."

Thus, what I am trying to argue here is that IBM’s tremendous losses on Prodigy are not necessarily due to a bad strategic decision made in 1994. Hindsight is always 20/20. Sears’ decision in 1994 to enter into this type of business as an Internet Service Provider (ISP) is hard to justify on similar grounds. Sears didn’t then know much about ISP, and thus should probably have not gotten into such a venture in the first place.

As to being first to provide a product or service, Prodigy was a pioneer in popularizing the concept of on-line communications, "but was late in updating its cartoon-like graphics and in emulating the slick marketing techniques of its rivals," notes the Journal. I would like to add that Prodigy failed to keep coming up with innovative products. The industry’s leader, America Online (AOL), was able to differentiate itself from the rest by coming up with innovative features such as facilitating "chat" sessions among its subscribers and providing their members with "bulletin boards" as a medium where members who share interest in certain topics can exchange such ideas. Once AOL was able to establish a following for these services, it became relatively expensive for these members to switch to another provider. Moreover, these services attracted members who were interested in these services.

The Journal also notes that Prodigy’s marketing strategy was not as effective as its competitors’. It is not clear what were the causes of the marketing failure, but one possibility is that IBM and Sears might not have provided the necessary funds to launch a major ad campaign.