This 1984 article about the state of the videotex industry — the buzzword at the time for online services like CIS — appeared in the December 1984 issue of Online Today, CompuServe's magazine for CIS subscribers. The main article makes some predictions, and there's a sidebar at the end with a range of predictions for the years 1985 to 2010.
by Carole Houze Gerber
Some critics call it a technology in search of a market. Other experts say videotex technology has developed a niche in the consumer marketplace and its users are a growing population with high-quality demographics.
Despite its less than mainstream status — only about 6 percent of all homes are currently equipped with personal computers and only 15 percent of this select group have modems — home videotex is big business. And it is growing bigger faster than you can say “online communications.”
In addition to established information utilities such as CompuServe, The Source and Dow Jones News/Retrieval, commercial giants such as Sears, Roebuck, CBS, IBM, J.C. Penney, Bank of America, Times Mirror, Knight-Ridder and many others are entering the home videotex market.
Already, $26 million have been invested in a color graphics service called Viewtron, for which consumers must buy or rent a $600 AT&T Sceptre terminal to get online. The reason for all this commercial investment in home videotex is as clear as capitalism — companies are convinced that there’s a lot of money to be made, and market surveys back up these beliefs. Some experts estimate that by 1990 videotex will be a $25 billion industry with market penetration in up to 15 percent of American homes.
Other studies have shown that, properly marketed, shopping and other home videotex services will gain widespread acceptance. Booz, Allen and Hamilton Inc., a New York consulting firm, found in a recent home information industry study that 60 percent of households surveyed would do half their shopping for “consumer durable goods” online if prices and quality were competitive with in-store items. A number of other market studies have also shown that those who can afford home computers are very interested in videotex services.
Only a couple of years ago, home hobbyists — those intrepid souls with the know-how to put together their own equipment — were the major users of videotex services. As the technology became friendlier and more services became available, techies were joined online by yuppies — young urban professionals — with the equipment, money and time needed to cruise the electronic malls, banks and other home services. According to CompuServe President Charles McCall, the home videotex market is now composed of well-educated people who are “knowledge intensive.”
“Our subscribers spend a lot of money on books, magazines and other knowledge-type products,” McCall explains. “They’re trend-setters — early adopters of new goods and services. They’re the same people who were the first to buy video cassette recorders and other electronic devices. We’ve found that people with high incomes spend a reasonable portion of it on information.”
A 1983 survey of the demographics of CompuServe subscribers shows that, like subscribers to other videotex services, they are an exceptionally well-educated and wealthy group. More than 50 percent are college graduates, compared to 21 percent of college graduates in the general population. Seventy-two percent of CompuServe subscribers have incomes over $25,000 a year. Of these, 19 percent have annual incomes in excess of $55,000, compared to a median U.S. household income of about $20,000. “At this time, our subscribers are a very select part of the general population,” McCall says. “Our job is to find and package the kinds of information they want to pay for online. We also feel we can expand our market by going after people who have slightly less income, by offering more services, and by making it faster and less expensive to get around the service.”
Despite the enthusiasm of CompuServe’s approximately 150,000 subscribers, the consumer base for videotex services will have to broaden considerably before its acceptance becomes widespread, according to Gary Arlen, president of Arlen Communications, a Washington, D.C.-based research and information firm specializing in interactive communications services. “Videotex has developed in about four or five different directions,” Arlen says. “It’s sort of an invention by committee, and things have to work a little more effectively than they do right now.
“As an example, there have to be efforts to develop different prices for different services if videotex is to be expanded beyond yuppies and the other special interest groups it presently serves. The range of services has to be expanded — transactional services appealing to large groups of consumers have to be added,” Arlen adds.
You can use videotex to check into a computer dating service in search of the man or woman of your dreams. You can log on and play a game of chess with a partner thousands of miles away. Electronic databases enable you to conduct speedy online research and to get up-to-the-minute news, weather, transportation schedules and entertainment guides. You can stroll electronic shopping malls, check your bank balance and deposit or transfer funds. A virtual smorgasbord of activities is available on CompuServe and some other videotex services.
But although videotex suppliers are offering a full plate, it appears that, in many cases, consumers are picky eaters. Major marketing thrusts by a number of videotex suppliers to provide online banking and shopping services, for example, have shown mixed results. This tentativeness on the part of consumers has not, however, dampened either the enthusiasm or the marketing plans of new videotex suppliers, who have spent hundreds of millions of dollars on market research to find out what videotex services consumers will buy.
Videotex expert Arlen readily admits that finding the key to effective marketing of online services is a difficult task. “Successful videotex operations require a magic blending of technology, programming, marketing, packaging, pricing and perceived value,” he explains. “A mix of services has to be offered so that customers perceive they are getting their money’s worth for every penny they spend. And that’s very tricky because people have different perceptions of what constitutes a good value. That’s why a lot more has to be done on the packaging of videotex services so they will appeal to a much wider market.”
Arlen’s contentions are supported by a number of consumer studies. For example, according to research findings reported by David Shnaider, a senior editor at CBS who reported at Videotex ’83 about a Ridgewood, N.J., consumer study, successful videotex services must meet several needs. Shnaider said that successful videotex services must provide up-to-date information and be diverse enough to serve a variety of needs. They should also be interesting to read, simple and enjoyable to operate, and have a strong local orientation in terms of sports coverage, news and the like.
“The local angle is very important in selling videotex services,” Arlen agrees. “People are far more interested in local information — whether it’s where they can buy things from local merchants or what the local weather is.” The local orientation is something that established services like CompuServe do not specialize in, because their market is a national one. However, CompuServe President McCall says online forums provide opportunities for people in different parts of the country to form their own neighborhoods based on interests, not geography.
McCall adds, “The merchants who advertise on our shopping service are national chains like Sears and therefore transcend the need for a local orientation.”
Providing at-home shopping and banking services has been a major thrust for new suppliers entering the home videotex market. Trintex, an information service subsidiary formed by Sears, IBM and CBS [eventually named Prodigy], is described as an information and transactional banking and shopping videotex service that also offers full news, financial, educational and message functions. A Trintex spokesman says the service is expected to be operational by 1987. Gateway videotex service, recently offered in southern California by Times Mirror Videotex Service, and Keyfax, offered since April in the Chicago area by KeyCom Electronic Publishing, are among many new heavily researched and marketed videotex services with information and transactional capabilities.
Videotex providers offering transactional-type services are in the process of building a subscriber base. While nearly 1,000 banks have home banking projects in the planning stages, less than 100 have gotten beyond the test market stage. Paul Ayres, assistant vice president of Huntington National Bank in Columbus, Ohio, whose bank has offered online services through CompuServe for two years, says, “The online banking portion of our services is negligible at this point.”
“If you were to compare the present state of online banking to the acceptance of automatic teller machines, this is about 1969 as far as online banking is concerned. We’re still at the first step in the evolution of a product. And certainly, any new product is going to take some time to develop.”
One reason banks want to fan consumers’ desire for online financial services is that the colossal amounts of paper passing through even the smallest banks would be drastically reduced — some experts estimate by as much as two-thirds. This reduction in paperwork would result in a corresponding reduction in clerical personnel. Another reason, according to Huntington’s Ayres is that online services give banks an entree into new markets. “It’s extremely expensive to put in new branch banking facilities,” he says, “and banks simply cannot afford to put up a new building in every location where we want to attract new customers. Through CompuServe, we now have customers online in 22 states and Canada. Most are customers we would not have had otherwise.”
Going after the home banking market in a big way is an expensive proposition, and one that few banks are willing to risk at this point. In New York City, for example, $20 million was spent by Chemical Bank to set up its online service, which now has about 5,000 subscribers. In San Francisco, Bank of America also spent a great deal to establish a service to attract its 8,000 subscribers. So far, no online banking services are breaking even — partly because they have yet to attract enough subscribers to support the service.
Also, to attract these initial subscribers, online services must be offered at rates well below the banks’ costs — especially since users must, in some cases, buy special terminals to use the service. Huntington National Bank, for example, charges only $4 a month for its service, in addition to normal CompuServe connect charges. To cover their costs and continue to offer attractive rates, banks will have to convince a large number of customers that online banking meets their needs. And getting customers to give up paper services for videotex services is clearly not an overnight occurrence.
However, Dave Bezaire, manager of large accounts marketing at CompuServe, is not discouraged by the present lukewarm response to online banking services. “I see a massive snowball effect coming for these services,” he maintains. “Right now there’s a severe limiting factor because banks are geographic entities, and by and large, people do their banking with an organization close to home. Since the three banks on our system (Shawmut Bank in Boston, United American Bank in Memphis and Huntington National Bank in Columbus) represent fairly small geographic areas relative to our total subscriber base, it’s natural that only a small group of our subscribers are using the banking services.
“But what’s going to happen,” he contends, “is that many more banks will offer home banking services and the number of modem-equipped home computers will proliferate quickly. These two factors will greatly increase access to online banking services.”
But effecting the behavioral changes necessary to pique people’s interest in online banking is a difficult proposition — regardless of how much sense the changes may make, says CompuServe President McCall. “Most people don’t embrace change. They still want to thumb through their paper checks at the end of each month,” he says, “even if, in most cases, they then throw them in a drawer and forget about them. It’s an ingrained, traditional method of handling their finances, and it will take a while to convince people that online banking is more efficient. We have to find ways to make online banking more attractive — like packaging it with other financial services — so that more people want to use it. It will take time, but I’m convinced it will happen.”
Many bankers are convinced, too. For example, a computing services company called ADP presently has about 20 banks online in several states offering an at-home banking service that also includes stock market information, news and weather. Huntington National Bank’s Ayres reflects the optimism of many bankers regarding the eventual widespread acceptance of videotex banking services. “With all the changes in technology in recent years, it’s really crazy to try to predict anything beyond the next couple of years,” he says. “Still, we can easily see the number of online customers doubling or even tripling within that time frame.”
Market tests involving Sears, Saks Fifth Avenue, J.C. Penney, I. Magnin and other major retailers show that online shoppers are willing to buy items they don’t need to see, touch or try on before ordering. Consequently, high-fashion clothing is out. Small appliances, books and computer merchandise are in. “Products with wide market appeal that are not particularly fun to shop for in person draw the biggest electronic shopping crowds,” according to one electronic retailer.
One problem with selling visual-type products online is the lack of sophisticated color graphics on most systems. An exception is Times Mirror’s Viewtron system, which has the capability of showing full-color pages similar to those in a traditional paper catalog. However, the cost of the special $600 Sceptre terminal needed to use Viewtron’s electronic shopping and other services is prohibitive to many consumers. One test in an affluent New Jersey suburb showed that even wealthy subscribers were not willing to pay more than $30 a month for the service — not nearly enough to cover the cost of operating the system.
Because online advertising by merchants is such a new phenomenon, many retailers are still trying to second-guess how to package their products to attract consumers. Martin Nisenholtz, manager of videotex development for Ogilvy & Mather, an international advertising firm, offered several guidelines for online advertising at Videotex ’84. Drawn from Ogilvy & Mather’s research in the United States and abroad, the guidelines include making the videotex/consumer interaction personal and letting consumers know how often and when the advertised products will be changed.
Among other things, Nisenholtz suggests placing “teasers” in other areas of the videotex system to draw consumers to the ad, and grouping various kinds of products together — such as those specifically for children. Offering unique advantages to the videotex shopper, such as using “viewpons” (online coupons) and other discounts, is another way to stimulate customer interest, according to retail experts at Touche Ross. Another Touche Ross finding is that well-known stores that have already captured customers’ loyalty through in-store and catalog sales are the best bets for online selling. Offering a variety of merchants online is also important.
At CompuServe, about 75 advertisers currently line its Electronic Mall™, jointly operated with L.M. Berry, a Dayton, Ohio, based Yellow Pages, advertising/publication company. The Mall offers goods in different categories including books, magazines, newspapers, financial information, hardware and software, gardening, travel, records, and discounted photography equipment and supplies. Mall merchants are responsible for merchandising and order fulfillment. According to Mary Finley Zacks, an associate product marketing specialist at CompuServe, many advertisers in the Mall, such as Sears, already have established reputations in catalog sales. “Customers know exactly who they are dealing with and have confidence in the merchants,” she says.
James H. Arnold, director of operations for L.M. Berry, says a recent Nielsen survey of Electronic Mall shoppers showed very positive results. “The problem now is that to compete with other mass media, such as cable and magazines, the penetration of communicating terminals will need to increase,” Arnold says. “We think that will happen and that today’s 1 million households with modems will grow to 7 million by 1990.
“We’ve also found that promotion of the Electronic Mall greatly affects usage,” explains Arnold. “Continuous advertising and marketing is necessary to let consumers know what is going on in the Mall.”
Arnold says an advantage of videotex is its selectivity in targeting particular groups. “It provides usage data so that advertisers can understand the who, when and what of product merchandising. It also supports transactions, which support the non-store retailing trend that’s apparent with the boom in catalog sales.
“We definitely view the Electronic Mall as a short-term opportunity that involves many long-range objectives.” Arnold concludes, “L.M. Berry is a conservative company. We wouldn’t be in this business if it wasn’t a good investment now.”
CompuServe’s faith in a bright future for home videotex is reflected in its aggressive expansion plans. “Just this current year, we’re investing over $15 million in capital expansion,” says McCall. “We’re adding $5 million worth of central computer power, and we’re investing another $5 million in expanding our network so we can go into more cities with local dial-up calls — we’re putting in satellite earth stations around the country to help with our communications network. Finally, we’re adding over $5 million worth of real estate here to our Columbus complex so that we can provide more customer service and product development employees.”
McCall says that despite the cautious acceptance of online banking and shopping — which he feels will eventually catch on — other CompuServe services are flourishing. “We’ve been most successful at offering services that are not replacements for something else,” he says. “InfoPlex, CB Simulator and interactive games have so far been the areas in which we’ve been most successful.
“I’m no psychologist, but from the popularity of these types of services, it’s apparent that videotex meets a social need for many users. Of course, there are hard-core cost-savings involved with electronic messaging, accessing databases and other business services,” McCall concludes. “But we can’t forget the human element behind all this high technology. And we don’t ever intend to.”
Carole Houze Gerber is a contributing editor of Online Today. Her CompuServe User ID number is 70007,1215.
By 1985, according to Gary Arlen, publisher of Videotex/Teletext News, breakthroughs in computer graphics will cut frame-creation time from two hours to less than 10 minutes. This increased speed will permit system operators to offer many more services at a lower cost. Other Arlen predictions include:
• Demand in 1985 and 1986 by special user groups such as doctors and investors will stimulate the rapid growth of private videotex systems.
• Public access videotex will increase more than six-fold, and each of the 50 largest urban areas will have at least one public access system by 1984 or 1985.
• By mid-1987, those living in the nation’s 25 largest cities will have access to local, broad-based home videotex systems — most of which will be operated by banks or newspapers.
• By 1988 Arlen predicts that videotex will “crash into mass market status” just as home computers did in 1982.
• As a result of the spread of fiber-optic telephone cables, video retrieval — the marriage of video disc technology and videotex — will come into its own.
• By 1995 one-fourth of all American homes and most businesses will use videotex.
• By 2010 videotex will be as much a part of most Americans’ lives as cars and telephones. More than 60 percent of homes will be videotex-equipped.