It seems intuitive to say that customer satisfaction is one of the most important -- if not the most important -- factors in the success of an Internet company. In the bricks-and-mortar world, people will shop at the corner store because it's close, whether they like the service there or not. On the Internet, however, another choice is immediately available, if not just a click away. If folks don't like one site or service, they can just bounce to another.
That's why it baffles me that Rule Breaker America Online (NYSE: AOL) has dominated the Internet service provider (ISP) market so completely for so long. I've had AOL accounts at various times since 1996, and I've been very dissatisfied with the service. Here's one egregious example of its poor functionality: When I click links to the World Wide Web that AOL provides on its Welcome or Personal Finance page, 99 times out of 100 I get a "This page cannot be displayed" error. The cause is a compatibility problem that most versions of AOL have with most versions of Windows.
It's inexplicable to me that AOL, which owns a browser company (Netscape), can't display the pages that it links on its own home page. I mean, I know AOL doesn't like Microsoft (Nasdaq: MSFT), but if you're building software, you've got to make it compatible with Windows.
I'm not the only one who's unhappy with AOL. On Monday, The University of Michigan Business School and its partners released its annual American Customer Satisfaction Index (ACSI), which included e-commerce businesses this quarter for the first time. In the Portal subsection, the average score was 63 -- lower even than the U.S. Government, which scored a 69. Yahoo! (Nasdaq: YHOO) led the sector with a 74. Microsoft's MSN finished first among ISP/portal combinations with a 71. AOL came in at an appalling 56.
(Aside: Rule Breakers Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) each led their categories with scores in the 80s.)
Professor Claes Fornell offered commentary on the results. AOL's score, on an absolute basis, was the lowest score for any company in the study. It's "a level of customer satisfaction the IRS would worry about," Fornell said to The Wall Street Journal. "These results suggest that MSN will pose a significant threat to AOL."
Prof. Fornell apparently hasn't paid very close attention to the business. This isn't the first time that AOL has finished near the bottom of the ISP heap in customer satisfaction. J.D. Power and Associates has produced customer satisfaction ratings for ISPs since 1998. Here are the partial results, as much as can be gleaned from the press releases (companies listed in descending order of customer satisfaction):
1998 1999 2000 MSN Mindspring AT&T AT&T EarthLink EarthLink Prodigy AT&T MSN CompuServe MSN Industry Avg. AOL AOL AOL
Based on customer satisfaction numbers, you'd think that AT&T's (NYSE: T) WorldNet, EarthLink (Nasdaq: ELNK), and MSN must be beating up on AOL. "To stay competitive in the U.S. Internet industry, companies must offer a consistent level of service across all drivers of customer satisfaction," Kirk Parsons, director of telecommunications at J.D. Power and Associates, says. "Both AT&T WorldNet and EarthLink clearly meet this requirement."
The truth, as I'm sure you all know, is quite the opposite. Here are their narrowband subscriber numbers by calendar year, as best as I can discern them (in millions):
1998 1999 2000YTD AT&T 1.4 1.4 1.5 MSN n/a 2.0 3.5 Mindspring/EarthLink 1.7 3.1 4.3 AOL/CompuServe 15.1 20.5 25.0
This year alone, AOL has signed up more customers than MSN or EarthLink have in their five and six years of operation, respectively. AOL has 2.7 times more customers than all three of these competitors combined. MSN has gained on AOL lately, thanks to its marketing campaign that gives a $400 rebate on computer purchases to customers who sign a three-year contract with the ISP. Nevertheless, even Rule Breaker Excite@Home (Nasdaq: ATHM) equals MSN in subscriber numbers, with about 2.3 million broadband and 1.2 narrowband customers through Excite's FreeLane service.
Why haven't these three competitors taken dissatisfied customers away from AOL? Why haven't they acquired more new customers than AOL, given that they've all had better satisfaction ratings for years?
I have some notions, but these questions really do baffle me. I certainly would bail to a better (and usually cheaper) service. Of course, I would also never enter into a three-year contract with an ISP at a fixed rate, what with prices falling and broadband options increasing. I apparently don't think like Joe Consumer. Still, here are some possible explanations:
- Marketing trumps service. CompuServe had a significant, early lead in the ISP market. AOL came up through the ranks rapidly, however, through an extensive marketing campaign that blanketed America with easy-to-use access software. AOL also was the first to figure out that people would much rather pay a flat, monthly rate than by the hour. Superior marketing put AOL on top.
- Switching "costs" are too high. Once people commit to one ISP, it might not be worth their time and trouble to change. It's a hassle to set up access numbers, build a new buddy list, and notify friends of a new email address.
- It's the community, baby. AOL, by virtue of having the largest subscriber rolls, becomes the default ISP for new customers because they want to be on the same service as their friends and family.
(If you've got other, better explanations, let's have 'em on the Rule Breaker Companies discussion board.)
People have been saying for years that AOL would lose customers because of low satisfaction rates. It hasn't happened yet. I would have thought that AOL would do everything it could to fix the problems by now, even if only on principle. That's the kind of attitude I like to see from my holdings, and from companies that provide me with a service.
I'll give AOL credit for its splendid marketing, but I fault it for its product development. I don't think that it can rely on its early narrowband lead to protect it forever. If you annoy your customers for too long, eventually they will leave you. Maybe it will happen when people make the switch to broadband. Maybe it will happen when someone devises a better free-access ISP. Maybe it will happen when other ISPs improve their marketing. (On October 25, Microsoft began a $1 billion relaunch of its Web services to compete better with AOL.)
It's really amazing that AOL hasn't paid a price for its poor product yet, but I believe it will if it continues to ignore the problem.
Here's to an excellent, profitable December.
--Brian Lund, TMF Tardior for his sins
