America Online to Buy Multimedia Company

by Sandra Sugawara

Thursday, May 12, 1994

America Online Inc. of Vienna, yesterday announced plans for a $ 33 million acquisition that it said would extend its reach beyond the computer jock community and encourage advertising on its service.

Company executives said the purchase of Redgate Communications Corp., a privately held company based in Vero Beach, Fla., would help America Online add graphics and pictures to its service, which uses telephone lines to channel information and electronic mail to and from subscribers' computer screens.

Redgate, which employs about 100 people and had sales of $ 13 million last year, specializes in "multimedia," the combination of text, video, photos and sound in computers. It also has expertise in information discs known as CD-ROMs, in selling products over computer networks and in operating private satellite networks.

America Online is the fastest growing of the major U.S. on-line companies. It has an estimated 700,000 subscribers. Analysts predict it will have 1 million by autumn.

Like other on-line companies, it acknowledges that its appeal so far is narrow. Fewer than 5 percent of households in the U.S. subscribe to any on-line service. The Redgate deal is a key part of a strategy to break out of that mold.

"We're focusing on trying to create a mass market for on-line services," said America Online President Steve Case. Part of the problem, Case said, is that "on-line services lack pizzazz."

Case said he also is looking to Redgate for expertise in incorporating advertising into the service, a move that America Online hopes will become a major new source of revenue.

The deal calls for Redgate shareholders to receive about 510,000 shares of America Online stock, according to Lennert Leader, America Online's chief financial officer. Company officials said they expect the deal to be completed by mid-June, if it passes through the federal regulatory process as expected.

America Online's stock closed yesterday at $ 64, down 50 cents.

Most on-line services look dull, with lots of text on the screen and few if any pictures, graphics, sounds or video clips. The reason is that the services transfer information from a central computer to a personal computer over telephone lines, which are generally too "narrow" to handle anything more than text.

Under the strategy unveiled yesterday, America Online would provide its customers with CD-ROMs containing pictures, graphics and video, as well as much of the text. That would mean that that material would not have to travel over telephone lines. The computer would simply get it from the disc.

The phone line would be used only to transmit up-to-date information, (the latest stock quotes, for instance), as well as electronic mail between users. Software giant Microsoft Corp., which is putting together an on-line service, is pursuing a similar strategy. Case described the strategy as a transition until networks that can easily transmit video and graphics are available.

America Online is involved in tests with two cable TV companies, Comcast Corp. and Viacom Inc., to use their networks' high-capacity capabilities to link computers. Case said he hopes computer customers in certain regions will be hooked up to cable networks by this time next year. But he said the timing depends on technology developments and the interests of cable companies.

Gene DeRose, an analyst with the New York-based market research firm Jupiter Communications Co., praised the interim approach. "The merging of consumer CD-ROM with the consumer on-line world is the biggest growth possibility of anything in the next three to five years," he said.

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