It's mortal combat for AOL: On-line developer sues ISP over network tenancy rights

A developer of multiplayer on-line games filed a lawsuit last week against America Online claiming the Internet service provider is violating antitrust laws by promoting its own games subsidiary over competitors.

The suit, filed by Kesmai Corp. in U.S. District Court for the Eastern District of Virginia charges that AOL is exercising "monopolistic control" over on-line services and Internet access, preventing small on-line content developers from distributing its product. Earlier this year, AOL acquired Kesmai competitor ImagiNation Network and relaunched in June under the WorldPlay brand.

AOL also gave WorldPlay sole anchor tenant status of its Games Channel. The effect was to force competitors to become subsumed under WoldPlay's brand or leave AOL.

"AOL has targeted my business for extinction," said Kesmai's chief executive officer Chris Holden.

AOL briefly offered to make Kesmai an anchor tenant but would charge the company between $5 million and $10 million, according to Lloyd Constantine, an attorney representing Kesmai.

"We never drilled down to see whether we could still make money at that exorbitant rent," said Holden. "It is the most valuable real estate in cyberspace, and it's worth something, but it's not worth that much."

The problem is exacerbated by AOL's pending acquisition of CompuServe, which will give AOL even more control over a market it already dominates. At last count, AOL had around 9 million subscribers. The CompuServe acquisition will give it an additional 2.7 million and control of 79% of the market, according to Holden. "Essentially, AOL enjoys a monopolistic existence in cyberspace. They are the 800-lb. gorilla. The problem is they're starting to act like the 800-lb. gorilla because they can."

Kesmai is a subsidiary of News Corp., although Holden said the developer's ownership has nothing to do with the dispute. "This issue is between Kesmai and AOL, not between News Corp. and AOL. At this point we are in dire financial straights because of this and we're struggling with an alternative strategy."

An AOL spokeswoman said that the company will fight the lawsuit and that Kesmai has a contract to be part of AOL's Games Channel through February 1999.

"News Corp. has a history of using litigation to get what they couldn't get in the course of normal negotiation," said the spokeswoman. "This is a contract dispute plain and simple. Right now, they are trying to improve their position and they don't want to pay for it."

She also declined to comment on the offer of anchor tenant space for $5 million to $10 million.

Kesmai's revenue has dropped 92% since WorldPlay was launched, Holden said. He also dismissed the idea of Web-based gaming, claiming the technical and logistical difficulties make the experience unsatisfactory for most players.

"The reality is there is no viable game business on the Web," he said. "Everyone that's tried has lost tens of millions of dollars. That's the reality of the games business. We're already on the Web, and we're not making money on it."

To back his assertion, Holden cited The Entertainment Network's Web-based gaming business. Although the company has captured 30,000 paying subscribers, it needs an additional 100,000 just to break even, according to a recent company announcement.

Kesmai's suit seeks unspecified damages and an injunction preventing AOL from giving exclusive control to its Games Channels to WorldPlay.

Kesmai lawsuit claims:

* AOL has given total control of its Games Channel to its WorldPlay subsidiary

* Kesmai accounted for 2% of all traffic on AOL as late as June

* Kesmai counts on AOL for 90% of its business

* Overall, the company was logging 2 million hours per month of gaming before WorldPlay was launched

* Since launching in June, WorldPlay has started charging AOL subscribers a $1.99-per-hour surcharge