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MSNBC: THIS LITTLE PEACOCK IS SHOWING SOME PLUCK

While it still has more flash than cash, the upstart is nipping at CNN's heels

When Cable News Network aired and subsequently retracted on July 2 an investigative documentary on Operation Tailwind alleging the U.S. military used nerve gas during the Vietnam War, some irate viewers may have voted with their clickers. During July, an average of 593,000 households watched CNN in prime time, a drop from 680,000 a year earlier, according to Nielsen Media Research. That same month, CNN's upstart rival MSNBC, aided in part by its expanding distribution, increased its prime-time household viewership 144%, to 134,000 from 55,000.

Although they may have smelled blood in CNN's stumble, MSNBC executives say they already thought their competitor's market position had been vulnerable for quite a while. ''If anyone was smelling blood,'' says Erik Sorenson, MSNBC's vice-president and general manager, ''it was being smelled before Tailwind cropped up.''

POPULAR SITE. Indeed, MSNBC has been gradually gaining ground as a player in the 24-hour news business. Backed by Microsoft Corp. (MSFT) and General Electric Co.'s (GE) NBC unit, the $500 million cable and online news venture is the cornerstone of NBC's elaborate strategy to prepare itself for the day when TV and the Internet are the same thing.

Already, MSNBC is available in 42 million households, representing more than half the country's cabled homes, and has inked deals to be available in 61 million homes by 2001. Although its audience is still a fraction of CNN's, MSNBC is staking out territory among younger viewers that advertisers covet: 44% of MSNBC's prime-time audience was in the key 25-to-54 age group during the second quarter of 1998, compared with 24% of CNN's. ''Make no mistake about it, they are being pressured by MSNBC,'' says Robert E. Igiel, U.S. broadcast director for Media Edge, the media-buying arm of Young & Rubicam Inc. The MSNBC.com Web site, meanwhile, has steadily increased its reach to the point where it gets some 5 million unique, or separate, visitors a month, making it one of the top news sites, according to research firm Media Metrix.

Despite its gains, rivals still dismiss MSNBC as little more than a hobby farm for Microsoft chief William H. Gates III and a costly promotional outlet for NBC, which has made no secret of its need to diversify outside of its sagging network business. ''They have spent immense amounts of NBC on-air promotion time on MSNBC,'' says a CNN official. ABC News President David Westin recently told a gathering of TV critics that had ABC not ditched its own plans for an all-news channel, it would be losing over $100 million a year. ''From a public relations point of view, I think it gives them an advantage,'' Westin said of NBC. ''I have yet to identify another advantage.''

Although they won't disclose its losses, NBC executives insist MSNBC is on track to break even ahead of schedule in 2000, despite the presence of a smaller third player, News Corp.'s (NWS) Fox News Network. Based on MSNBC's growing reach and recent valuations in cable-channel deals, NBC execs believe MSNBC--not counting its Web site--is already worth more than $1 billion. ''It has more than justified the resources that have gone into it,'' says Robert C. Wright, NBC's president and chief executive.

While MSNBC positions the network for a high-tech future, it is helping transform NBC's costly network news unit into a viable business. MSNBC is beamed out of a converted warehouse in Secaucus, N.J., hued in metallic orange-tinted blues, that might have doubled as a set in the film Starship Troopers. Such NBC News personalities as Tom Brokaw, Katie Couric, and Jane Pauley routinely show up on shows repackaged for MSNBC, which can be interrupted at any time for breaking news. In one of NBC News President Andrew Lack's boldest synergistic moves, MSNBC's hour-long The News with Brian Williams--which suffers the fate of going up against CNN powerhouse Larry King Live--is aired again an hour later on NBC's business and talk channel CNBC. ''We're getting a lot of value out of that program,'' says Lack.

The value Microsoft is getting out of the deal is from both NBC's news resources and its marketing muscle. TV journalists sit side-by-side with MSNBC.com Webheads in Secaucus who feed data to an online newsroom in Seattle. Already, a mention on Dateline NBC to go to MSNBC for more information on a story can send 100,000 viewers to that site. According to Media Metrix, the share of home Web surfers visiting MSNBC.com has increased from 3.3% in August, 1997, to 4.9% in June. Archrival CNN.com had a 3.9% reach, while USAtoday.com had 2.6%. (CNN has separate news sites for sports, business, and politics, which it argues generate as much as 27% more traffic than MSNBC if measured together.)

MSNBC's appeal has been boosted by Microsoft's technological knowhow. One new feature, for example, allows local news, weather, and sports to pop up at the entry of a zip code. For now, however, online news is a commodity for which little is paid. The vision of a lucrative Web business tied to interactive TV has been slow to develop, says Peter Neupert, a former high-ranking MSNBC executive who recently left Microsoft. ''It's going to take a lot longer than anybody expected,'' says Neupert, who is now chief executive of drugstore.com.

Pete Higgins, group vice-president of Microsoft's Interactive Media Group, concedes that although ad sales are growing at a rapid pace, profits are still a long way off. However, he says, the software giant is in this for the long term. ''It's a core part of what we want to offer,'' Higgins says. ''If you take an asset view of the world, we have built a great asset.'' Eventually, the goal is to provide what Higgins calls ''truly personalized news,'' where consumers can call up a rich variety of text or video--at a price.

MARITAL TENSIONS. In the meantime, MSNBC's partners may find themselves with divergent interests. While NBC has invested in the portal Snap!, Microsoft has created a rival service, start.com. And just as Microsoft operates the personal-finance portal investor.com, NBC plans to pour resources into a CNBC.com portal. Another source of tension for NBC comes from its own affiliates. Alan W. Frank, general manager of NBC's Detroit affiliate WDIV-TV and chair of the network's affiliate-relations board, describes his reaction to promos on his station that direct viewers to MSNBC: ''Wait a minute, we're televising something else here!'' NBC recently offered the affiliates a small piece of equity in MSNBC, but those talks are preliminary, and most affiliates are said to prefer another form of payment.

Dealing with its owners and affiliates is one thing. MSNBC's biggest challenge remains its Time Warner Inc. (TWX)-owned competitor, whom no one is counting out. Despite its tough July, CNN held its ratings while its household audience increased 10% during the first seven months of 1998 compared with 1997, according to Nielsen. CNN spokesman Steven Haworth also says that although ratings are down at CNN's Headline News, it still has the youngest viewers of any of the news services, MSNBC included. ''It's getting camp to say: 'Let's go for a younger demographic,''' Haworth says dismissively. Since a full rollout of interactive TV is still years away, the true battle between these services has yet to be fought. But clearly, MSNBC has got its rival's attention.

By Richard Siklos, with Amy Cortese in New York



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