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Microsoft's Online Timing May Be Off


Cover Story

MICROSOFT'S ONLINE TIMING MAY BE OFF

Ever since plans for Microsoft Network surfaced nearly a year ago, pundits and competitors have predicted the dominant player in software would quickly dominate online services. The reason: With the click of a mouse, millions of Windows 95 users could sign up--an edge so big that rivals complained to the Justice Dept.

But weeks before launch, MSN isn't looking like an instant winner. Some 160 U.S. and 75 European content providers have signed up. But CompuServe has 3,000. And except for NBC, Home Shopping Network, and ESPN, MSN has few marquee names. Worse, until MSN's "Blackbird" software is ready in 1996, online publishers won't match the whizzy graphics of other nets.

"YESTERDAY'S GAME." There's another problem: Microsoft is launching MSN when content providers are swarming to the Internet's World Wide Web. Forrester Research Inc. says MSN will hit 2.4 million subscribers in 1997, but after that, all commercial services will suffer at the hands of the Web, which is expected to have more than 11 million users in 1998. "Microsoft is playing yesterday's game," says analyst William Bluestein. Some content providers agree. "There's no gain to going to Microsoft now," says Dan Mapes, president of SynergyLabs, a San Francisco multimedia producer. "The Internet is happening so fast."

Microsoft executives say it isn't an "either-or" scenario. America Online, Prodigy, and CompuServe have Internet links now, and so will MSN by yearend. "More and more, we think of MSN as a part of the Internet," says Russell L. Siegelman, general manager for online services.

MSN also must get out from under the Justice Dept., which is looking into whether bundling MSN with Win95 violates antitrust rules. The New York Times has estimated that 9 million people might, at least temporarily, sign up for Microsoft's network by the end of the year. But the number is likely to be far lower. For one thing, virtually all new home PCs include software making it easy for people to sign up with existing online services. Analysts estimate only 10% of people use that option. Legal experts say it will be hard to prove any violations. Justice is also looking into allegations that Microsoft, which plans not to share subscriber lists with content providers, will track who visits rival software makers on its network, then target those as potential customers for Microsoft products. "Microsoft hopes to attract competitors to its network like a fly to a spider's web," says Robert H. Kohn, general counsel at Borland International Inc. Microsoft executives say online services routinely withhold subscriber data to protect privacy and have no plans to use the lists to push Microsoft wares.

PRICING ILLUSION? MSN has its fans. Other services give content makers a cut--up to 30%--of the connect fees based on how much time is spent by members in their online areas. MSN allows each content maker to set fees, from which Microsoft will take a cut of up to 30%. Microsoft also gets 20% of advertising revenues and a 5% commission on goods sold on MSN but delivered by other methods.

Rivals say this is no bargain. Barry F. Berkov, CompuServe's executive vice-president, calls the pricing plan "complete bull." Keeping 70% of fees in a Johnny-come-lately network, he says, may be less than the 30% you get from a much bigger pie.

Rivals are dancing as fast as they can. Each has new multimedia software, Web links, and marketing initiatives. Reno Air now hands out CompuServe disks with the snacks. Prodigy is making deals that will put its software on 80% of new PCs. And AOL plans a second network with MSN-like pricing. Even for Microsoft, there are no instant winners in cyberspace.By Kathy Rebello in Redmond, Wash., with Paul M. Eng in New York


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