MICROSOFT NETWORK (MSN)

The Microsoft Network—MSN for short—is an online service owned by the Microsoft Corporation. MSN.com is a multi-service web portal, comparable to America Online (AOL) or Yahoo, which offers a number of free features to surfers of the Web, including email from Hotmail, news from MSNBC and Newsweek magazine, a variety of financial and shopping services, and MSN Web Communities, a network of chat rooms and online communities.

MSN derives its revenue from a combination of subscription fees, advertising, and e-retailing agreements. MSN's millions of subscribers can use MSN to access the Internet and the proprietary portions of MSN.com. The service has forged strategic alliances with firms, such as AltaVista, John Hancock Mutual Life Insurance Co., Merrill Lynch & Company Inc., Unilever PLC, and Barnes & Noble Inc., which in turn sponsor a number of individual services on the MSN site. The site has become a nexus of e-tailing with stores like Barnes & Noble and The Discovery Shop represented. According to MSN, in late 2001 it had agreements with over 10,000 businesses that brought in some $6 billion in e-commerce every year.

By 2001, its burgeoning partnership, its slowly growing subscriber list, and the pure glitter of the Microsoft name had helped raise MSN to the number two spot among online services, second only to AOL. Reaching that level, however, was an achievement fraught with missteps, turnarounds, and failure that only a company with the size, power, and deep pockets of the Microsoft Corporation could have survived. And though it was number two in September 2001, MSN was a distant second, its 6.9 million subscribers well behind over 31 million at AOL. In fact, AOL managed to sign up 7 million new members in 2001 alone—more than MSN's entire subscriber base.

MICROSOFT BUILDS ITS ONLINE SERVICE

When Bill Gates decided in 1993 that Microsoft should launch its own online service, it was conceived as a private dial-up service on the order of CompuServe or Prodigy at the time. In such a "closed" system, all content—databases, bulletin boards, etc.—was stored on a private network and could only be accessed by paying subscribers via local dial-up numbers. In 1994, however, while Microsoft was designing MSN, the online world underwent a momentous change. The Internet, an incomparably larger network, was opened to the public. For the cost of a browser and a modest monthly charge, users could surf the vast network. The Internet rapidly began displacing the old private dial-up networks. Microsoft, however, was unable to react quickly to the change. When the Microsoft Network debuted in August 1995, it did not yet offer Internet access—a feature its primary competitors, like AOL and CompuServe, had already implemented. Nonetheless, because MSN bore the Microsoft name, most observers expected it to be a rousing success.

Microsoft was hard at work developing a Web browser and other software for MSN, and it planned to install them all on Windows 95, the new version of its best-selling operating system, due for release around the time MSN was going online. Microsoft's plan to integrate MSN into Windows created more problems, in particular an icon on the Windows desktop which enabled computer users to sign up with the MSN service with the click of a mouse. Competitors, like AOL, maintained that this amounted to an antitrust violation and asked the Justice Department to intervene. It was alleged at the same time that Microsoft intended to track MSN users' visits to competing software makers in order to follow up with advertising of its own. Three weeks before MSN's debut, the Justice Department announced its investigation.

The first reactions to the service were mixed at best. Its complicated graphics were slow to load, critics said. Its on-screen interface was a virtual carbon copy of Windows, which would be off-putting to some users. There was very little brand-name content, and most of that had to be paid for. Finally, by 1995 it seemed inconceivable that a service from Microsoft would not include general Internet access. Microsoft put a browser together—but it was only available in a special version of Windows 95 or with extra software that cost about $50.

When Microsoft Network opened its virtual doors Microsoft admitted that it expected the service to lose money during its first year of operations. By the end of 1995, MSN had more than half a million subscribers, which placed the service up with the industry leaders. Industry observers predicted that the service would grow quickly to three million or more subscribers by the end of 1996. However, MSN's early growth was staggeringly slow, considering that some 7 million copies of Windows 95 had been sold, each offering the ease of one-click access to MSN. The slow start led some of MSN's content partners to cancel agreements with the service. It also caused the Goldman Sachs Group., an investment firm, to remove Microsoft from its list of recommended stocks, sending the shares into decline.

MSN WORKS TO FIND ITS FOCUS

In an attempt to shore up its loses, eight months after its debut, in March 1996, Microsoft inaugurated the first of a series of major makeovers at MSN. Microsoft put the entire "closed" service on the Internet. MSN still had a full range of features, including shopping, news, business and finance pages, chat rooms, etc—but made them available free of charge. The facelift was intended to make MSN more attractive, but one of the signals it and later changes sent was that Microsoft really had no vision for MSN, that it was merely reacting. The change to the Internet had another serious short-term impact. It alienated most of MSN's 400 information providers, companies like NBC that spent millions of dollars to develop material for the old MSN. The switch to Web-based operations meant they had to go back to the drawing board to design product offerings for the new MSN. The transition to the Web was completed in October 1996.

In April 1996, MSN made a huge advance in terms of brand-name content, when Microsoft announced a major partnership with NBC. The two firms intended to produce a variety of news, sports, finance and entertainment products for the Web and cable TV. Part of NBC's contribution was developing a 24-hour, New York-based cable news network to be called MSNBC. Microsoft built a large newsroom at its headquarters in Redmond, Washington, and with NBC began generating news content which would be posted free on MSN.com.

The alliance with NBC pushed MSN into its second large-scale makeover at the end of 1996, just two months after its transformation to a Web-based service. The Microsoft Network as newly conceived would radically expand the model of a standard Web portal and Internet service provider. While it continued to develop what would later be considered "traditional" online content—the series of arts and entertainment guides for various American cities called Sidewalk, the Internet Gaming Zone, or the MSNBC news stories—MSN would at the same time begin morphing into a full-blown media company. A production studio, Microsoft Multimedia Productions, was founded for it where some 20 online comedies, dramas, and soap operas went into production. MSN introduced Slate, an upscale online magazine modeled on the New Yorker or Vanity Fair. MSN hoped its radical new focus would pump up its subscriber base to 3 million by summer 1997 and enable it to overtake CompuServe as the number two online service.

Only two and a half months later, however, the strategy seemed to be failing. Microsoft announced the layoff of hundreds of part-time workers who had been hired to develop content for the new MSN. It cancelled half the newly formed MSN programs. New programming was on the way, the company said, that would be "light years better," a blunt reflection on the quality of the cancelled content. Things were falling apart on all fronts in April 1997. MSN was plagued by apparently irresolvable billing problems. Worse, overloaded servers shut down its email system on various occasions, depriving MSN subscribers service for days at a time. E-mail remained MSN's Achilles tendon until January 1998 when it purchased Hotmail, the free email service, for about $395 million. The purchase gave MSN a tried and true email technology along with instant access to nearly ten million Hotmail subscribers. By that time although MSN had 2.3 million users, it was still number 3. According to reports, MSN was not making money on subscriptions or advertising, and had lost hundreds of millions of dollars. One effect of the Hotmail acquisition was to put an end to a buzz in the online industry that Microsoft intended to cut its losses and sell MSN off once and for all.

Whatever, MSN's difficulties, the power of Microsoft was enough to make it attractive attract new corporate partners. AltaVista Search Service, Infoseek Corp., Lycos Inc., and Snap Internet Portal Service chipped in $60 million for the right to be the featured search engines on MSN. Barnes & Noble Booksellers allied with MSN in hopes of catching Amazon.com. One effect of these partnerships, combined with the new popularity of service-oriented Web sites such as Yahoo!, was to nudge MSN back into its previous incarnation. In August 1998 it abandoned its attempt to become an online entertainment powerhouse altogether and transformed itself back to a simple Web portal, offering news, information, email, bulletin boards, and online shopping. The change increased traffic at the MSN site, but further distanced advertisers who were losing confidence in Microsoft to develop and stick with a plan for MSN.

If advertisers suspected a lack of vision at MSN, they may have been right. MSN redesigned its entire site again, first in 1999 when it shifted its direction to focus on online communications, and again in early 2000, when the service returned to Microsoft's functional roots in software and set itself up as a toolkit for the Internet that assembled resources to make Web-based activities, like shopping, investing, and communicating, easier for consumers. MSN launched a series of expensive media blitzes in 2000 and 2001 that included nationwide TV commercials, massive CD-ROM mailings, and even rebates up to $400 on computer purchases to customers willing to commit to MSN service for a year or more. It was a desperate and ultimately futile effort to make headway on AOL. The promotional campaigns added another $1 billion to the $1.5 billion Microsoft had already sunk into MSN, yet by spring 2000 MSN still had only 2.5 million members compared to AOL's 22 million. By the end of 2001, Microsoft Network was once again a basic Internet portal, much like AOL's.

The MSN-AOL competition frequently broke into open conflict. Microsoft's decision to rig Windows in favor of MSN drew a long Justice Department investigation largely at AOL's behest. In 1999 AOL protested publicly and loudly that MSN Messenger, the network's instant messaging tool, had been improperly set up to communicate with AOL's members-only instant message system. What's more, AOL users who had Windows versions that included MSN Messenger found that MSN Messenger ran automatically when they tried to send messages, and blocked or completely disabled the AOL version. AOL also accused Microsoft of planning to program its new Windows XP system so that only MSN would be able to run on it—a threat 19 state attorneys general took seriously enough to jointly bring suit against Microsoft. Eventually Microsoft agreed to allow dealers to place on the Windows desktop any Internet provider as long as an MSN icon was there too.