MS' free Net access plan won't help MSN

Zeroing connection fees comes way too late

Analysis The news that Microsoft might offer MSN access for free, or at least at a low price, is hardly surprising, although poor old Microsoft is getting stick for just thinking about it. But for once at least it can hardly be castigated for the move, if it's true. The history of MSN provides a business school case study. Although antitrust law (and the tougher competition law in the EU) is supposed to stop leverage from a dominant position in one market into another, it hasn't really been necessary to resort to the law, since Microsoft has not succeeded with MSN. Marvel, as MSN was code-named in 1995, arose from a bunch of bought-in products and services. Microsoft found out how online services worked by persuading CompuServe from going with Unix and putting itself on NT, which Microsoft described as a "design win". CompuServe was oddly reluctant to discuss the deal. Microsoft licensed Internet Assistant from Booklink Technologies so Word could create HTML pages, with the deal being completed just before AOL acquired Booklink. At Comdex in November 1994, AOL was able to crow "AOL announces licensing agreement with Microsoft", to Redmond's embarrassment, and this marked the beginning of the bad feeling towards AOL. Microsoft was sufficiently uncertain about MSN to persuade TCI, the cable operator in Denver, to acquire a 20 per cent holding in the Microsoft Online Services Partnership for just $125 million in December 1994. The text retrieval software was provided by Fulcrum Technologies of Ottawa, and in January 1995 Microsoft took a stake in UUNet to get UUNet to provide the plumbing. Spyglass, of course, provided the Mosaic browser, renamed Internet Explorer version 1, after Microsoft failed in its attempt deal directly with the University of Illinois. Wang's document embedding technology was used in the browser, and finally GE Information Services provided electronic data interchange services for MSN. Although MSN was only offered with Windows 95 initially, it caused great concern at the time for AOL (then two million subscribers), CompuServe (2.7 million subscribers) and Prodigy (1.3 million subscribers). They need not have worried. In July 1995, MSN used 130 servers, with space for another 90 to be added in a nearby area, but each NT server could only handle 500 concurrent user log-ins, so the 75,000 capacity was hardly a threat. Microsoft did claim that MSN could support a million users initially, but in performance, it was a dog. The CEOs of MSN competitors (and Scott McNealy of Sun) sent a letter to Congress expressing this concern, and especially the bundling of MSN with Windows 95. MSN was priced a little below the rival services, so they immediately lowered prices to compete. Bill Neukom replied on behalf of Microsoft, claiming that MSN's competition would be good for consumers. To the surprise of many people, MSN was a flop and continued to be a flop, and not just because the content lacked lustre and the performance of the site was below par. Relaunches did not help, and it began to be clear that other powers were at work: first movers tended to remain winners, all else being equal. MSN rivals assumed that Microsoft was bound to be successful with MSN but they forgot that Microsoft's operating systems monopoly was obtained through licensing practices, and tying Windows to MS-DOS, and certainly not on the merit of the product. If this new pricing move for MSN is put into practice -- and it looks likely -- Microsoft may for a time pick up a few more subscribers, but they will probably mostly be the floaters who move around the services anyway. A business plan that makes up the losses on MSN by reducing the price does not look good, and we doubt if there's really enough advertising to go round. Of course, AOL might suffer -- but we have long since given up making any sense of AOL's own business plan (and assuming there really is one may be generous). It's been a story of rags-to-riches, although the years of rags went on for so long that the upturn must have surprised even AOL. The saving grace was not even something that AOL did -- it was a cultural shift to emailing, coupled with much lower prices for PCs, and CD-ROM carpet bombing that did the trick. AOL's share price went from a low of $17.25 in September to a high of $175.50 in April, but finished yesterday at &83.50 after falling to $77 earlier in the day. CEO Steve Case and some other insiders decided to sell four million shares when the price was over $100. This is bad news for the new hires whose options are of no value, at least for the time being. AOL has little to fear from Microsoft offering a low-cost or free service, since the wall had already been breached in Europe and exposed the fragility of AOL's business model. There appears to be no more likelihood of MSN becoming dominant now than there was four years ago. Microsoft should be allowed to lose its money in any way it chooses. ®

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