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Why Microsoft's MSN PC give away didn't work

It didn't (arf...) have a monopoly of the channel...

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MSN claims to have recruited 500,000 new subscribers in Q4 2000, and MSN is pulling the $400 hardware rebate it offers new subscribers in March. What do these two things have in common?

The $400 rebate is available only for people signing up with MSN for a three year contract, and when all of the numbers are counted up doesn't come to a massive bargain. But it has the obvious effect of spreading the payment over the term of the contract, and leaving somebody picking up the tab for $400 x X upfront. Microsoft hasn't given out any breakdown of how many rebates were taken up, how many were for the full $400 and who exactly picked up the bill, but as the company says it was hurting, we can presume Microsoft itself picked up more than it anticipated.

Dell was the big player in the deal as far as the PC companies were concerned, and as you don't get that kind of gig for free, we can presume Dell was in for a few bucks as well. Best Buy merrily gave out the rebates on any kind of hardware in the store, which again presumably meant a substantial hit for Best Buy, and a fairly complicated claw-back procedure as far as the store's relations with the lucky hardware vendors was concerned.

The Microsoft line on the cancellation of the offer is that it has run its course and that it's probably mopped up the bulk of the PC-less society. Execs last month also said that the offer was hitting the bottom line. It's being replaced by a couple of other offers; one year's free MSN service for purchasers of any PC the retailer cares to make part of the offer, and a couple of sign-up related offers - a $200 rebate for signing up for two years, and $75 for nine months.

But there also seems a possibility that the $400 offer will continue for buyers of the MSN Web Companion, so one can perhaps speculate that there's more to all this than initially meets the eye.

The subsidy model works in the mobile phone business, where the service provider takes the initial whack, grumbling, but makes the money back within the term of the contract, and gets some sweet deals from the hardware supplier if it's cute enough. Clearly it isn't working for Microsoft as the company has been applying it, so what's the difference?

Mobile phone sales seem to have established a two to three year replacement cycle driven by new features, fashion, and a free or next to free price tag whenever the customer comes to the end of a contract. This clearly does not apply to the PC business, and does not apply - yet - to the MSN Web Companion/appliance business.

Highly structured competition also probably plays a part in the mobile phone model. In most territories there are at least three to four main service providers plus numerous tiddlers and close relations competing over deals. This obviously isn't the case in the sector MSN inhabits, where basically you've got the AOL monolith and the challenger MSN chucking money at market share. You've also got big regionals and any amount of smaller ISPs, but for the most part ISPs are not throwing money at hardware in order to chase users. Where Microsoft led, they did not follow.

Microsoft's real problem was probably as follows. In the mobile phone market the service providers can more or less dictate whether hardware gets out into the channel or not, whereas Microsoft's arrangement relied heavily on the core deal with Dell, and on trusty outlet Best Buy. This does not amount to control of a channel, not even if you only count PCs bought specifically to access the Internet. The hardware sellers and the retail channel still have a choice as to how they spend their marketing money (the "choice" is far narrower in the phone market), and about the deals they do with suppliers.

So logically, if Microsoft failed to make the subsidy model a widespread one in this assault (which it did), then Microsoft is going to end up shouldering most of the cost of sale (which wasn't the original idea) as it partners cool on the notion. A $400 upfront subsidy pans out OK financially for Microsoft over the three year period, but if money from Microsoft's channel partners doesn't get factored in as well, all it is is OK. This isn't the way the mobile phone numbers stack up, so go figure.

The notion that the subsidy might continue on the Companion though suggests that Microsoft hasn't quite given up trying. But how do you make an Internet access device more like a mobile phone? Chain it to a service (done), make it cheap to build and a very high (higher than PCs) volume product (tricky, these two), and drip-feed the range regularly with must-have consumer features and fashion bells and whistles. Consider the kinds of features phones have added to them year on year, then try to imagine PC equivalents - very tricky indeed, this one... ®

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