Analyst: AOL's Customer Base 'More Attractive' than MSN's

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NEW YORK ( -- In its continuing struggle to catch up to AOL Time Warner's America Online, Microsoft Corp.'s MSN is expanding globally, promoting broadband service and aggressively courting what it calls "valuable users," corporate officials said.

As portal powers go, AOL is the undisputed kingpin of the category, with 33 million Internet access subscribers, far exceeding the 8 million customers who subscribe to MSN's Internet service. But the dial-up access business has matured, the low-hanging fruit is gone and AOL's growth is slowing as narrowband subscription pressure mounts, fueled in part by MSN's aggressive campaign to lure AOL defectors.

MSN, which since last May has plowed $50 million in advertising and marketing support to recruit "switchers" from AOL, last week lobbed a new offer at potential defectors -- $50 cash back after three months to new MSN broadband or dial-up Internet access subscribers.

MSN executives hope defectors from AOL and other Internet service providers will be persuaded to stay by services such as MSN Extra Storage, music via a partnership with PressPlay and content from jobs site Monster and Walt Disney Co.'s ESPN.

MSN's current audience includes the 8 million subscribers who pay for MSN Internet access, 270 million unique visitors per month who access the network's diverse free offerings, including Hotmail, eShop and Carpoint, and 110 million Hotmail users.

'Valuable users'
"Reach and subscribers are the two areas to watch for MSN," said Yusuf Mehdi, vice president of MSN & Personal Services. "Our goal from a business standpoint is to have the largest base of 'valuable users,' meaning that they spend a lot of time online and money, and therefore they're monetizable.

"This is an important distinction because there are a lot of people on the Web who are not valuable users," he added.

MSN defines a valuable user as someone who visits the Web at least every other day; who subscribes to MSN for access or is registered with an MSN service, such as Hotmail; and who uses two or more of the network's services.

Broadband service
MSN sees broadband service and international expansion as critical to its growth. Broadband service enables faster downloads and more multimedia applications. A representative declined to specify the number of MSN broadband subscribers other than to say the number is "comparable" to AOL's, which analysts estimate at around 400,000.

MSN is not currently in the Internet-access business abroad, but its network offerings are in 34 countries. AOL has also made international growth a priority.

AOL's broadband challenge
For AOL, the transition to broadband through sibling Time Warner Cable has begun with a staggered rollout in 40 markets.

A recent report from Lehman Brothers Internet analyst Holly Becker listed AOL's challenges, noting: "AOL also faces increased competition from a number of rivals, most notably Microsoft. AOL is far and away the leader in brand recognition and market share ... and we believe its customer base is more attractive than MSN's, but its slowing growth coupled with Microsoft's deep pockets may have competitive implications for both narrowband and broadband economics."

Ms. Becker also cited pressure from MSN's "switcher" campaign, sluggish Web advertising revenue, unprofitable international market operations and the costly migration of AOL subscriptions to broadband service.

"AOL will push as hard as possible on the high-speed [broadband] offering through Time Warner [Cable]," said T.S. Kelly, vice president and principal media analyst, Nielsen/NetRatings.

While MSN positions its paid subscribers and the vast population of users accessing its network as premium customers -- those who spend more time on the Web and who have a level of comfort with incorporating it into their everyday lives -- Mr. Kelly said AOL has "the best breadth in terms of clientele. ... They've reached every single economic segment."

However, this strength may also prove to be a challenge as AOL must repackage and market new services to upgrade customers, according to Mr. Kelly.

"MSN is a little more nimble," he said.

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