Digital Domain: MSN goes after 'valuable users'

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Microsoft Corp.'s MSN lags behind AOL Time Warner's America Online in sheer number of Internet access subscribers. But the network is setting its sights on a different vision: expanding globally, promoting broadband service and getting its users to spend more time and money online.

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 believe defectors from AOL and other Internet service providers will be persuaded to stay when they see how much more the MSN network has to offer. They say services such as MSN Extra Storage, music via a partnership with PressPlay and content from jobs site Monster and Walt Disney Co.'s ESPN are big draws. Since last May, nearly 80% of new signups to MSN have switched from other ISPs, and nearly half of those came from AOL, according to MSN data.

MSN may finally be getting its act together after a series of false starts following its 1995 launch. While size and scale matter, MSN could have an edge on its rival, both in terms of its broadband business model and the depth and reach of its audience. That audience includes the 8 million subscribers who pay for MSN Internet access, but also 270 million unique visitors per month who access the network's diverse free offerings, including Hotmail, eShop and Carpoint. Hotmail alone has 110 million users globally and is available in 12 languages.

Microsoft executives envision MSN as a digital hub through which content, services and software can be delivered through broadband Internet connections.

"Reach and subscribers are the two areas to watch for MSN," said Yusuf Mehdi, VP-MSN & Personal Services. "We have tremendous momentum for both. ... 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," Mr. Mehdi said. "This is an important distinction because there are a lot of people on the Web who are not valuable users," he added.

frequent visitors

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.

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.

MSN's focus on international growth led to two key hires late last year: Robin Fern, regional sales director, MSN Asia Region, and Chris Dobson, pan-European sales director, MSN Europe Middle East Africa Region. The two will cultivate relationships with media, telcos and advertisers to offer premium services in their respective regions. MSN last year plowed $90 million into its MSN Advantage Marketing program in Asia.

"We've got reach and traffic ... Hotmail, MSN Messenger. Organically, we've built a very compelling business," Mr. Medhi said. As leader of MSN's global marketing and business plans, he is responsible for sales and business development, including key pieces of MSN programming such as the home page, channel properties and relationships with content providers. Microsoft's equity positions in several telcos and cable providers-it will own a portion of No. 1 AT&T Comcast if the pending merger of Comcast Corp. and AT&T Broadband is completed-mean that Microsoft will get a piece of the broadband pipe. MSN, as well as the company's interactive TV software, are likely to play starring roles.

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 enumerated 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.

pushing hard

"AOL will push as hard as possible on the high-speed [broadband] offering through Time Warner [Cable]," said T.S. Kelly, VP-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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