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No free lunch for MSFT
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August 5, 1999: 2:39 p.m. ET
Microsoft would face technological, financial obstacles to free access
By Staff Writer Randall J. Schultz
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NEW YORK (CNNfn) - If Microsoft Corp. follows through on offering free Internet access, as it reportedly is considering, it faces a number of technological and financial hurdles.
The software firm is mulling low-cost, or possibly free, Internet access, according to the Wall Street Journal Thursday, in an attempt to wrest a chunk of the Internet away from America Online.
Microsoft apparently is covetous of AOL's dial-up online access business, which brings in $21.95 monthly from each of its 17 million subscribers.
Microsoft spokeswoman Mellissa Milburn said Thursday that the company had no comment on any new strategies. But she acknowledged "We are looking at ways to make Internet access better, faster, and easier."
Microsoft (MSFT) finds itself in the unusual position of challenger in the online service segment, which America Online (AOL) dominates. It attempted to offer its own proprietary service, the Microsoft Network, which combined Internet access along with original content and organization of the Web's offerings.
However, the service failed to surpass AOL and now exists as a personalized Web site, along with offering Internet access.
Microsoft has proven it knows how to make up for lost time. While the Netscape Navigator browser was once the overwhelming choice on the Web, Microsoft began a strategy of giving away its own browser, Internet Explorer, and now the two browsers are running neck and neck.
However, Microsoft will have to be careful in how it approaches another giveaway situation.
It made its Internet Explorer the default browser for its dominant Windows operating system, which eventually led to a mammoth antitrust case brought by the U.S. Justice Department and 19 states, alleging it was trying to use Windows to muscle aside competitors in other areas.
"The question is can they offer it free without it looking like predatory pricing," said Jeffrey Maxick, Internet analyst with Madison Securities. "I'm not sure they can do something that extreme when in the next six months they'll be getting some kind of judgment in the Department of Justice trial."
Microsoft approaches free service from a very different financial position than America Online.
Subscription fees from AOL's 17 million subscribers account for two-thirds of the company's revenue. Conversely, the fees from the two million MSN subscribers amounts to approximately $480 million annually, about 2 percent of Microsoft's revenue.
Still, if Microsoft does decide to take the plunge into free access, it had better be prepared to pay the price, said Tim Sloan, director of tech research at Aberdeen Group.
"If they make an investment but can't drive revenue [for] two years and are giving away access for two years, it's going to be difficult," he said. "I know Microsoft has a lot of money, but it would begin showing up on the bottom line."
Gutsy move for Microsoft
If Microsoft were to attempt to offer free Internet access, it would be an unorthodox move for the company, which has been considered slow to grasp the opportunities on the Web, according to Sloan.
"Microsoft has been behind the curve in the Internet space for a long time," said Sloan. "This would be a gutsy move and would be the first time I've seen them take a preemptive move on the Internet."
Free Net access is a rarity in the United States, although it is more common in Europe. Under the European model, most users are able to receive free access but pay minute-by-minute phone charges, which is where the ISPs such as Britain's Freeserve make their money.
However, the U.S. model has taken on a different form. In order to get the free service, Net users have to submit personal and consumer information and agree to receive much more invasive types of targeted Web advertising.
As the risks are many, so are the rewards -- especially if a company such as Microsoft, dominant in so many areas, can achieve a critical mass of users due to its nearly ubiquitous presence in many areas of personal computing.
Whoever is the first to garner this large consumer base could find it easy to stay on top, according to Iain Stevenson, principal consultant at Ovum, a Boston-based technology consulting firm.
"If you're not the first big free provider, it's hard to compete against the incumbent provider," said Stevenson, noting that other free providers obviously have little to offer price-wise.
The free ISP model is viewed somewhat skeptically among those in the Internet community, mainly because no one has yet proven it can work financially.
"I'm not confident the model will be successful," said Aberdeen Group's Sloan.
Some of the obstacles such a provider would need to surmount are technological, Sloan said, since most companies thus far are dealing with a small subscriber base.
A free ISP with millions of users would have to compile, manage and utilize a huge database of customer information in order to garner the top- dollar type of targeted ads that advertisers would crave.
Currently, no technology exists to take complete advantage of that specific user information. Until that occurs, free-access providers will find it difficult to fully leverage their advertising muscle.
Additionally, to pay for the costs of giving free access, these ISPs may be forced to push increasingly invasive amounts of advertising onto the user.
Net users have proven to be a difficult challenge for advertisers. People who put up with 2-minute commercial interruptions on television often see relatively passive Net ads like banners as obnoxious, and click-through rates on ads are still often less than 1 percent.
Analysts say that consumers may not even mind paying a small subscription fee if it will mean having to sort through less mandatory advertising.
Still, free Net access probably will become the domain of the larger companies, such as Microsoft, that can offer a large base for advertisers.
In the same way, portals such as Yahoo! and Netcenter already may be well positioned for a move to free access, since they already have a registered user base and are using the most current targeted advertising technology.
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America Online
MSN.com
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