Microsoft revamps MSN strategy

SEATTLE: Microsoft Corp.'s $750 million settlement with AOL Time Warner Inc. gives the No. 1 media company an edge in attracting subscribers and shows Microsoft is ready to phase out MSN as a rival Internet access service, analysts said.

The settlement between the world's largest software and media companies marked a strategic shift for Microsoft. The upshot, they believe, is that Microsoft is more likely to turn its money-losing MSN Internet services arm into a software and services business, rather than an Internet service provider that competes head-on with AOL.

"Microsoft is essentially withdrawing from the ISP business," said Matt Rosoff, an analyst with Directions on Microsoft, an independent researcher based in Kirkland, Washington. Microsoft denies any intent to withdraw as an ISP and says MSN will still compete with AOL for dial-up Internet customers and subscription-based content and services.

"The settlement doesn't change our strategy at all," said Lisa Gurry, MSN group product manager. "Even with the settlement, AOL and MSN will continue to compete hard," she told Reuters on Friday. Analysts are less certain that is the final word, especially given the market position of MSN, which was launched in 1995.

MSN has nearly 9 million subscribers while AOL is the world' largest Internet service with more than 34 million subscribers.

"Increasingly, it looks like Microsoft is willing to support AOL as a content and media provider," said Brendan Barnicle, an analyst with Pacific Crest Securities. Rosoff agreed: "They are less interested in trying to compete with AOL in trying to sign up large numbers of subscribers."

Burying the hatchet

The once-bitter rivals agreed yesterday that AOL would drop its antitrust lawsuit against Redmond, Washington-based Microsoft in exchange for $750 million and a range of other concessions and cooperative arrangements. Those included a seven-year license to use Microsoft's Internet Explorer browser technology without charge on AOL.

Microsoft will also distribute AOL's online service software discs with copies of its Windows operating system that are shipped to "white-box" personal computer manufacturers that make customized PCs from off-the-shelf parts.

In addition, Microsoft agreed to give AOL access to early versions of its Windows operating system to develop its own software and services. Microsoft has already started to offer MSN independent of Internet access, where subscribers can get a specialized Internet browser, enhanced Hotmail e-mail features and a wider range of Microsoft content.

The two companies also said they would work together to spread the use of digital media software by taking advantage of Microsoft's technology and the wide reach of AOL's media businesses, which include CNN and the recent splashy release of "The Matrix Reloaded."

Charles Di Bona, an analyst at Sanford C. Bernstein & Co., said that while the settlement appeared to favor AOL, it also marked a powerful alliance in the area of digital media where the two companies are positioned to "establish a de facto standard for digital media content and rights management." Pacific Crest's Barnicle agreed: "We're in an economy where the big are getting bigger."

© Reuters