"About a year ago, Microsoft started making radical challenges to its MSN product line. After stumbling along a path of ala carte consumer services, Microsoft opted for a back-to-basics approach of focusing on what the company does best: Develop software.
A little history: In March 2001, Microsoft announced an ambitious plan to deliver 14 ala carte Web services under the moniker HailStorm. But by early 2002, that plan--renamed .Net My Services--had run aground. Microsoft rightly concluded that consumers weren?t ready for the planned Web services and the company lacked the institutional expertise to deliver them.
So, Microsoft decided to chuck the HailStorm remnants into MSN 8, which launched in late October 2002. Rather than ala carte Web services purchased from MSN Websites, Microsoft would enhance the value of the MSN online client by dumping the majority of its paid services into that one bucket. For example, enhanced Microsoft Money financial services and the Encarta online research library moved from being paid services on the MSN Website to being part of the MSN 8 client. At the same time, Microsoft?s back-to-basics approach produced some nice MSN 8 enhancements, such as the inclusion of photo-editing software, better parental controls and new spam-filtering features.
The result is a much more appealing online service, more differentiation between the MSN Web properties and the online access site and software development that is more in tune with consumer interests. MSN Messenger 6, for example, is as much a sociological product release as it is an improved instant-messaging client. Microsoft is beginning to understand the community aspect of instant messaging, which is clearly seen in MSN Messenger 6.
Now, the company is prepping the Outlook Connector for MSN. That product will allow people that use Outlook at work to easily retrieve their consumer MSN e-mail, calendars and contacts. Microsoft has said the Connector will be available later this year.
In terms of services, a few ala carte options remain. Microsoft claims outstanding response to its premium Hotmail Extra Storage service, which costs 20 bucks a year. The paid service offers more storage and other enhancements. Microsoft attributes the success of Hotmail premium to the rise in the number of Hotmail users using the Web-based mail service as their primary consumer account: 50 percent, up from 10 percent a few years ago.
Microsoft claims to have exceptional MSN Messenger traction in South Korea, where the company says instant messaging is often referred to as MSNing. There, MSN chat characters known as Avatars are a hot commodity, and custom Avatars represent a services opportunity for MSN. MSN has done about 2 million transactions of the Avatar service in South Korea. But these are one-time transactions.
Microsoft claims about 7.8 million paid MSN subscribers, which include premium Hotmail users but not Avatar buyers.
MSN?s business breaks down into three areas: ISP, which is U.S. only; information services, such as portal and search--a $1 billion business in the last fiscal year; and communication services, which includes messaging and MSN 8.
On the Internet Service Provider side, Microsoft is moving away from MSN-branded ISP services, as seen by last week's launch of the MSN High-Speed Marketplace. This transition is part of Microsoft?s back-to-basics approach of emphasizing software and getting out of the broader services business. Still, Microsoft may take a subscriber hit during the transition and also from the expiration of three-year dial-up contracts made during the great Internet-rebate boom of three summers ago.
While MSN is getting more on track, the Microsoft division faces many challenges, some arising from over-dependence on paid search services for the bulk of revenue. More importantly, the division expects 4 percent to 7 percent revenue declines during fiscal 2004, ending June 30, largely because of subscriber losses due to Internet-rebate contract expirations and MSN's exiting the ISP market."
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