From the WSJ:
August 5, 1999
Microsoft-AOL War Heats Up
Over Plans for Internet Access
By NICK WINGFIELD and DAVID BANK
Staff Reporters of THE WALL STREET JOURNAL
Microsoft Corp.'s continuing attempts to loosen America Online Inc.'s grip
on millions of instant-messaging customers is the latest skirmish in what
promises to be a long, costly war between the No. 1 software maker and
the No. 1 online service.
Microsoft's next target: AOL's dial-up Internet-access business, the
$21.95-a-month service for more than 17 million customers that accounts
for about two-thirds of AOL's revenue. Microsoft executives are laying
plans to hasten the trend toward low-price, or even free, Internet access.
The trend threatens AOL much more directly than Microsoft, which has
only about two million Internet-access subscribers.
"We intend to be aggressive with access,"
said Brad Chase, vice president of
Microsoft's new consumer and commerce
Group and the point man for Microsoft's
new strategy. "AOL might think about it as
a profit center. That's not how we think
about it."
It is unclear whether Microsoft's latest
attempt to tackle AOL will be more
successful than prior efforts. In 1995,
Microsoft Network was launched as a
proprietary online service to compete
directly with AOL. AOL howled when
Microsoft unveiled plans to bundle the service into its Windows 95
operating system; as it turned out, the tactic was ineffective. Microsoft
eventually moved the service to the Web, where some online properties
have found success, but has done little to dent AOL's lead.
Protective Measure
Microsoft says it is more serious this time. Chairman Bill Gates and
President Steve Ballmer have generously funded the new plan, formulated
in the past six months, in large part as a protective measure for Microsoft's
core software business. AOL's dominance in online services gives it the
opportunity to become an alternative software "platform," threatening the
dominance of Microsoft's Windows operating system. Internal AOL
documents disclosed in Microsoft's antitrust trial indicated that was exactly
AOL's intention.
AOL executives have distanced themselves from such statements, but
Microsoft executives point to a recent comment by Steve Case, AOL's
chief executive: "Windows is the past. In the future, AOL is the next
Microsoft."
AOL executives say they are prepared for any Microsoft counterattack.
"Microsoft has been very successful in being a big infrastructure player --
that's their strength," said Bob Pittman, AOL's president and chief
operating officer. "Consumers are our strength."
The squabble between Microsoft and AOL
over instant messaging shows how ferociously
the online giant intends to defend its turf.
Instant messaging allows users to conduct
private online chats in real time, without the
delays of e-mail. Microsoft last month
introduced MSN Messenger to compete with
AOL's Instant Messenger service, which has
attracted 40 million subscribers; AOL's
separate ICQ service has 38 million users.
Microsoft thought it could piggyback on
AOL's success another way: by allowing users of MSN Messenger to
exchange messages with users of AOL's service. The move outraged
AOL, which quickly blocked Microsoft's efforts to let its chatters hook
into AOL servers, the computer hubs that coordinate instant-messaging
traffic. AOL said it never gave Microsoft permission to access the servers.
Microsoft, for its part, called the defensive measures hypocritical, since
AOL has lobbied elsewhere for open access to cable-television and other
networks. Microsoft has since rallied industry executives to push AOL's
Mr. Case to open the company's proprietary instant-messaging service.
According to AOL executives, the cat-and-mouse game has continued this
week, with AOL jamming every workaround Microsoft created to get into
its servers.
Although AOL admits the service isn't profitable, a closed
instant-messaging system helps the company maintain a captive audience
and build a platform for future audio and video services. "It's about
loyalty," said Lisa Buyer, an analyst with Credit Suisse First Boston.
"Clearly AOL is the one to beat," said David Readerman, an analyst at
Thomas Weisel Partners, a merchant bank in San Francisco.
Microsoft has already launched its strategy to help drain profits from the
Internet-access business. The company's deals with retailers and PC
makers to offer customers bounties of $400 in return for three-year MSN
service contracts has boosted sign-up rates by 50%, the company says.
The company also has tested a price point of $9.95 a month and is
considering offering free service to consumers who commit to a certain
level of spending with Microsoft's e-commerce partners.
Consolidating the Market
Microsoft also is pondering plans to consolidate the fragmented
Internet-service market and broaden its cut-rate offerings. According to
people familiar with the situation, Microsoft has discussed purchasing or
partnering with a number of large Internet-service providers, including
EarthLink Network Inc. and MindSpring Enterprises Inc., and partnering
with PC makers such as Compaq Computer Corp. and Dell Computer
Corp., which have launched their own access services.
To finance such efforts, Microsoft is considering the creation of a "tracking
stock" to reflect its Internet-related businesses. Because the stock market
has valued such stocks based on revenue, rather than profit, the tracking
stock could absorb large losses without hurting the value of Microsoft's
core businesses, said analysts.
Microsoft has used price cuts before, first to catch up to Lotus
Development Corp. in the spreadsheet market, and later to overtake
Netscape Communications Corp. in Web browsers. And the company has
demonstrated its willingness to spend heavily. Executives say its $5 billion
investment in AT&T Corp. and $600 million stake in Nextel
Communications Inc. will help the company gain a footing in the emerging
broadband and wireless online-services markets.
But AOL executives insist even Microsoft won't be able to lose money on
Internet access forever. "There are economics in the access business and
everyone's got to play by economics," said Barry Schuler, president of
AOL's interactive-services group.
AOL also points out that existing free-access plans and rock-bottom
access prices from other service providers haven't slowed its own torrid
growth. In fact, AOL last year actually raised prices for its
unlimited-access plan to $21.95 from $19.95 and claims to be adding new
subscribers faster than ever.
"People don't buy on price," Mr. Pittman says. "They buy on value."
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