Why Microsoft Hates AOL
By Alex Lash
Is it a war of products or a war of words?
Microsoft's Internet strategy increasingly consists of
jabs at America Online, the online service king that
Microsoft has never been able to topple.
Microsoft's latest salvos are as much flares of
distraction as they are well-aimed strikes in a rivalry
that's rapidly growing beyond online services. With
its purchase of Netscape Communications last
November and a subsequent e-commerce alliance
with Sun Microsystems, AOL now has an arsenal
to challenge Microsoft on several Internet fronts: a
high-powered server operating system, e-commerce
software for businesses and consumers, and
interactive software and services that could replace
Windows on PCs and run an array of digital
devices.
The recent instant-messaging battle and Microsoft's
musings about dropping or eliminating the fee for its
Internet-access service are the latest moves in a
much larger battle to win over the next decade of
Internet users.
In the U.S. alone, the number of adult Net users is
expected to more than double to 130 million by
2003, according to market researcher Cyber
Dialogue. Also by 2003, says Forrester Research,
Net-driven commerce will jump from last year's $8
billion to $108 billion, while business-to-business
transactions – for which both Microsoft and AOL's
partner Sun Microsystems want to sell the
computing infrastructure – will top $1.3 trillion.
To convert Net surfers into online advertising dollars
and transactions, AOL, Microsoft, Yahoo and the
other online services must keep them from doing
what comes naturally on the Net: jumping from site
to site. Instant messaging, Net access and a
myriad of other services play an important role in
creating user loyalty and retaining their business.
The messaging brouhaha has garnered an overload
of headlines, many of which focus on America
Online's refusal to open its AOL Instant Messenger
(AIM) system to the outside. It was a smart
publicity move by Microsoft: casting itself as an
open-standard champion and painting AOL, which
is currently hammering AT&T to open its newly
purchased cable empire to outside content
providers, as Internet Hypocrite No. 1.
It also deflected attention away from Microsoft's
own problems. Messenger, which is a crucial piece
of Microsoft's strategy to draw users to Hotmail and
its other Web-based services, arrived July 22,
months behind schedule. After high-profile press
demos last summer and talk of an autumn 1998
beta, the product dropped out of sight, as a
leadership void and development turmoil distracted
the company's new-media division. To add to the
pressure, AOL pulled a coup with its June 1998
purchase of runaway chat software favorite ICQ.
At the time, it didn't matter if AOL couldn't – or
wouldn't – let ICQ and AIM users communicate with
each other or anyone else's chat systems. But
now, with Microsoft and others turning up the heat
and encouraging AOL to join an international effort
to create a messaging standard, AOL is playing for
time. It has recruited several industry allies,
including Apple's Steve Jobs and Novell's Eric
Schmidt, for an advisory committee. It has also
invited the key international standards-making body
to join its own effort, instead of vice versa.
Six days after debuting MSN Messenger, Microsoft
said 700,000 unique accounts had been created.
But with claims of 28 million registered AIM users,
and 38 million more entrenched on ICQ, there's little
imminent danger of mass defections to Microsoft.
But if Microsoft wasn't able to embarrass AOL into opening the instant-message
gates, it's made a separate but related attack. Yesterday, musings from key
Microsoft executives about offering low-cost or no-cost Internet access had the
immediate effect of dropping AOL's stock nearly 10 percent. (It has since
recovered.)
The investor handwringing likely made Microsoft marketers smile, but AOL has
been able to fend off Microsoft time and again. Its subscriber base continues to
climb and could reach 20 million by next year. MSN's ISP business has about
1.8 million subscribers, according to research firm Jupiter Communications.
Microsoft no longer releases subscriber numbers and wouldn't confirm or deny
the Jupiter estimate.
Of course, it's not exactly news that Microsoft wants to attract more ISP
subscribers with lower prices. The company has a six-week-old campaign run
jointly with retail outlets Staples and Costco to give PC buyers a $400 rebate if
they commit to MSN for three years. It's also offering through Costco a
$12-per-month plan as long as subscribers sign on for three months at a time.
Microsoft won't release specific numbers, but Mehdi says the sign-up run rate
has increased 50 percent. Like AOL, the company has also toyed with reduced
rates for limited hours.
But Microsoft's top Internet executives have been claiming that the access
business finally stepped out of the red about six months ago. "We turned it from
losing lots of money into one that now breaks even," then-Microsoft Network chief
Laura Jennings told The Standard last December. "This year we'll spend lots of
money to grow the user base."
Because Microsoft doesn't itemize revenues for its various new-media holdings,
it's impossible to verify such statements. But if Access is slowly but surely
becoming profitable, a reduction or elimination of subscription fees could be seen
as a step backward.
Not so, says new MSN marketing director Yusuf Mehdi. "Our long-term vision is
to do exciting stuff on Web, and that requires a lot more people on the Web," he
says. "The way to deliver value to the user and derive benefit for the company is
much broader than just [Internet] access."
In other words, the more people getting to the Web through MSN, the more
Microsoft can funnel them to its portal, its advertisers and its e-commerce
partners. To open up a new revenue stream, the company is quietly considering
taking a cut of e-commerce transactions with merchant "tenants" on MSN - up
until now a Microsoft no-no.
Microsoft traditionally does best when it imagines itself to be the underdog. In the
online service and messaging battles, it truly is. Initial reports say the follow-on to
Windows 98, due late next year, will integrate the Internet more deeply into the
operating system. That could hamper AOL's ability to reach out to new PC users.
The logical path leads AOL to brand its own cheap PCs and other devices.
It's a safe bet that Microsoft will be dogging its online rival at every step.
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