ARCHIVES :: SEPTEMBER 2001 :: BIG BUSINESS

MSN vs. AOL:
Round 2

Microsoft Comes Out
Swinging in Fight
For Control of the Internet

By  REBECCA BUCKMAN AND JULIA ANGWIN
Staff Reporters of The Wall Street Journal

Microsoft is trying to wrest control of the Internet from America Online—again.

A software company at heart, Microsoft has been struggling to master the consumer-friendly Internet since 1995. But the company’s MSN online service languished for most of that time, while AOL racked up subscribers and turned itself into a household name.

Now the contest is changing. Microsoft, with determined management, popular Web sites and a new strategy to link its Windows software with new Internet services, is mounting a much broader attack on America Online. And this time, it has more chances to win.

It’s hard to miss all the sparks flying between the two companies. They compete viciously with each other in areas ranging from monthly Internet access to instant-messaging to interactive television to computer games. “We are totally shooting for the hearts and minds of consumers,” says Yusuf Mehdi, the vice president in charge of MSN. “We want to do that, AOL wants to do that.”

But Mr. Mehdi thinks the two companies’ strategies are like night and day. America Online, with 29 million paying subscribers to about five million for Microsoft, has grown by stressing ease of use, brand awareness and a sense of community among users, who may spend more time on its own service than on the broader Web. Microsoft, Mr. Mehdi says, plans to use new technology to build a platform that other companies can use to create Internet services.

Opp osition Research

 A s they have in earlier business struggles, Microsoft staffers are gathering reams of information on their new No. 1 enemy. That includes data about advertising effectiveness and which specific MSN services—like money-management or travel planning—attract America Online users (who can access them from the Web). Microsoft even has people come to its research labs for side-by-side product testing; Microsoft might ask each person to, say, look up a baseball-team schedule on AOL and MSN, and observe how quickly and easily they found it.

America Online executives sound wary, but not worried. Microsoft is simply copying America Online’s existing business model, says AOL’s chief executive, Barry Schuler. “They’re trying to build what we already have,” Mr. Schuler says, adding that his company has every intention to keep evolving to retain its hold on the consumer market. “We really don’t look at them as a competitor. They are a business-to-business company.” Nevertheless, AOL was concerned enough recently to lobby lawmakers against Microsoft’s Windows XP operating system, which incorporates some of Microsoft’s consumer services.

It’s easy to see why Microsoft is training its guns on America Online. Finding it increasingly difficult to sell upgrades for its major products, the software company would love to get recurring revenue from subscriptions for online access and other services.

Aggressive Marketing

 So Microsoft is using aggressive marketing to cut into AOL’s lead in subscriptions. When America Online last month announced a slight price increase, Microsoft slapped together a targeted ad campaign, including full-page newspaper ads, to capitalize on the news. And Microsoft is developing services that exploit new links to its software. In March, it introduced HailStorm, a system that will tie together information from various Web sites and make Web transactions—and online notifications about events—easier.

Users of Windows XP, for example, could more easily log on to Microsoft’s Passport user-identification service and receive pop-up notifications of appointments. A consumer might visit a ballet company’s Web site and automatically move a performance date onto his or her electronic calendar. AOL meanwhile, has its own calendar and notification features.

The companies compete in many other areas. AOL has teamed up with two big music companies and software provider RealNetworks in online music; Microsoft is expected to align with the rival Pressplay service backed by Sony Music and Universal Music Group. Both are racing to develop ever-more sophisticated forms of interactive TV and online services to mobile devices such as cellphones.

AOL executives are excited about marketing tie-ins with the former Time Warner’s content properties. But Microsoft has won most often by tying products and technologies together.

The newly promoted Mr. Mehdi is pumped up by what MSN has to offer—not the least of which is its free Hotmail service. When people send him e-mail from an America Online address, he says, “I think, why is that poor person spending so much extra money? I am motivated by that.”