The Cutting Edge: COMPUTING / TECHNOLOGY / INNOVATION : On-Line Operators Gear Up for the Microsoft Network Onslaught
When Microsoft Corp. earlier this month announced an exclusive on-line service agreement with NBC television, it was launching the first volley in what promises to be a ferocious battle over one of the hottest growth industries in the country.
For Microsoft was doing more than signing up a valued information provider for its upcoming Microsoft Network: It was stealing a partner from two of its main rivals, America Online and Prodigy, which had previously carried NBC programming on their networks. And it was doing so by agreeing to pick up million of dollars in costs associated with translating broadcast programs into something interesting for someone with a personal computer and a modem.
It may not yet have a single customer and it remains months away from its late-August debut, but the Microsoft Network poses a mortal threat to the Big Three of on-line services: America Online, H&R; Block’s CompuServe and Prodigy, the joint venture of IBM and Sears. Microsoft intends to incorporate the software needed for its network into Windows 95, the newest version of the operating system that runs most personal computers, and analysts say the Microsoft Network could quickly exceed the membership rosters of all three big rivals combined.
But the incumbents do not intend to go down without a fight.
It’s only in the past two years that on-line services--electronic information centers that offer newspapers and magazines, chat areas for discussion of hobbies and other topics, on-line shopping and more--have caught the interest of even the computer-equipped: America Online now has more than 2.5 million subscribers, CompuServe has 1.9 million and Prodigy 1.55 million. They’re now mobilizing to battle Microsoft in every way they can imagine.
They’re improving their connections to the Internet, the worldwide network of networks, partly by buying up small software companies. They’re cutting deals with the makers of popular CD-ROM software to offer ever-simpler access to their services. They’re stepping up marketing of all kinds, flooding consumer channels with free sign-up diskettes and other promotions.
And they’re prodding the Justice Department--still glowing from its success in stopping Microsoft’s acquisition of Intuit Inc.--to take the next step and challenge Microsoft’s inclusion of the Microsoft Network on Windows 95.
“It’s not the Microsoft Network that we’re worried about, it’s the fact that it’s being bundled with Windows 95,” said Steve Case, chief executive of America Online. “If it wasn’t for that, the Microsoft Network would get a reasonable amount of attention. If it was coming from someone other than Microsoft, it wouldn’t get much attention at all. What makes it interesting is who it’s coming from and how it’s being delivered.”
Analysts seem to have little doubt that no matter what the competitors do, Microsoft will do some serious damage. With about 30 million copies of Windows 95 expected to ship in the first year of its release, there will be 30 million computer users who merely need to click on a colorful icon to instantly sign up to the Microsoft Network. Should Microsoft succeed in holding the interest of only a small percentage of those who try it out, the network will be wildly successful.
And, of course, Microsoft has the resources to price its service aggressively--and to assure that the information content and the design are top-notch.
The deal with NBC provides a good example of how hard the on-line battle will be for the entrenched competitors. Microsoft will lend the broadcaster a corps of software programmers, who will not only create programs for its network, but will also collaborate with NBC on CD-ROMs and eventually on programming for interactive television.
Microsoft will pick up all the development costs while sharing any revenue it collects. Neither side will spell out the financial arrangement--how Microsoft will charge for subscriptions and what the revenue split will be--but Microsoft Chairman Bill Gates said that “content providers should receive the lion’s share of the revenue.” With its PC software business robust, Microsoft can afford to wait for the on-line advertising dollars that will eventually support its network.
All Microsoft asked from NBC in return was a promise of an exclusive relationship--and America Online and Prodigy were thus unceremoniously dumped by the TV network. It’s the kind of scenario that could play out again and again as major publishers and big-name entertainment companies are wooed by the various on-line networks.
“There’s going to be a bloody battle over the key content providers,” said Allen Weiner, an analyst for Dataquest Inc., a San Jose market research firm. “The on-line service companies are going to try to lock them up.”
America Online, Prodigy and CompuServe typically offer development assistance to content providers for a negotiated fee, and revenue shares are also negotiated. Content providers--which have long complained that these deals were inadequate--will probably find them becoming much more generous in the months before Microsoft launches the network.
Another weapon in the Microsoft arsenal is Blackbird, a software development tool that content providers say is allowing them to create multimedia-style programs for the Microsoft Network that are superior to what can be created on the other services.
Today, America Online is considered to have the most attractive interface of the three popular on-line services, with colorful, eye-pleasing graphics. But select an article in the topic “Today’s News,” for example, and you get no more then a screen of text and a grainy color photograph.
According to those who have used it, Blackbird will allow the creation of content rivaling the best CD-ROMs. “It’s more multimedia-oriented than the other services,” says Genevieve Martineau, manager for Ziff-Davis Online Services, a computer publisher that offers its trade magazines and other information on a variety of on-line services. “You can put sounds in it, video in it, and the images look very photographic.”
The on-line competitors thus find themselves on the defensive in this area too.
“I think everyone has the objective to improve the user experience,” said Gary Berkov, an executive vice president of on-line services for CompuServe. “Just as Microsoft is out there building tools, so are others, like CompuServe.”
Still, the competitors are hardly out of tricks. America Online has been especially aggressive on the acquisition front: Last week it announced an agreement to purchase WAIS, a maker of software for searching databases. It has also spent $85 million to buy BookLink Technologies, which makes a browser for the Internet’s World Wide Web; Navisoft, which makes Web server software, and Advanced Network Solutions, an Internet access provider.
CompuServe spent $100 million to buy Spry, an Internet software company. Prodigy is working with its parent IBM on ways to provide better Internet access.
The companies are also scrambling to put their services under consumers’ noses in the same way Windows will for Microsoft. America Online diskettes offering 10 free hours of the service are pouring into mailboxes and computer stores around the country, and both America Online and Prodigy have signed agreements with popular CD-ROM publishers so that users playing a CD-ROM can click on an icon and sign on to their services.
But their best hope might be the Justice Department. While some consider it unlikely that Justice would move so soon after thwarting Microsoft’s efforts in on-line personal finance with its lawsuit blocking the Intuit acquisition, all three on-line service providers have recently been questioned by government regulators.
And hope springs eternal among the software giant’s enemies.
“I told [Justice] that stopping the Intuit deal was a good first step,” said Gary Reback, a partner with the law firm Wilson, Sonsini, Rosati & Goodrich, which represented three unnamed companies that challenged the Microsoft-Intuit deal. “Now they need to take all the staff that was working on the Intuit deal and have them look at the Microsoft Network.”
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The On-Line Explosion
The proliferation of the personal computer has produced a large increase in the number of people connected to on-line services. Most use one of the three large on-line operators.
TOTAL MARKET SIZE
In millions of people:
1996: 15.8 million*
* Projected.
MARKET SHARE
Total U.S. subscribers: 6.5 million: America Online: 39% CompuServe: 29% Prodigy: 24% Delphi: 2% Other: 6%
Source: Jupiter Communications.
