THE CUTTING EDGE: COMPUTING / TECHNOLOGY / INNOVATION : A Software Sell : Microsoft Must Convince Public of On-Line Joys

Microsoft Corp. may have dodged a bullet when the Justice Department decided not to throw up any immediate obstacles to the launch of its on-line service this week, but the computer giant will nonetheless face a tough fight in seeking to dominate the emerging field.

Though the on-line world has grown by leaps and bounds over the past couple of years, a close look at the industry shows that getting consumers to go on-line has been a surprisingly tough sell, and Microsoft faces the same challenge as its competitors in attracting subscribers.

Although nearly all of the 16 million computers sold in the last two years are equipped to access on-line services, the big three providers--H&R; Block’s CompuServe, America Online and Prodigy, a joint venture of IBM and Sears Roebuck & Co.--have only about 8 million paying customers. Indeed, less than 10% of U.S. households have gone on-line in the 16 years since CompuServe launched the first commercial service in 1979.

“You can buy the best color TV in the world and subscribe to a cable service for about half of what you now pay for an on-line service,” says Rod Kuckro, editor of Information & Interactive Service Report, a Washington-based trade publication. “The on-line services are still populated by high-income earners in their 20s and 30s.”

Many experts, including Kuckro, expect that the on-line industry will eventually establish itself as a major home entertainment-information diversion, just as the cable TV industry did a decade ago. There are 23 national on-line service providers in operation today, according to Information & Interactive Services Report. What’s more, several big communications companies, such as MCI and AT&T;, are poised to join the fray.

But so far, many Americans apparently see no need to send electronic messages, participate in on-line discussion groups, download electronic files or surf the Internet.

Even Microsoft Chairman Bill Gates expects tough sledding.

“It’s the first time in our history we’ve gone into a business where there will be substantial losses early on,” Gates told a group of financial analysts in Seattle last month. But, he added, going on-line will eventually “become the preferred way to learn and collaborate.”

To catapult the on-line world into the big time, Microsoft will air a flurry of network television commercials over the next several months and launch a $200-million marketing campaign that will, among other things, portray Microsoft Network as inexpensive to access, easy to use and full of interesting information.

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But the experience of other computer giants suggests that consumers are not likely to be smitten with a new on-line service just because it has been pre-installed on their computers.

For nearly a year, Apple Computer Inc. has been pre-loading most of its Macintosh computers with software to access Apple’s eWorld on-line service. Although more than 2 million Macintoshes have been sold during the period, Apple has attracted just 100,000 subscribers, according to estimates by Dataquest, a San Jose computer research group.

What’s more, Microsoft is up against a group of rivals that have established loyal followings by emphasizing various strengths:

* America Online, the fastest-growing service, with about 3 million subscribers, has a reputation for being particularly easy to use. It has aggressively marketed its product with a blizzard of free software disks distributed through direct mail and magazines. The company has made a number of recent acquisitions, including the $50-million purchase of Booklink Technologies, an Internet software developer, and Navisoft, which makes tools for multimedia displays.

* CompuServe, the granddaddy of the on-line services, also with about 3 million subscribers, has amassed about 3,000 content providers, ranging from United Airlines to virtually all the major computer software and hardware companies. It has a strong presence overseas, where it is available in 150 countries. (Microsoft Network will initially be available in 52 countries, according to Naveen Jain, its senior technical marketing manager.)

* Prodigy, the No. 3 service with about 1.6 million customers, has undergone a major overhaul to become more competitive. The company has hired the former president of MTV Networks’ VH1 music channel, Edward Bennett, to head its operations. It has introduced a new design and broadened its Internet access and high-speed dial-up connections to attract more subscribers.

But the big providers fear that all that might not be enough to fend off Microsoft. They say the software giant has a major advantage over them because its on-line service is bundled with its Windows 95 operating system, which is expected to sell as many as 30 million copies by the end of the year.

Microsoft has also signed up more than 100 content providers, ranging from the QVC home shopping network to greeting card maker American Greetings.

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Some providers, such as Photo Disc, a Kodak subsidiary that hopes to provide a new digital imaging service through local photo finishers, have never been on-line before. Others, such as NBC, are defectors from rival services.

“The fact is that Microsoft is [helping] us an awful lot in the way of money . . . and creating a strategic alliance,” said Martin Yudkovitz, a senior vice president at NBC, which left America Online to join Microsoft Network. “The play here is not who is on-line, but those who have yet to come on-line.”

With the launch of Microsoft Network, some previous critics of Microsoft’s tactics have softened their hard line and steeled themselves for a more competitive environment.

“Our position on Microsoft is ‘Welcome to the on-line world,’ ” CompuServe spokesman Jeff Shafer said. “Traditionally, competition has been extremely good for the industry, provided there is a level playing field. Our challenge now is not in getting Joe Businessman to check our stock quotes rather than AOL’s or Microsoft’s, but in getting to the millions of people out there who have not signed up.”

Indeed, some analysts say that although they expect Windows 95 to be a big hit, cyberspace’s 800-pound gorillas could turn out to be communications giants such as MCI and AT&T;, which are working with legions of entrepreneurs to create software to simplify the navigation of the Internet and transform the way Americans view computers.

“I’d give Windows 95 a B+, but I’d only give the Microsoft Network a C,” said Scott Kurnit, a former executive vice president at Prodigy and now president of MCI Communications Corp. and News Corp.’s recently announced joint on-line venture.

Kurnit forecasts that “most on-line services will diminish in market share” as the Internet grows more popular. Commercial networks will have a role to play only to the extent they open their networks and embrace the Internet in a big way.