Even as Microsoft Corp. announced Monday a better-than-expected 62% increase in earnings for the quarter ended June 30, the software giant quietly unloaded Sidewalk, an arts and entertainment service that was part of its doomed push to become a major media power on the Internet.
Reflecting strong sales of such meat-and-potatoes software products as Office, Microsoft's revenues rocketed 44% for the quarter to $5.76 billion from $4 billion a year earlier.
Earnings for the quarter climbed to $2.2 billion from $1.36 billion a year earlier. The earnings, amounting to 40 cents per share, slightly exceeded analysts' average estimates of 38 cents a share.
But in an effort to staunch the flow of red ink in its online business, Microsoft said Monday it would sell Sidewalk to rival Ticketmaster Online-CitySearch in exchange for a 9% stake in the company worth $280 million and warrants that could eventually give Microsoft as much as 14% of the company.
Although Microsoft said it would record a profit on the sale of Sidewalk, analysts said the sale represented an important admission of failure.
"They're cutting their losses," said Lisa Allen, an analyst at Cambridge, Mass.-based market researcher Forrester Research.
"Shipping software is different from running an editorial operation. That was an eye-opener for Microsoft."
Analysts also speculated that Microsoft might be preparing for plans to create a separate stock that would track the performance of its online properties. Microsoft said Monday it continues to consider the idea.
Sidewalk was initially positioned as a way for Microsoft to tap into the billions of dollars in local advertising now going to city newspapers in the form of classified and other advertisements. The company spent millions of dollars creating huge databases of information on entertainment events and hiring writers across the country to cover local events.
With 2.5 million visitors to the arts and entertainment site, Sidewalk was in many ways an Internet success story. But Matt Kursh, business unit manager for MSN, said the company was having trouble translating that traffic into profit and decided to focus instead on electronic commerce in areas like travel and finance that provide better growth potential.
As part of the deal, Microsoft agreed to make CitySearch the exclusive provider of local information on its MSN portal. Microsoft will keep the local Yellow Pages and buyers guide portion of Sidewalk that it introduced last October in an effort to rejuvenate the failing entertainment site.
Kursh said Microsoft President Steve Ballmer's review of the profit potential of Microsoft's various online efforts played a role in the decision.
"No amount of hand-waving is going to trick Steve Ballmer about a business," Kursh said.
By contrast, Kursh said, the business makes sense for CitySearch because it can take visitors to its sites and get them to buy products through its exclusive deal with Ticketmaster, a feature Sidewalk lacked. USA Networks, which owns Ticketmaster, also owns 58% of Ticketmaster Online-CitySearch.
"We think this is a terrific deal for both companies and for the consumers and merchants we serve," said Charles Conn, chief executive of CitySearch.
With the acquisition of Sidewalk, CitySearch will increase by nearly 40% the number of visitors to its site and add 34 new cities to the 33 cities it already serves, giving it an important edge over Digital Cities, operated by America Online.
Ticketmaster Online-CitySearch stock closed at $40.06, up nearly 18%. Microsoft stock closed at $98.38, down $1.06, and continued to slide somewhat after the close as analysts reflected on the company's warning of dark clouds looming ahead. Both trade on Nasdaq.
In what has become a customary effort to lower expectations, Microsoft Chief Financial Officer Greg Maffei warned that slowing sales of personal computers in Japan and a potential slowdown of PC sales in the United States related to concerns about the year 2000 problem would make it difficult for Microsoft to continue its rapid profit growth.
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