Microsoft Network Off To Slow Start -- Initial Troubles Seen As Temporary, Could Even Be A Blessing In Disguise

Just a few months ago, The Microsoft Network, by virtue of all of Microsoft's power and money, was regarded as the King Kong of the online world, an untamable beast about to escape from its shackles and wreak havoc everywhere that it stomped in cyberspace.

But now that MSN has actually been in operation for six weeks, few people are approaching it any longer with abject terror. In fact, the prevailing view these days is closer to ridicule.

"It's the Yugo of online services," said Rick Spence, an analyst at Dataquest Inc. in San Jose, Calif.

Adam Schoenfeld, who follows the industry for Jupiter Communications in New York, said he was "shocked" by how bad the service was at its introduction; he called the current system "an extended beta test." Subscriptions appear to be below nearly all predictions.

Microsoft admitted that it has been bombarded with complaints from customers about the network's limited offerings and its often excruciatingly slow response times to user requests.

Of course, no one who follows either Microsoft or the online world expects these problems to last long. In fact, analysts expect the technical glitches to be ironed out in coming months and said the network probably will be the nation's second-largest by the end of next year. That's especially true if the network begins to change its pricing strategy, something it has promised to do.

But at the very least, MSN's surprisingly bumpy start is likely to make it harder for the government to bring an antitrust suit against the company, as the Justice Department had threatened to do.

More significantly, though, the technical and legal challenges now confronting the network may pale in comparison to a much larger business challenge: the growth of the Internet, which is changing the ground rules for everything involved in online computing.

"It's a very funny time to be coming to market with a proprietary online service," said Peter Friedman, Apple Computer Inc.'s vice president for Internet Services.

Friedman knows whereof he speaks. Last week, Apple announced it was pulling the plug on its struggling eWorld. The service had attracted only 115,000 subscribers in a year.

By next year, Friedman said, eWorld will be transformed from a private network available only to Macintosh users into something much more like a traditional "page" on the World Wide Web, available to any Internet-equipped computer.

Apple's problem is shared by everyone involved in the online world. Microsoft Chairman Bill Gates, for example, conceived of MSN several years ago with the notion that online communications would become a major force in computing and would be used for banking, shopping and the like.

Gates said he wanted to use Microsoft software and services to get a percentage of all of those transactions; in fact, that was the main reason he tried to buy Intuit Inc. and its Quicken personal-finance program.

Gates' notion of the online world, though, was confined to a universe composed of traditional networks such as America Online and CompuServe, with which MSN was supposed to compete.

But the explosion of the Internet, especially the World Wide Web, changed all that. Now, for example, a bank that wants to lure consumers with PC-based banking no longer needs to, in effect, "rent space" from AOL or MSN. Instead, it can have its own Web page and keep to itself the profits and strategic control - something that Wells Fargo Bank, among others, is beginning to do.

"The growth of the Internet was an arrow through the heart of the old MSN business plan," one Microsoft veteran said.

As a result, Microsoft and the other commercial online services are struggling to shift their strategies. Both MSN and AOL, for example, now make similar pitches for themselves: as a user-friendly way of getting onto the Internet, as well as destinations in themselves with unique services, personalities and "communities."

But the Internet has also unleashed a flood of new software companies, all working on software that will give Web-based services the same sorts of people-oriented features, such as chat rooms and special-interest forums, now found only on the commercial networks.

The reason that's a problem for the MSNs and AOLs of the world is that their business models are based on charging people, beyond a certain usage level, for each hour they are logged on. The Internet, though, is rapidly moving toward a standard charge of around $25 a month for unlimited connect time.

Microsoft, which doesn't need MSN for its revenues or profits, said it is quickly taking these new realities into account. Next year, said Bill Miller, the network's marketing director, Microsoft will introduce a new set of pricing options for the network.

Although details are still being worked out, Miller said one option is to offer a minimal monthly charge of about $5 for customers who connect to the network from another source, such as a standard Internet service. The fee would allow unlimited connect time, making MSN, in effect, a cross between a traditional network and an Internet provider.

Currently, the network's fees are much more like those of its competitors. MSN's "heavy user" option is $20 for the first 20 hours each month, plus $2 for each added hour. Microsoft provides all telecommunications connections.

If fees for online services drop as dramatically as Microsoft's impending moves suggest they might, analysts said services such as AOL could be in for a rough time. With 2,500 employees, AOL has a built-in high cost structure as well as low profit margins.

Beyond its network, Microsoft faces a much larger battle for control of whatever software components of the Internet it thinks are important, which in the case of Microsoft means just about all of them.

"It's a big mistake to think that MSN is Microsoft's entire Internet strategy," Miller said. "The network is just a piece of our strategy. Our main Internet strategy involves Windows being a good way to get on the Internet and Windows NT being a good Internet server. I'm not going to try to convince you that we're not playing a catch-up game. But I don't think we're as far behind as a lot of people think we are."

Software industry analysts expect Microsoft in coming months to begin introducing its competitive responses to such high-profile Internet endeavors as Netscape Communications Corp., the "Hot Java" programming language of Sun Microsystems Inc. and the 3-D-oriented Virtual Reality Modeling Language of Silicon Graphics Inc.

At issue for Microsoft is whether its dominance of the PC desktop can somehow translate into a strong strategic position on the Internet. Microsoft and all the other companies also face an even tougher question: whether the intense interest in the Internet can be translated into profitable lines of business.

By comparison to those long-term strategic challenges, the immediate technical hurdles for MSN are not so imposing. Many of the difficulties with the system, Microsoft said, are a result of the network's ambitious technical goals. For example, most of the service makes heavy use of graphics, which take a long time to download.

And others say Microsoft is paying the price for a rushed development effort. The company so badly wanted the network to be operational by Aug. 24, to capitalize on all the hoopla accompanying the introduction of Windows 95, that engineers didn't have enough time to create a polished, glitch-free system.

But considering, if nothing else, Microsoft's money, the situation is universally regarded as a temporary one. The company has a long history of coming out with losers and slowly turning them into winners, with the decadelong saga of Windows being the best example.

"The network is still in its infancy," Schoenfeld said. "Microsoft is very committed to an online service, and I expect them to bring whatever resources to bear that are necessary to make it work."

If there's a silver lining for Microsoft in MSN's inauspicious beginning, it's that it will be more difficult to bring an antitrust case against the company, something that AOL, CompuServe and others have been urging the government to do.

Those competitors argue that Microsoft shouldn't be able to leverage its strong position in the operating-system market to enter what they call the unrelated field of online services.

The early numbers, though, don't appear to support a claim that Microsoft is crushing its competitors.