Microsoft Refines Its Net Game

Software, not content, continues to be the giant's best bet

Mention the word "media" around Microsoft Chairman William H. Gates III, and he squirms in his chair and screws up his face as if he's swallowed a bad oyster. "The notion that Microsoft is a media company is a strange thing to say," he grouses.

Gates's displeasure is understandable. Since Microsoft began dabbling in new media--first with CD-ROMs and then on the Internet--it has drawn the attention and ire of the old-media guard. The Net was redefining media, and Gates, like everyone else, figured "content" would be king. In the past year, Microsoft spent a cool $500 million on high-glam ventures such as MSNBC, a joint TV-and-Internet news venture with NBC; Slate, a political Web 'zine edited by Michael Kinsley; and a revamped Microsoft Network for the Net, chock-full of TV-like "shows." When the software giant invested $1 billion in cable operator Comcast Corp. and $425 million to buy WebTV earlier this year, it seemed a foregone conclusion: Gates was fixing to be a new-media mogul. "They're gearing up across the board for all-out war," steams Bob Ingle, president of Knight-Ridder New Media, an arm of the newspaper giant.

Not quite. These days, don't expect Microsoft to challenge the mainstream media at their own game--whether it's Time Warner or Walt Disney. Instead, after several years and hundreds of millions of dollars' worth of experimentation, Microsoft has come to a revelation: Software, not entertainment content, is where it can best cash in on the Net. "We discounted this a year ago, but it turns out that software matters," says Pete Higgins, vice-president of Microsoft's Interactive Media Group.

Now, Microsoft has a new media game plan: less glitz, more bits. Forget Hollywood-style entertainment. From here on, the company will rely more on creative partners for that, such as Disney, which produces a Web site for children called Daily Blast. Microsoft's online programmers, meanwhile, will zero in on the software engines that make Web sites and services useful--powerful databases and tools that help Netizens sift through data and act on it. Microsoft's travel site, Expedia, for example, lets travelers search for the best airline fare and then book it. "Some of the starry-eyed optimism of a year ago is gone," Higgins concedes. "We're taking a little more sober view, but also a more focused view."

NEW TARGETS. So while Microsoft may be rolling back from creating its own snazzy content, it's not backing off from new media one iota. Instead, it's upping the ante on informational services and transactions on the Net, putting a whole new set of companies in its crosshairs, from travel agents to car dealers to mortgage brokers. In addition to Expedia, Microsoft has a car-buying site and an investment site. This year, Higgins' budget has been increased 20% to expand Sidewalk, Microsoft's local arts-and-entertainment guide, from four cities today to 10 by yearend, and to add new interactive services, including one for home-buying and another for bill-paying. "Microsoft may lack the entertainment gene," says analyst William Bass of Forrester Research Inc. "But they're doing a good job of taking the leadership position where the money will be made--transactions."

Indeed, Gates has a new requirement for Microsoft's interactive-media efforts: a clear path for profits. As revenue in its core operating system and software-applications business slows from an average of 32% a year over the past five years to an expected 22% by 2001, the company is on the prowl for new revenue streams. And the Web, where analysts predict that some $35 billion in goods and services will be sold by 2000, is a potential gold mine.

Microsoft is already eking some revenues out of its Web operations, though it's still chump change compared with its $9 billion in fiscal '97 revenues. Expedia, for example, is on track to book $100 million in travel transactions this year, in which Microsoft takes a commission. And Microsoft's other Web sites have drawn $2.9 million in advertising revenues in 1997's first quarter, according to Jupiter Communications Co. Jupiter analyst Peter Storck says that could hit $20 million this year. Further out, things look better: Forrester estimates that, all told, Microsoft's online businesses will drum up revenues of $2 billion in 2001.

Can Microsoft pull this off? To be sure, there is no guarantee that its revised media strategy is on target. In many cases, Microsoft is playing catch-up. Pasadena-based CitySearch Inc. has outdistanced Sidewalk with its nine local information sites and four more on tap. Intuit Inc. has used its lead in personal finance software to get a jump on an insurance Web site, which opened its doors in June, and a mortgage site planned for October. Microsoft's real estate site, by contrast, is not expected until early 1998. And America Online Inc., with some 8 million members, is bigger and growing faster than MSN. Says James V. Kinsey, AOL founder and director: "AOL has been interactive for 15 years, and they haven't. We know that business better than they do."

There are other challenges, too. It's not yet proven that Microsoft has the expertise to create compelling, specialized Web sites. Emerging electronic-commerce markets, such as financial services, are still as alien to Microsoft as application-programming interfaces are to a Citibank branch manager.

But time and again, Microsoft has proven its mettle when it comes to learning from its mistakes. The company's online trials and errors make a valuable case study for others, too. So what has the software giant learned? No.1: Stick to your knitting. Microsoft's strength is software, not entertainment. What's more, some forms of entertainment don't work well on the Net yet, such as Web soaps, which are unwieldy, with blocks and blocks of type, and trivia and game shows. Says Higgins: "So far, the Internet isn't a place for truly mindless entertainment."

Microsoft also found what media companies have known for some time: No matter how good your programs are, you won't have a hit without a big audience. Instead of relying on MSN or its own Web sites to attract viewers, Microsoft is inking deals with popular Web destinations to have them offer Microsoft-branded content. The company's fare is carried on the @Home Internet-cable service and will be available on CNET's new Snap! Online Web site, scheduled for September. Microsoft would even consider a similar arrangement with archrival AOL.

And, lastly, Microsoft has discovered that developing fun Web fare is serious business. Nowhere was that more obvious than with Microsoft Network. When MSN was relaunched from a proprietary online service into a Web supersite last November, it came with 25 original programs--most of them created in-house. But they didn't click with viewers. At the end of their 13-week season, 40% of the shows were canceled. And even though MSN's subscriber list has grown from 1.6 million last November to 2.3 million today, analysts say most use it simply to get onto the Net. For MSN's new season, kicking off in October, virtually all of its 16 new shows are being produced by partners.

Instead, Microsoft is setting its new-media guns on electronic commerce. Gates sees a huge opportunity to bring together buyers and sellers--and command a fee for the service. Microsoft's car-buying site, CarPoint, for example, fits the vision to a tee. Originally established a year ago as an editorial guide to car shopping, the site was relaunched in July as a high-octane E-commerce site that now logs up to 30,000 visitors a day. Viewers can read reviews of cars, calculate how much they can afford to spend, and solicit bids from up to three auto dealers near their homes.

Microsoft gets paid a $1,000 monthly fee by each participating dealer--an approach copied from former partner Auto-By-Tel. And that's not all. In the first week of September, CarPoint will launch a used-car listing--marking its first foray into classified ads. Microsoft "gets it" with Expedia, CarPoint, and other transaction-based sites, says Forrester's Bass.

OUTCRY. These businesses have huge potential. Newspaper classifieds alone brought in $15 billion last year. Of course, the further Microsoft gets into markets already claimed by other industries, the more conflicts it faces. Edward Canale, director of marketing for the Sacramento Bee newspaper, believes that with Sidewalk and CarPoint, "Bill Gates wants to skim the cream off the newspapers' business without paying for real journalism."

This reaction sends off alarm bells in Microsoft's Redmond (Wash.) headquarters. "The big concern is that newspapers write negative articles about Microsoft and that creates a bad feeling," says John Neilson, vice-president for Microsoft's interactive-media services unit. So, for now, Microsoft is treading softly--and not just in the newspaper sphere, where, analysts say, it backed off more aggressive plans for classified ads after the industry protested. Mindful of the uproar that Gates caused when he called banks "dinosaurs" three years ago, Microsoft seeks to ally with others as much as possible.

But even when Microsoft goes the partnership route, it sometimes steps on toes. Peter Ellis, president of Auto-By-Tel, the leading auto-sales service on the Web, complains that Microsoft was "picking our brains" during the year and a half that the two companies collaborated. They decided to split in May after disagreeing on strategy, and Microsoft now handles its own transactions. "When they call you up, you think it's great, but in reality, the dance will soon turn into a nightmare," says Ellis.

Microsoft's reputation for roughing up partners doesn't scare Countrywide Home Loans Inc., the nation's largest independent home lender. Cameron King, Countrywide's executive vice-president for electronic commerce, is working with Microsoft to offer online lending on the software giant's upcoming real estate site. "It's ludicrous for me to think that Microsoft would be able to duplicate the decades of knowledge and infrastructure that make up an industry," says King. At the same time, he has already cut a similar deal on a real estate site to be launched in October by rival Intuit.

LIFESTYLE SUITES. Microsoft may have one more ace up its sleeve in its new-media bid. The combination of its Web sites--from investing in stocks to buying cars, airline tickets, and finding out what cultural events are in town that night--creates a "suite" of Web sites that are linked and can cross-promote one another. That's much like Microsoft's supernova hit, the Office productivity suite. Others see the merit in that approach, too. "They can package a network with a whole bunch of demographics in one media buy," says Jupiter analyst Storck. "That's what advertisers are begging for."

That could be a powerful combo. Add in Microsoft's upcoming Windows 98, which will feature some of these sites as readily accessible "channels," and the software giant may be even better positioned in new media. Microsoft came up short as an entertainment content creator. "At its heart, this is a geeky company," concedes Richard Barton, who heads Expedia. But in the end, if software is what really matters in Web media, being geeky could turn out to be a really cool thing.

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