MSN UK sounding a retreat? - Analysis

Market dynamics have moved on dramatically since the US services invaded our cyberspace some four years ago. Those same dynamics have seen the assimilation of the once mighty CompuServe and the birth of a new breed of Web players -- the free services and the portals.

Portal power, of the type which so elegantly saved Netscape Communications last month, has for some, become the primary money-making tool. Portal power means traffic which in turn generates advertising revenue, market branding and perhaps most important of all, customer registrations.

This radical and dynamic shift in the origin of revenue and the tools that generate it has meant, for Microsoft in particular, a retraction of services in order to keep business operations viable. According to Microsoft group marketing manager for MSN, Gillian Kent, Internet access - that's the bit that gets people online with MSN -- can only exist "as long as it remains a viable business". Industry observers note that with the advent of free services -- the likes of Dixons' Freeserve and the newly launched Telinco -- MSN's viability comes into question.

This view was reinforced when Freeserve announced last Wednesday that it had taken the top position from AOL less than six months after it was launched. The free model provides 100% savings for consumers and enormous brand recognition/loyalty for the companies that provide it. It is working and analysts are united when they say people like paying nothing to go online.

MSN says it has 150,000 users in the UK compared to AOL's 550,000 and Freeserve's 900,000. Microsoft has been using that same figure for more than 12 months and although Kent doesn't like the term "stagnant growth", it's an undeniable fact that MSN is under-performing, badly .

In short, MSN is becoming unviable.

Kent did not offer any argument against this but focused her comments on the growth of MSN.co.uk, now the UK's second largest portal. "Our target is to become the largest UK portal... and that's where all our efforts are going." Indeed, this has been in evidence in France, Germany and more recently Canada, where the MSN service has already been canceled. So embarrassed is the software giant about axing the services that it refuses to divulge information about their state of health when the chop came.

James Eibisch, online analyst at IDC agrees that MSN's glory days are over - particularly given the momentum of the free model - but doesn't believe the switch will be turned off before Oftel has completed its investigation into free Internet service. "Looking at what they [Microsoft] did in France and in Germany you could say they're not shy at cutting and running but that said, the environment that gave birth to Freeserve and its imitators may be on the way out. If MSN holds steady and doesn't actually start to lose customers it will remain." But once the bleeding starts? "You can be sure MSN will be sold," says Eibisch.

It would be foolhardy indeed to suggest that MSN will disappear this year or next. Common sense however, drives one to conclude that those same people who like paying nothing to go online must make up a percentage of MSN's current users and unless they feel consumately devoted to MSN, it won't be long before they switch to a free alternative. "Certainly anyone who charges for going online is going to lose a percentage to those that don't," says Mike Welch, vice president of UK analyst Inteco. "Stuck with 150,000 subscribers, MSN is now way behind CompuServe, AOL and Demon" and has been for more than a year. How will it stem the bleeding in an increasingly competitive market? "It could go free," quips Welch. But Microsoft offering a free service just doesn't sound right.

Welch notes that MSN hasn't been very loud recently. The marketing machine that has reaped so much reward for Microsoft has all but gone silent for MSN. Even a telephone call to establish how many users there are worldwide goes unanswered. "As a business it (MSN) will prove less attractive as time goes by" says Welch, whose company tips the free model as the only winner in Internet service provision.

Asked if she could offer any guarantees of an MSN beyond 2000 Kent, in an uncharacteristically wooly response said: "There are no guarantees. I wish there were."

Jane Wakefield contributed to this report.