With HailStorm, think fee, not free

Is the Internet free lunch over?

If Microsoft has its way, that could very well be the case, analysts say.

The Redmond, Wash.-based software company on Monday unveiled HailStorm, one of the cornerstones of its software-as-a-service initiative known as .Net.

HailStorm is a group of services, using Microsoft's Passport authentication technology, meant to provide secure access to e-mail, address lists and other personal data from virtually anywhere via PCs, cell phones and PDAs (personal digital assistants). The catch? Users of the services will be required to pay a fee to use them. Analysts said that if the HailStorm model is widely adopted--and if people will pay a premium for security--the days of ad-subsidized Internet services, such as free e-mail and messaging, may be over.

"HailStorm is absolutely the test of can you make money on the Web," said Gartner analyst Chris LeTocq. "But to get there, you have to offer people something they are willing to pay for. That will be the test for Microsoft."

Microsoft's HailStorm lets loose Chris LeTocq, Gartner analyst

Microsoft executives are confident that the time is right for HailStorm. "There's been a lot of stuff (on the Internet) in the last couple of years that was free and interesting, but people weren't actually willing to pay for it," said Charles Fitzgerald, director of business development in Microsoft's platform strategy group. "We want to pursue a model that lets us deliver a lot more value in an economic fashion so that we all can get paid every two weeks like we're used to."

Certainly the current advertising-driven model has sent many Internet-based companies to an early grave. More than 320 dot-coms have shut their doors since January 2000, half in the last three months and 52 in February alone, according to Webmergers.com.

Meta Group says two questions face Microsoft as it presents its new privacy initiative: Will HailStorm be seen as a Redmond power grab? If not, will Web surfers even bother to use it? see commentary

"The ad-based model is basically a failure," said Prudential Securities analyst James Lucier. "The reason we've had so much content provided on an advertising model is that was the only model there was."

How much do you want to pay today?
Microsoft is convinced that the company and its partners can charge for services and content if they deliver value to consumers and businesses. During its HailStorm launch event Monday, Microsoft disclosed five partners using the services. American Express, for one, plans to use Passport to authenticate Internet purchases made with its Blue card. At the same time, the company will utilize MSN Messenger, which also relies on Passport authentication, to alert customers when their bills are due. The instant messenger alerts, which include possible fraudulent-use warnings, would be dispatched to PC, pager or cell phone.

LeTocq described the concept that Microsoft uses as that of personal context services, which is Gartner's name for the collective management of an individual's personal information. Using a Passport-authenticated service, a business traveler would be able to grab disparate data from both PC and cell phone to send instant messages to the last 100 people called.

"That's really where the unique value plays," he added. "What Microsoft has put in place is an application architecture which has the capability to provide that value. That's what people would be willing to pay for."

Strangely, Microsoft's strategy seems the antithesis of the company's focus for 25 years. Perhaps more than any company, Microsoft is viewed as the catalyst that broke people away from the server-in-the-sky mainframe-era model and brought information and power to the desktop. Microsoft's HailStorm model, in contrast, would take content, services and even software away from the PC.

Fitzgerald dismissed the contention that Microsoft has shifted focus. "Our roots are around personal empowerment and giving people control over their environment," he said. With information going back to the server because of the Internet's dominance, "HailStorm is about personal-empowerment tenets--the idea you're in control of your stuff not just on a single PC but all the different technologies in your life."

"There's PCs, phones, PDAs and all kinds of access devices, so getting information to them could be a good value proposition," said Technology Business Research analyst Lindy Lesperance. "But it all depends on what the pricing is going to be."

Microsoft has yet to say what it will charge for HailStorm services when it launches them in force next year. But there is great potential for revenue, Merrill Lynch analyst Henry Blodget said in a research report issued Tuesday.

"Today, there are roughly 230 million unique monthly users of MSN," Blodget wrote. "However, Microsoft has a billing relationship with only a tiny fraction of these users--specifically, the 4.5 million subscribers to its MSN Internet access service." If Microsoft can establish a billing relationship with these customers, the company could also pitch additional HailStorm services to them, he added.

Still, convincing people to pay for services, such as MSN, after getting them for free could be a challenge, even for Microsoft, say analysts.

Matters of trust and antitrust
Microsoft could capitalize on a unique advantage: a huge installed base of Windows users. New operating system and application software from Microsoft will be designed to work with HailStorm. That, however, raises the antitrust specter. Microsoft's integration of Internet Explorer into Windows 95 and Windows 98, in part, led to the company's antitrust case, which currently is being appealed.

University of Baltimore School of Law professor Bob Lande said HailStorm probably poses no antitrust problem for Microsoft. "Microsoft got in trouble the first time not because it integrated something into its operating system but because it prevented other people from competing. I haven't seen Microsoft throwing things in other people's paths on HailStorm--plus, they want to charge for it. This is completely different than before."

How successful Microsoft might eventually be with HailStorm is uncertain, but LeTocq sees "the potential for transforming how people pay" for Internet content and services.

Lucier sees HailStorm possibly "expanding the range of alternatives available to entrepreneurs. Will this replace free content? Possibly not, but free content hasn't really been able to support itself."

But Microsoft's real asset could be offering the carrot of privacy. Because the company plans to collect subscriber fees rather than rely on advertising, the model is clean and free from conflict, Fitzgerald said.

Lesperance said this could make all the difference for Microsoft. "I think people are willing to pay for their privacy," she said. "I think Microsoft could do well to offer people increased privacy over the Web."

LeTocq agreed, but added a cautionary note. "Will people really trust Microsoft to safeguard their personal data? I can tell you there are countries in Europe that will not look favorably on Passport authentication."

For now, Microsoft is holding its course, emphasizing what HailStorm promises in terms of information access and privacy protection. Ultimately, HailStorm's success could hinge on people asking one simple question, Fitzgerald said.

"How much would you pay to get all your stuff to work together and know that nobody has access to your personal information?"