Clash of the titans: MSN vs. AOL

Some say the Microsoft Network has more lives than Bill Gates has money. But all that cash can make even AOL nervous.

After America Online Inc. and Time Warner Inc. finally consummate their marriage, one of the pair's most potent rivals in consumer online services will certainly be Microsoft Corp., right?

"You would think so," said one major Silicon Valley Web investor. "But we've been waiting for that to happen since the last century."

Since 1994, to be specific, when Microsoft (msft) co-founder Bill Gates, after failing in his attempt to buy AOL (aol), decided to compete with it. To do so, he would create a service called the Microsoft Network that would quash the then-fledgling startup faster than you can say "Netscape."

Of course, it didn't turn out that way. With endless changes to its focus, format, management, advertising campaigns, and even its name (one dumped moniker was "Start!"), MSN has had more lives than Gates has dollars. And Microsoft has sunk billions of those dollars trying to develop and market the lagging service.

Facing these realities, what's Microsoft going to do? Keep on doling out the dough, it seems. And with its deep pockets, if anyone has a chance to keep AOL sweating into the next decade, it is the behemoth from Redmond, Wash.

For one thing, the number of truly powerful portals has declined precipitously over the last year (Hasta la vista, AltaVista; Going, going, gone, Go; Snip, Snap). The central destination points for consumers on the Web have narrowed down to three: AOL, Yahoo! (yhoo), and Microsoft. And because Yahoo!, popular as it is, has no monthly subscriber relationship with its users, it's up to MSN to provide the most aggressive competition to AOL.

Microsoft finally seems to be showing signs of progress in the race. For several years, MSN had refused to reveal numbers for its access service -- in flat-out embarrassment, one assumes. When anyone did get a number out of the company, it was between 1 million and 2 million users. But spurred recently by a rebate program with computer retailers such as Best Buy, the number of MSN members has risen to 3.5 million. It added about 500,000 in the United States in the most recent quarter.

Of course, AOL added a net 900,000 users in that same time, bringing its subscribers up a lofty 25 million -- whose credit cards have been ripe for leveraging other services.

Yusuf Mehdi, an MSN vice president, said quick expansion is crucial. If MSN could equal AOL's growth rate soon, "a lot of eyebrows will suddenly go up and things can change for us quickly."

Whether it does that depends on execs like Mehdi, who looks like a college freshman despite his reputation as an up-and-comer after stints in the company's important Windows and browser divisions. He already runs MSN's marketing efforts, and he's going to be taking over its advertising-services business, network programming, business planning, and local-content business development.

The opportunity has never been greater for MSN, said Mehdi, sitting in his small office at MSN's headquarters on the Red West campus near Seattle. The recent shakeout, in particular, has given his company more of an open playing field and an impetus to compete.

He ticked off a number of recent initiatives the company has used to spur momentum: a $150 million global-marketing campaign; another attempt to distribute software, this time integrating MSN and its Explorer browser in an AOL-like package; and a commitment from Microsoft CEO Steve Ballmer to place MSN in the wide-ranging Microsoft .Net effort to create new Web services.

It helps that MSN now falls into a newly formed division called Personal Service and Devices headed by Rick Belluzzo, a former Silicon Valley executive whose leadership of the interactive-services businesses has proved a much-needed steadying influence at MSN. Because he had little online experience, the appointment of Belluzzo last year was seen by executives at AOL and Yahoo! as a sign that Microsoft had little interest left in competing in the consumer Internet space.

Mehdi said employees at the company now understand the importance of leveraging their many powerful sites, which include the popular Hotmail free e-mail service and impressive car and travel sites.

"I think a lot of people here looked at all that froth around the Web sector and felt a bit overwhelmed," he said. "But at the end of the day, we are the ones with a much stronger offering, since we can afford to invest for the long term."

AOL's linkup with Time Warner (twx), he said, puts the company in a better position to form closer relationships with other media companies, which have become leery that AOL has become more of a competitor than a partner.

After several failed attempts, Microsoft now has only a few competing media properties (such as its well-regarded Slate online magazine), so Mehdi said MSN can serve as a platform from which its partners can reach out to consumers.

That means programming against AOL, and focusing on areas that play on Microsoft's strengths in the software sector. For example, he said, MSN has an ability to build more robust online software services, some of which can generate premium fees.

It might include a personalized radio station, a legal version of Napster, or an online music locker. Premium fees, Mehdi said, would help well beyond simply selling ads and sponsorships or collecting access fees, the two main ways it now generates revenues.

Such a focus could allow MSN to find a comfortable position between AOL and Yahoo!.

"I think we were always asking ourselves, 'Are you an AOL or are you a Yahoo!?'" Mehdi said. "We were always debating whether to sell our access business or get out of the portal business, when, in fact, both qualities are assets to where we are going."

Mehdi noted the bromide that it takes the company three tries before nailing it, saying, "In some ways, this is classic Microsoft."