Microsoft, Disney partner on MSN 8

Joining Microsoft Chairman Bill Gates onstage in New York's Central Park was Disney CEO Michael Eisner--accompanied by Mickey and Minnie Mouse sidekicks--to announce a co-branded, family-oriented Internet service that will feature MSN 8 software with Disney content.

While the MSN 8 launch is a clear assault on its main rival in the Internet access business, Microsoft has taken pains to emphasize the differences between its service and AOL's--a point underscored by the Disney deal, one of Microsoft's highest-profile content partnerships to date.

The two companies have a long history of cooperation, going back to deals that became evidence in the government's antitrust trial against Microsoft.

Still, the deal embodies the kind of relationship that Microsoft hopes to forge across the entertainment industry, which has thus far treaded a careful line between embracing the software giant's technology and fearing its power to take control of key infrastructure for creating and distributing its products.

During his introduction, Gates said that Microsoft was taking a different approach with MSN 8 than it took with earlier versions. Rather than making online content a priority, Microsoft focused on improving the online access client. This approach is important because the boundary between "what you do online and on the PC doesn't exist," Gates said.

He talked about "the magic of software" and that MSN 8 "has been many years in the making" and is a "breakthrough product for us."

"We understand that we aren't a media company," Gates said.

Microsoft on Thursday also officially kicked off a $300 million ad campaign for MSN 8 featuring Lenny Kravitz's "Fly Away" as the theme song. Kravitz is scheduled to perform at a concert following the official MSN launch festivities. Microsoft started promoting MSN 8 using Flash ads at various Web sites, including MSNBC.com and WashingtonPost.com. The Web ads are expected to run for five days. MSN ads featuring the MSN butterfly helping people in everyday situations debuted on television.

Paying for perks
Customers using another ISP (Internet service provider) will have to pay extra if they want to use MSN 8. Earlier versions of MSN were usable with another ISP for free. Microsoft charges $9.95 a month or $79.95 a year.

Microsoft on Thursday also announced that it is freezing the monthly dial-up access fee for MSN at $21.95 for 12 months. AOL currently charges $23.95 for the same service. MSN broadband access will cost $39.95 or $49.95 a month, depending on the access speed.

The co-branded Disney on MSN service serves up a free subscription to Disney's Blast, the company's paid service for kids. Disney on MSN subscribers will also receive a free subscription to Disney Adventure magazine.

MSN has at least one other online partnership with a major content provider, as it features sports giant ESPN on its Web portal.

Ken Goldstein, executive vice president of Disney Online, said the MSN partnership is the "first time we're getting into a Disney-branded access business."

Goldstein declined to comment about future deals with MSN.

Disney has taken a run at the Internet before with mixed success. The company's Walt Disney Internet group underwent several rounds of layoffs last year, which affected its flagship Go.com portal.

The co-branded service will be available for the same price as the regular MSN 8, but with the extra Disney content.

"MSN is making a credible play to reach out to families more than before," said Joe Laszlo, a Jupiter Research analyst. He noted that AOL has long courted families, something MSN is only playing catch-up on. On the other hand, new MSN family-oriented features "raise the bar" for AOL.

"MSN is taking on AOL on its home turf," Laszlo said. "It will be interesting how this battle plays out on the family front."

The official release of MSN 8 ratchets up the competition with the online service and rival AOL 8 in what some analysts are calling the "battle of the eights." Both companies have a lot riding on these releases. AOL Time Warner's America Online division released AOL 8 last week.

AOL, which has been battered by accounting irregularities and declining online ad sales, has more to lose than Microsoft. The majority of AOL customers access the service via dial-up connection.

In a Wednesday interview, Yusuf Mehdi, the corporate vice president overseeing Microsoft's MSN division, estimated that ISPs like AOL and MSN take in about $10 profit per customer, before accounting for cost of acquisition and related costs.

Betting on broadband
MSN is betting big on broadband; AOL, however, loses profit every time one of its customers converts from dial-up to broadband, say analysts.

"If (they) move to broadband--(to) anyone but Time Warner--all that profit is gone," Mehdi said. "We're all in the same boat, that the move to broadband is a challenge."

He cited tariffs as the big problem, something AOL could only avoid by using AOL Time Warner's cable network. MSN has focused its broadband expansion on DSL (digital subscriber line) connections, cutting deals with Verizon Communications and Qwest Communications.

"We're going to work to profitably acquire subscribers," Mehdi said.

Still, AOL will not be an easy incumbent to unseat. With more than 35 million subscribers compared with MSN's 9 million, AOL has an enormous presence on the Internet. Jupiter Research estimates that AOL accounts for more than 25 percent of the time people spend on the Web compared with about 9 percent for MSN.

MSN also has not turned a profit in its more than seven-year history. The division took in $427 million during Microsoft's first fiscal quarter, ended Sept. 30, down from $430 million a year earlier. But the ISP claims online sales are way up, rising 40 percent between the fourth and first fiscal quarters. During the same period, AOL advertising and commerce plummeted 48 percent.

To beat AOL, Microsoft focused on beefing up the MSN client, which includes new features available only to paying customers. The Redmond, Wash.-based company is trying to differentiate features and services offered for free on MSN.com from those available to MSN 8 subscribers.

In the MSN 8 goodie bag: Pervasive parental controls that work with the Web, e-mail and instant messenger features; Money Plus, an online money management and billing paying service with features not available to non-MSN 8 subscribers; spam filtering as part of the overhauled e-mail client; online research through Encarta.com; and photo editing using Picture It.

Gates touted some of the benefits of these new features, noting that out of all online users, 34 percent do online bill paying, 93 percent have at least one e-mail account and more than 50 percent use instant messaging. He pointed out a new MSN 8 feature that allows two MSN Messenger 5 users to browse the Web at the same time.