MSN's quest for dominance

Can Microsoft's MSN Web portal become all things to all people? Talking to Yusuf Mehdi, the Microsoft executive in charge of figuring out the company's portal strategy, you get the feeling that's certainly no stretch.

Mehdi, who recently launched MSN Video and MSN Premium Internet access, also has plans to incorporate a next-generation search engine, a music download application service similar to Apple Computer's iTunes and a social-networking service. And that's just what we know for now.

Mehdi, who has quickly climbed the management ranks since joining the company 12 years ago, earned his stripes during the Internet browser wars of the 1990s, when he played a major role in helping Microsoft's Internet Explorer outstrip rival Netscape Navigator.

A big part of Mehdi's current work is figuring out how to capitalize on the resurgence of the online advertising market.

We think that the sun has not set on even the first day of the search opportunity.

MSN wants to roughly quadruple its share of the total media-spending business in the next five years. Founded in 1993, the MSN business turned a profit for the first time in last year's third quarter, thanks largely to the hot sector of search engine marketing. Including commercial search, MSN's sales from Internet ads were $1 billion last year, the company said.

CNET News.com caught up with Mehdi at MSN's recent advertising summit at the company's Redmond, Wash., campus, where he was playing host to 500 of Microsoft's top customers.

Q: What is your time line for developing or introducing a new search engine?
A: The first thing we have to do is to get out to a beta. Within the next 12 months, we will have released a first version.

And what about advertising technologies for search?
We have a big investment in advertising technologies for our brand advertising business. We run our own ad server and we serve billions of ads a day. We have those two services today and are looking at how to expand them. It is natural that you would say we should make it simple for people to be able to buy all their advertising together with a good partnership. We are evaluating options about whether we should do more in that specific space or not.

Much has been made of Microsoft's rivalry with Google, and Yahoo, for that matter. What is your viewpoint on Microsoft's position in this industry and how it can improve search?
We really do not think of ourselves as rivals of Google. There is, however, some major rivalry today between Google and Yahoo. But we are certainly going to compete.

We think the sun has not set on even the first day of the search opportunity. In all our research, one out of every two people searching for something does not even get an answer. We certainly envision a world where we can answer persons' questions much, much better. I think the dream case is that we can actually answer the question directly: How many cups in a gallon? How far is it to the moon? What time does the ferry leave? What are the top 10 stocks?

How much integration will there be between the operating system and Web search, and will that be a coordinated effort when you launch?
There are a lot of different aspects to search. Some of them are local PC search; some of it is yellow pages-like search. Some of it is deep Web search going into databases that you cannot even touch today. We will slowly look at all of them. We think that we will build a best-in-class search service for doing a bunch of other things before we ever get to doing anything significant in the operating system.

How has online advertising changed since the dot-com heyday, and what do you think the dominant themes will be in the coming years?
In the past, we just put up things like banners and hoped the people would see them.

We may have to look at going even harder in terms of providing a more restrictive way for people to get e-mail.

We just thought that the old models applied. So much more science and expertise has come to the area now than we have ever had before.

The Internet has also become a very important part in people's lives now, both in a time-based sense and in an emotional sense. The next-generation audience--the 12- to 21-year-olds--they claim that the Internet is the most important media in their lives now. You now have a mainstream media phenomenon.

You have plans to introduce a music service. Will it be more like an iTunes download service or a Rhapsody subscription service?
We are going to look at all models. I think the initial model is more like an iTunes service in the sense that you can purchase songs in the form that you want--individual tracks or in albums--as opposed to a subscription service.

Can you characterize the importance of the licensing deal with Major League Baseball and how that plays into your long-term strategy with the newly launched MSN Video?
It's a great way to aggregate a lot of additional consumer interests and time on the MSN network, which will increase our traffic, reaching and engaging more people.

We also sell online advertising and will have the rights in this deal to sell all online advertising throughout all the MLB video broadcasts. Broadband video advertising is one of the things that will kick off the next wave of brand advertising. So we now have a very unique property to go talk to Fortune 500 accounts about doing brand advertising in a way you cannot do anywhere else.

MSN cancelled its community sites in Europe last year, citing its inability to police them adequately. Do you have any plans to invest in social networking?
We actually shut down the chat service, to be precise, not the community. There is an important distinction there. We did shut down the chat service, and the reason we shut down is that there was just an amazing amount of really bad things going on there, like pedophiles chasing after kids.

In terms of social networking, we think it is a very interesting area. Truth to be told, MSN Messenger is just effectively a couple of simple tweaks away from becoming a social network, because you have all your buddies and your buddies know who their buddies are. This is the ability to actually connect the two, and it's very, very close. The only thing that is not there is just an extension for which I could see my friends' friends.

How much responsibility does an Internet service provider have to protect customers from unwanted viruses, spam, pornography and fraud? How well do you think MSN is helping customers deal with these problems now?
I think it is super important to protect people from those things. As an ISP, I think if you do not have a service like that, you will not be around for long. People really do need that help to protect against spam and spyware and all that. I think we do as good a job as anybody in the industry. Maybe even the best job, but I do not think it is enough.

What are customers asking for right now, and how well are you fulfilling their needs?
Safety, security, privacy--and we just need to do a better job of addressing that. Even in spite of all our good work on spam protection, we may have to look at going even harder, in terms of providing a more restrictive way for people to get e-mail and make that an option for people to choose if they want to reduce that spam.

How many subscribers do you think MSN can ultimately hang on to at $21.95 a month? And going further, will you offer a lower-cost dial-up service?
When subscribers move to broadband, they usually end up staying with us through an MSN Premium subscription service. We do not have any projections to release externally. I am not sure how much they really matter, to be honest with you. Most customers, when they leave MSN dial-up, end up going to MSN Premium. So in general, I think we are retaining the relationship; we are just shifting that access provider.

Will you launch a discounted dial-up service, as America Online did?
We have no plans right now to launch a discounted dial-up service.

You have some partnerships with DSL (digital subscriber line) companies. Do you think that you will do the same with cable companies?
I think part of why DSL is making a little bit of a comeback in the United States is because of the fact that Yahoo and SBC Communications, in addition to Verizon Communications and Qwest Communications, are doing a good job. I think that cable companies see that, and they are more interested in talking about doing things with MSN. So that may happen.

EarthLink has gotten very aggressive in funding and experimenting with ultimate broadband technologies such as WiMax and broadband over parallel lines. Is MSN looking at ways to bypass the last-mile broadband choke hold?
We are a software company. All our energies are really focused on how to do better software for people, and that is really around products like MSN Premium and the MSN Web site.

Would it make sense to buy AOL?
I do not know. I do not want to speculate.

So what keeps you up at night?
I am just kind of a pumped-up individual right now about how great the business and the Internet are going. Can we be going faster? Can we be doing more? Can we get more customer-oriented innovation and features?

I would like to create some "evangelical products"--you go to cocktail parties, and people just rave about them. To pay a compliment to Apple, I think the iPod--it has got a little of that. TiVo has a little bit of that. These are the types of products that people talk about and say, "Hah! Seems amazing."