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Two-way Sidewalk: Growth, layoffs

Microsoft's localized service is laying off three to four employees in each city that is up and running but is expanding its roster to 50 cities.

Just in case folks forgot what the Internet is all about these days, they need only look at the reorganization of Microsoft's localized service Sidewalk.

Right. It's the money.

And while in the past, some have thought that Microsoft would be too proud to admit it had taken some wrong turns on the information highway, no one is saying that now.

But the point on which observers have trouble agreeing is just exactly where Microsoft should go today to make a buck on the Net.

In the latest example of Microsoft's quest, today it announced that it will be expanding and contracting Sidewalk at the same time.

Sidewalk will be laying off three to four people in each of its ten cities that are operating or about to start operations. The service also will vastly expand the number of cities it serves to 50 and will be centralizing some of its functions, Matt Kursh, business unit manager for Sidewalk, told CNET's NEWS.COM.

While Kursh said the reorganization is about fine-tuning an already successful business model, analysts interpreted it many different ways. All, however, agreed on one point: the shift in strategy is about trying to increase revenues.

The layoffs mostly are aimed at business and support staff and not employees involved with editorial content, Kursh said. Employees were being told about the layoffs this morning. The move will leave each of the ten cities with about ten full-time employees plus contractors, he said.

At the same time, Sidewalk will be centralizing some of its functions, he said, declining to be more specific, and will launch 40 more cities by the end of the year to bring the total number of cities to 50. Sidewalk currently has nine live sites but is fully staffed and set to launch in Chicago. Kursh declined to give a launch date for the Chicago site, but said it would take place "soon."

The news of the layoffs, the centralization, and the expansion of Sidewalk confirms rumors that have been flying around the Net for several days. Acknowledging that Sidewalk has been "closed-lipped," Kursh said he wanted to break the silence by "coming out of our shell" and discussing the changes.

He was scant on details, however, saying he didn't want to alert Sidewalk's competitors such as CitySearch and America Online's Digital City of all the internal workings of Sidewalk.

He also put a positive spin on the issue, saying the news should be taken as a sign that Sidewalk is achieving its goals and learning how to streamline its operations. He added that Sidewalk has been successful in gaining both local and national advertisers for its service and in keeping within budget.

"What we've found is, through better organization and centralization and just overall more efficient processes, that we could get Sidewalk built with fewer people," he said.

But with Sidewalk vastly increasing the number of cities and decreasing individual staffs, it's obvious that something has to give.

The reorganization indicates that Sidewalk is making a major shift away from its original business model of providing highly specialized, targeted information to each of its local markets, said Peter Krasilovsky, an analyst with Arlen Communications. Instead, it will get bigger and more generic, he said.

"While Microsoft executives insist it's a continuum, in fact, it's a radical shift from the original vision," he said. "Microsoft had gone after name-brand editorial talent in each market that they entered with hopes that with their tools and editorial talents, they could create something that would bring customers back in the same way that television brings people back on a regular basis. Now they think of Sidewalk as simply a directory that might be more socially connected to their users than a traditional yellow pages."

Fred Moody, a writer for the Seattle Weekly who covers Microsoft, said that Sidewalk will beef up its coverage with a database from which it can pull copy. "It's a national database with a little big of local sprinkling in each city," he said. "The sites are not going to be unique in each city any more."

Although neither Microsoft officials nor analysts would discuss specifics about Sidewalk's ultimate goal, it is not exactly an industry secret that Microsoft has and will continue to shift its Internet properties so that they link to some kind of transaction model aimed at pulling in dollars directly from sales rather than just from advertising.

In fact, Moody added that Microsoft is going to add features code-named "crosswalks" in which the company will create national classified databases linked to its transaction-based sites such as its online travel agent Expedia or car-purchasing site CarPoint.

The move would be consistent with Microsoft's overall shifting Web strategy. Microsoft has continually streamlined its online service, Microsoft Network, for example, to direct surfers to its moneymaking sites.

"Ultimately, the local media space is going to be a place where you're trying to bring together buyers and sellers," said Greg Wester, an analyst with the Yankee Group.

The fact that Microsoft is shifting its strategy should not be seen as a negative, he added. "I think it's safe to say every competitor has seen a strategic evolution in the last six to 12 months, and Microsoft is in the same situation."

The move, he said, "shows that editorial content is not the end all-be all in terms of acquiring revenues."

But just what is the "killer app" is a subject of great debate.

Bill Bass, an analyst with Forrester Research, says the bottom line is that the only winners in the localized content business will be newspapers, local television stations, and those who partner with them.

Bass's blunt assessment of Sidewalk? "They're doomed."

Kursh said that Sidewalk has done quite well with advertisers, exceeding expectations and hitting advertising targets "either before launching or shortly thereafter."

But Bass differed, saying that with Sidewalk, like other localized services, Microsoft executives found they were not hitting their expected advertising revenues.

And advertisers have found that they weren't getting much bang for their bucks, Bass noted.

"Their advertisers aren't getting much traffic," he said. "This is a problem with directories in general."

While others said they see Sidewalk becoming successful, Bass said the strategy shift doesn't matter at this point.

"I don't see a business model emerging in which Sidewalk will ever be profitable," he said.

But Kursh said the shift in strategy is going to allow Sidewalk to focus on what it does well and streamline its operation into a more profitable unit.

The layoffs, he added, would be "primarily in business and overall support and operations roles. We're really making very, very, very few cuts amongst the writers."

"I think it's pretty clear that you should interpret this as we are very happy with our progress to date and we're going to continue to invest and move the business forward," Kursh said. "And while certainly there is some sadness tinged in the announcement, it's really a positive direction for Sidewalk."