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WebTV caught between MSN deals, free PCs

WebTV has become an unwilling competitor to the "free" PC movement, and now it may be facing an even bigger threat from its own parent company.

    WebTV appears to have a new, formidable, and well-heeled competitor--its parent company Microsoft.

    The WebTV set-top box and monthly Internet service was originally conceived as a way for people to get onto the Net cheaply and easily via the TV. Microsoft snapped up the company in 1997.

    But WebTV has become an unwilling competitor to the rapidly growing "free" PC movement as those companies have devised ways to drop the cost of getting on the Web with a computer. And now the service may have to fight a threat much closer to home--Microsoft's own MSN Internet service.

    Recently, Microsoft executives confirmed that the company is evaluating giving away or steeply discounting MSN in the hopes of attracting new subscribers to the service. Microsoft recently began offering $400 rebates to computer buyers who sign multiyear, standard-rate contracts with MSN when they buy a new PC at select outlets, and it also started offering monthly MSN service for $11 to Costco customers.

    With computers priced at $500 or less, this means a buyer can get a full-fledged PC from Staples or other retailers for $100 if they agree to a multiyear subscription for MSN. The same buyer could get a $500 computer from Costco and enjoy standard Internet service for about half the standard price.

    By contrast, WebTV set-top boxes, which don't run PC applications and are limited in other ways, typically cost $99 or more, and the service runs from $21 to $25 a month. As a result, The recent MSN deals mean that the overall cost for WebTV is about the same or even more than getting a PC.

    If Microsoft's MSN deals take off, WebTV's subscription numbers may take a dive, analysts warn.

    "To the degree that anyone is [giving away Internet services], they may already be seeing an impact," said Kevin Hause, an analyst with International Data Corporation. "You're probably going to see some potential impact on WebTV subscription, not only if MSN moves to a free model, but if anyone does."

    Microsoft declined to comment on any impact that rumored plans to give away MSN may have on WebTV. But its aggressive promotion of the MSN Internet service raises questions about the company's commitment to WebTV, which has billed itself as the simple--and inexpensive--way for consumers and computer neophytes to access the Net.

    In recent months, WebTV has backed away from that strategy, recasting itself as a provider of "enhanced television" services rather than a full-fledged ISP, despite the fact that the $25 monthly fee for the WebTV Plus service is more expensive than many ISPs.

    For its part, WebTV says its business will be unaffected if Microsoft does give away MSN, pointing to its consistent subscription growth despite pricing changes among other ISPs, most notably by the largest, America Online.

    "If it were to happen, it wouldn't be a big impact either positive or negative for WebTV," said Phil Goldman, general manager of the WebTV platform and co-founder of the company. "WebTV is a different market than PC customers. Clearly, there are exceptions, but by far, most people who own WebTV do not own a PC. They are two different services, to two different customers."

    The number of new households with computers has not increased significantly since the start of the free PC trend, indicating that low prices will not lure every family to purchase a computer, according to Hause. This gives some credence to WebTV's strategy of targeting non-PC households.

    The revised MSN strategies seem to create the potential for confusion within Microsoft about its overall plan to succeed in Net connections. MSN is ostensibly targeting computer novices with its rebate plans and Costco discounts, which is also WebTV's market.

    Where does WebTV fit?
    "There is a bit of an issue about where WebTV fits into the future of Microsoft's vision," Hause said. "It seems a little bit confused, a little bit short-sighted. It may be an indication of strategies not being set with both MSN and WebTV in mind."

    There is also the possibility that within Microsoft, WebTV may be a victim of its own modest success, some observers have suggested, since it has built up a paying subscriber base, while MSN has continually struggled to compete against AOL and other ISPs.

    "WebTV is looked on as being more profitable than MSN," said Richard Doherty, principal at consulting firm Envisioneering Group, adding that bolstering MSN's subscriber base may ultimately be a more profitable strategy for the company. "The upside for gaining an MSN customer is much higher than gaining a WebTV customer," because a PC user is more likely to continue buying Microsoft software.

    WebTV is also evaluating alternative pricing strategies, Goldman said, declining to comment on any specific plans for the future.

    Microsoft has demonstrated its faith in the long-term success of the WebTV group by offering subsidies to hardware manufacturers like Sony and Philips, who make the WebTV box, sources say. Under the plan, Microsoft reimburses each manufacturer for any losses it incurs in selling the devices.

    Ultimately, the success of either unit depends on Microsoft's tolerance for red ink. Whether reimbursing its WebTV hardware manufacturers or absorbing the cost of a free MSN service, Microsoft is using its own vast resources to keep its Internet businesses afloat. The life of either business, for the near future at least, may rest on the company's patience with subsidizing two expensive Internet groups.