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Analysts skeptical of MSN subscriber numbers

Microsoft has claimed a sharp spike in new subscribers for its Internet access service, but critics are calling the numbers underwhelming and misleading.

Microsoft is claiming a sharp spike in new subscribers for its Internet access service, but critics call the numbers underwhelming and misleading.

Microsoft's MSN Internet Access has long struggled to make a dent in the industry's 800-pound gorilla, America Online, which claims more than 23 million paying subscribers.

Following a major promotional push, Microsoft said Monday that it had upped MSN's subscriber rolls by 800,000 new members to 3 million. But skeptics pointed out that the company in April had reported 2.5 million subscribers and therefore also lost 300,000 members, paring its gain to 500,000 new subscribers.

Either way, MSN failed to impress analysts, who discount the Internet service provider's years-old challenge to AOL as a long shot.

"I think you start caring when they get within shooting distance of AOL," Giga Information Group vice president Rob Enderle said. "Right now AOL is not in the same county."

Microsoft has been intensifying its efforts over the past several months to make a credible challenge to AOL. In September, Microsoft named former SGI chief executive Rick Belluzzo as head of its interactive services unit, which includes MSN. Later that month, the company reaffirmed its commitment to MSN with a series of new offerings and a strident battle cry from Microsoft CEO Steve Ballmer.

MSN also brainstormed numerous costly incentives to attract new recruits and lure AOL members. These included an offer in December of a $400 computer rebate to new subscribers and another promo in April giving away an introductory six months on MSN for free.

Microsoft kicked off a $150 million advertising campaign on behalf of MSN earlier this year and struck deals with RadioShack and Compaq Computer to promote MSN Internet Access.

Microsoft this week sought to demonstrate that the efforts are paying off. But the announcement raised the eyebrows of some analysts.

Every ISP deals with so-called churn, or subscribers who abandon their accounts. But the proliferation of one-time free offers may be contributing to MSN defections, analysts point out, as people lured by the promise of free access or a rebate fall away.

"They got the big uptick because of the deals," said David Card, an analyst at Jupiter Communications. "There is churn potential for those."

Explaining the churn
MSN's churn appears to have been particularly severe, though, at least according to subscriber numbers the company released early this year. In January, the company said it had 2.5 million subscribers. In April, it said it had added 500,000 new subscribers since December.

But also in April, MSN's total remained where it began in January--2.5 million--suggesting that the service had lost as many subscribers as it had gained, or it had gained all of its new subscribers in one month: December.

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Ratings game
On Monday, Microsoft said that MSN Internet Access had signed up 800,000 new subscribers--each paying $21.95 per month--between April and June to reach 3 million members. But based on the figures reported in April, the company appears to have lost subscribers.

Microsoft executives were not available today to comment on MSN's subscriber numbers and churn rates. But on Monday senior vice president Brad Chase minimized the severity of MSN's churn problem.

"We always lose subscribers as well," Chase said on CNBC. "All the people who have Internet access lose subscribers every month. That number is small. It's fair to say we have had a net gain in users...We lost some who moved on to some other service, but we gained a lot more."

In addition, Chase acknowledged that MSN "probably" failed to meet internal goals for subscriber numbers.

The real leader?
Analysts also questioned MSN's claim to have pulled into the lead, ahead of Yahoo and AOL, in terms of traffic to its free Web sites. MSN sites, which include, Hotmail, Expedia, CarPoint and others, garnered 201 million unique users during the month of June, Microsoft said Monday, making it "the No. 1 worldwide Internet destination for consumers."

MSN deserves credit for becoming a strong contender on the Web, said Forrester analyst Chris Charron, especially as would-be competitors such as Disney's portal, CMGI's AltaVista and NBCi's have languished in the second and third tiers. publisher CNET Networks is an investor in NBCi.

But contrary to MSN's claims, AOL and Yahoo remain ahead on the Web, analysts agreed.

"MSN certainly has hung in (in) the portal race," Charron said. "I think they have not fallen by the wayside and are still capable of challenging AOL and Yahoo more from a content side than with access. But Yahoo and AOL are the clear leaders."

Even if MSN's unique users have outstripped Yahoo's and AOL's figures, analysts said only one metric really counts.

"The real number that's interesting is whether they're making money or not," Jupiter's Card said. "Yahoo and AOL are profitable, and I don't think Microsoft's Internet properties are."