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Commentary: Microsoft readies new consumer market attack

By placing WebTV in the MSN division and repositioning it primarily as a conduit to deliver MSN services to television devices, Microsoft is looking to boost interest in both.

By placing WebTV in the MSN division and repositioning it primarily as a conduit to deliver MSN services to television devices, Microsoft is attempting to both address the WebTV value proposition and broaden the MSN customer base.

See news story:
Microsoft shifts WebTV oversight to Redmond

Microsoft acquired WebTV in April 1997 for $425 million dollars as part of its overall strategy to break out of the PC market and target a broader consumer market. Also part of this strategy were the various investments in set-top box technology and cable businesses as well as MSN and related consumer sites such as Expedia and others. However, WebTV failed to provide compelling consumer benefits and therefore never attracted a significant user base.

The repositioning links WebTV more closely with the service delivery market in which MSN plays and specifically with MSN streaming audio and video services. It also should clear the way for Microsoft to develop the natural synergies between its consumer products.

The disparity in the service design between MSN and WebTV never made sense. Now Microsoft will develop a common set of services, based on its MSN services, across the different access points to the Microsoft world. This will allow individual consumers to maintain a single identity regardless of which access point they are using.

The repositioning of WebTV within the MSN group removes the clash between the WebTV and MSN vision for back-end services and gives it an opportunity to blend these visions and services together. This vision of services will clearly be dominated by the MSN model, with WebTV services being incorporated piecemeal where they provide unique value. MSN in the long term becomes the model through which Microsoft delivers its applications as services to consumers built on the .Net vision. Moreover, MSN becomes a mechanism to deliver a common set of services across all platforms, be it PCs, set-top boxes, game consoles or other means.

The end of the box
As a hardware platform, WebTV's days are numbered. We do not believe the repositioning will result in a resurgence of consumer interest in the WebTV box. Indeed, we expect to see WebTV as a consumer entertainment platform replaced by Microsoft's UltimateTV (general purpose interactive TV) and X-box (games and internet access) platforms in 18-24 months.

Microsoft has invested billions in the consumer market in recent years, and so far the results have been disappointing. However, this does not mean that Microsoft is giving up on the consumer market or that it will not be successful in selected niches. Microsoft's pattern has always been to keep trying in a market until it gets the products and marketing right, and we expect that that is exactly what it will do now. However, its inability to turn these investments into a commanding position is a sign of a new reality for Redmond. Microsoft no longer dominates every market it enters as it traditionally did in the PC and end-user application industries. Microsoft will be a major player in the home consumer entertainment market, but it will not dominate that market.

Recently, Microsoft has invested in a number of markets that are far from its core market. This has included investments in cable TV and satellite communications and a range of Internet services. As a result, one can look at Microsoft's business as focusing on three broad areas:

• Its traditional business of operating systems and end user applications such as Microsoft Office software.
• A new focus on business application solutions and services such as Great Plains.
• Consumer products and services such as MSN, X-box and Pocket PC.

We expect Microsoft to continue to invest in all of these areas. However, it will take several years to turn the last two market areas into profit centers, and Microsoft is unlikely to dominate either of these markets.

The move toward the X-box
In the consumer market specifically we expect it to invest heavily this year in developing and promoting X-box. As a platform play, it is closer to the core Microsoft technology and business competencies and therefore has a better chance of success than WebTV. We also expect significant investment in UltimateTV, which is Microsoft's new attack on the interactive TV market. Although the Ultimate TV technology and architecture look compelling, we remain skeptical until Microsoft can prove itself in this marketplace by generating consumer demand.

The Pocket PC, the latest iteration of Windows CE in PDAs, is gaining market share. The Compaq iPaq pocket PC PDA, in particular, is generating excitement in the market this year. We expect the Pocket PC family to gain more market share, but we do not expect Microsoft to dominate this market, making this another example of the new reality in Redmond.

Similarly, MSN's market share has grown steadily to about 10 percent of the market. However, it is far from challenging America Online for the lead in the consumer Internet services arena, which in any case is fragmented among several players.

For Microsoft it is critical to establish a relatively strong position in these consumer technologies--particularly interactive TV, PCs and game consoles--if it wants its .Net initiative to become pervasive. So it is critical to Microsoft's plans for it to grow its presence in the consumer markets.

Users should evaluate Microsoft activities outside its core OS and application business in light of the new reality. Microsoft will not automatically dominate any market it enters, although users can generally expect it to make long-term commitments to those markets and compete hard for a respectable market share. Users must be cautious of long-term promises that are not backed up by clear near-term solutions with demonstrable value.

Nevertheless, in the long term, users should expect Microsoft to be a major player in the consumer market. However, we expect it to take at least three years for Microsoft to grow its market share to a point where it contributes significantly to the bottom line in comparison to the OS and application businesses. In the mean time, it will have to make heavy investments in the consumer markets and will need to depend on its traditional markets for its income growth.

Over the next two years, people should expect Microsoft to be less aggressive in pricing in markets where it feels it faces little or no competition such as its traditional markets. However, many of these prices will be hidden from consumers as part of an overall OEM (original equipment manufacturer) platform. On the application side, it is likely to maintain current pricing on base products and aggressively sell new add-ons to Microsoft Office and other products to increase revenues. In the new markets it enters, Microsoft will likely be very aggressive with pricing.

Meta Group analysts Dale Kutnick, William Zachmann, David Cearley, Steve Kleynhans, Peter Burris and Val Sribar contributed to this article.

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