Microsoft bets on RadioShack for Web strategy

Microsoft's deal with RadioShack is perhaps the clearest indication yet of the software giant's strategy to sell Web services to a mass market.

It's also a sign that the company, which has so far built its success primarily through business customers, may need help selling its products to mainstream consumers.

The alliance with RadioShack, one of the country's best-known consumer electronics chains, will put Microsoft's products in thousands of stores that employ vast sales forces to help answer consumers' questions about the many technologies that often befuddle the digitally challenged.

RadioShack, in turn, will get a boost in its efforts to become a major provider of high-speed Internet access by offering customers one-stop shopping for services. RadioShack has similar "store within a store" deals with other manufacturers, such as Sprint's PCS cellular services. The companies said RadioShack is responsible for 70 percent of all retail cell phone sales.

For Microsoft, its troubles in reaching mainstream customers are summed up by the sluggish start of its online service, the Microsoft Network, which has fallen well behind industry giants America Online and Yahoo--two companies that continue to add hordes of loyal users while defining the medium.

Peter Ausnit, an equity analyst at Volpe Brown Whelen, said the deal has a lot of potential to add much-needed subscribers of Microsoft's Internet services, given RadioShack's success in marketing cellular phones and services for Sprint and other companies.

And that could help Microsoft expand its focus beyond selling productivity software to businesses using desktop computers, another area of declining growth, Ausnit said.

"I think [Microsoft] is trying to sell services instead of software," he said. "Microsoft is still a business company. Eighty percent of its revenue comes from businesses. Less than 20 percent comes from the home or consumers."

Today's deal comes at a critical point for Microsoft. In September the company revamped its Internet strategy and hiked the price on its MSN Internet Access service. Executives tried to portray the company's Internet properties as destinations for completing daily tasks, where users could communicate through email or create small-business storefronts on its newly launched "bCentral" site.

The agreement with RadioShack also comes amid a turning point in Microsoft's dealings with the Justice Department. Recently labeled by a federal judge as a monopolist that harms consumers, Microsoft may be placing itself in a more favorable light with mainstream computer users by making friends with a national retail chain.

Microsoft will market its myriad Internet services and products in RadioShack storefronts. A bastion of the blue-collar electronic equipment industry, RadioShack, with 7,000 retail outlets nationwide, will sell Microsoft software, MSN-branded Internet access, and home networking products for the Redmond, Washington-based software giant.

Microsoft, which historically has faced mixed reactions for its Net strategy, is up against intense competition from the ever-growing America Online. The world's largest Internet service provider claims 19 million dial-up Net access customers, has an enviable reputation for being easy to use, and is increasingly forging ahead with high-speed Internet connections.

But the key for Microsoft may be in letting its Net services sell themselves to customers who want to try out the services first.

A hands-on approach to high speed
That's a strategy that fits nicely with RadioShack's plans to become one of the nation's leading sellers of high-speed, or broadband, Internet access and networking in the home. Both markets are expected to become booming businesses, according to analysts.

More than 100 million U.S.

Microsoft's broadband investments in 1999
Nov 1999	$200 million in broadband service provider Teligent, as part of an investor group that received a 14 percent stake in the company.
Aug 1999	$15 million investment in DSL.net to deliver cobranded MSN Portal to small and medium-sized business customers and help the company build its network infrastructure. $126 million in Brazilian cable operator Globo Cabo, which calls for launching Virtua, Globo's high-speed Internet access service.
July 1999	$400 million in Rogers Communications to provide Rogers's customers with Microsoft TV and MSN Internet content over Rogers's broadband network.
June 1999	$30 million investment in Wink Communications, as the two companies collaborate to speed the adoption of interactive television, based on the ATVEF specification. Wink will provide ATVEF enhanced television tools for broadcast and cable networks and advertisers. $50 million investment in Concentric Network to develop cobranded MSN portal and application hosting services and spur broadband deployment.
May 1999	$5 billion for AT&T convertible trust preferred securities and warrants. Microsoft will also buy 29.9 percent of Britain's No. 2 cable operator, Telewest Communications, in a stock swap. $600 million investment in Nextel Communications, which will use the funds to deploy wireless Internet services, grow its U.S. network, and expand in other countries. Nextel customers also receive access to customized Internet services via a cobranded MSN portal.
April 1999	$30 million stake in NorthPoint Communications, an upstart DSL company. Committed to buying 100,000 DSL lines over two years.
March 1999	$30 million investment in Rhythms NetConnections, a DSL start-up. Announced MSN would offer DSL-based business portal.
Jan 1999	$300 million investment in initial public offering of United Pan-Europe Communications of the Netherlands for joint projects to deliver Internet and telephone services in Europe. $500 million in convertible preferred shares for a 5 percent stake in Britain's No. 3 cable operator, NTL.
Source: staff research, Reuters

adults use the Internet, according to a recent report. But only about 2 million people have high-speed Net connections, based on complex technologies that are not as widely available and are more difficult to install.

Microsoft hopes to "demystify" digital subscriber lines (DSL) by allowing customers to personally try out the fast Net access service in stores before buying, said Yusuf Mehdi, product manager at Microsoft.

Caroline Rice, a spokeswoman for national DSL wholesale service provider and Microsoft partner NorthPoint Communications, added: "Consumers don't necessarily want to understand it, but they want to see the benefits of the technology. They're hearing a lot about broadband, but they want to see it up close."

NorthPoint, which has its own alliance with Tandy, had planned to offer in-store DSL connections to 1,400 RadioShack stores. The company recently expanded its DSL deployment plans and will offer Net connections in about half, or 3,500, of the RadioShack stores, RadioShack representatives said today. Microsoft invested $30 million in NorthPoint in April and has a similar stake in DSL competitor Rhythms NetConnections.

Cable modem service provider Excite@Home, the nation's largest high-speed Net access company, has had success signing up customers during day-long, hands-on demonstrations of its service in shopping malls across the country. Excite@Home executives have said that consumers often cannot grasp the benefits of always-on, high-speed Net connections without trying them firsthand.

Telecommunications giant Sprint has sold cellular phones and services in RadioShack stores under a partnership since 1996.

"Their selling point is that no one is more than five minutes from a RadioShack. So in terms of a distribution channel for us, it's been great," said Bob Kelley, a spokesman for Sprint PCS. "It's been one of the more dynamic [sales] channels for us."

RadioShack salespeople are instructed to allow potential customers to try a cellular phone call to hear the call quality for themselves, Kelley said. "The hands-on [experience], we think, is very critical to wireless sales, because our whole message is the clarity of the call," he said.

RadioShack earlier this year purchased AmeriLink, a national cabling installation firm that will allow the retail stores to help consumers hook up their new technologies, including DSL and home networking products.

RadioShack technicians will come to customers' homes, install their DSL and cable service, and connect PCs, audio-visual equipment, and other appliances using a mix of wireless, phone, and power line technology. Microsoft executives today said they will consider adding the home networking kits that Microsoft builds with 3Com as part of RadioShack's package.

Beating out AOL

Microsoft may chalk up its RadioShack deal as a win against its online nemesis AOL. Len Roberts, chief executive of Tandy, which owns RadioShack, said the company was in talks for a similar in-store Internet access deal with "an ISP partner" but chose Microsoft instead.

Roberts said the company chose Microsoft because it fit RadioShack's "entire home strategy, which goes beyond an ISP." With Microsoft, Roberts explained, the partnership could extend to selling more consumer electronics products and their accompanying Internet access services.

But some analysts, such as Abhishek Gami, an equity analyst at William Blair, said Microsoft's larger coffers could have made it a more attractive partner for RadioShack. Microsoft's $100 million investment in RadioShack could have been the "linchpin" in securing the deal, Gami said.

If rumors surrounding discussions between RadioShack and AOL were true, some analysts said today's deal could be a significant blow for the online giant. According to Gami, brick-and-mortar computer shoppers provide an attractive demographic for AOL. Losing out on a deal with RadioShack could cause AOL to search for another brick-and-mortar partner.

"[AOL] will do deals with other retail providers," he said. "It makes sense for them to do it."

Brokerage firm Merrill Lynch predicts that AOL will make a similar deal with electronics superstore Circuit City.

A note written by Merrill first vice president Peter Caruso said AOL was indeed in negotiations with Tandy for a strategic partnership. With RadioShack in Microsoft's hands, Caruso wrote that AOL could strike a similar partnership with Circuit City, including an investment in the retail chain's Web site.

"This could be an important boost to Circuit City, as it would align their retail stores and online e-tail efforts with the nation's No. 1 Internet service provider," Caruso wrote.

News.com's Wylie Wong contributed to this report.