Microsoft drops BellSouth DSL deal

Microsoft is ending a two-year-old broadband access deal with BellSouth, as the software giant continues to reposition its MSN service for the high-speed Internet.

Beginning Nov. 12, MSN will no longer provide digital subscriber line (DSL) service to subscribers in BellSouth's 13-state service area, Microsoft said Wednesday. Microsoft will continue to support dial-up access in the area, but MSN DSL subscribers there will lose access unless they change providers before that date.

Microsoft pulled back its broadband partnership with Qwest Communications International in July, dropping out of the access business to focus on software.

"We've recognized that phone and cable companies are the best equipped to offer that broadband Internet piece," said Lisa Gurry, MSN's group product manager. "We are absolutely committed to being a major player in the broadband market but want to offer the best broadband services."

Microsoft's decision to back away from selling broadband access highlights broad difficulties facing dial-up Internet service providers (ISPs), which have begun to see customers defect in large numbers to faster cable and DSL networks as well as cheaper discount rivals.

Some ISPs have managed that transition well, signing access deals with cable and DSL providers and successfully reselling those services. But others have stumbled as cable and telephone companies grew more aggressive about marketing broadband access themselves.

MSN was until recently one of several ISPs that buy DSL lines in bulk from the Bells and resell the lines under their own brand. However, it began stepping away from those deals, in part due to poor returns. Microsoft would not disclose how many subscribers it will be cutting off in November. But a BellSouth representative said the change would affect only a "small number" of subscribers.

Rather than sell access, MSN has opted to sell a package of high-speed Internet services such as e-mail and security to third-party broadband customers for $9.95 a month.

"It's the best move Microsoft can make because they had little success in providing their own broadband access strategy," said Daryl Schoolar, an analyst at In-Stat/MDR.

America Online has also faced difficulties shifting its predominantly dial-up business to broadband. AOL for now continues to sell its own branded broadband services. But it is also hedging its bets with a "bring your own access" (BYOA) strategy of its own, offering exclusive content and other features for $14.95 a month.

It's still too early to tell whether these efforts are paying off, and both companies have been scrambling to upgrade their services to appeal to broadband users.

Yahoo has also been angling to upgrade its service for the high-speed Internet, having struck a cross-marketing deal with SBC Communications.

Although MSN is no longer selling broadband access, it hasn't cut its ties to broadband providers completely. It currently has a deal with Verizon Communications in which MSN is promoted as the preferred Web service for Verizon subscribers, both for its DSL and cell phone data services. MSN is also marketed as the preferred Web service for Qwest.

"Rather than providing the broadband network, system infrastructure and all the support that we do today, MSN will be focusing efforts on developing Internet software," a Microsoft representative said.

Bells: DSL or bust
The move to BYOA underscores a troubling trend for MSN and AOL. Both have been reporting losses in their core dial-up subscriber bases. Many subscribers are defecting to phone and cable broadband carriers.

Like its Bell cousins, BellSouth has been on a marketing push to add more DSL subscribers. The company is selling FastAcess DSL for $45 a month and a slower-speed "Lite" version for $35 a month.

"MSN is making a strategic shift in business," said Rich Wonders, BellSouth's executive director of broadband marketing. "We will help them migrate their customers from an access solution to a bundled solution."

BellSouth joins Verizon and SBC in a trend among the Bells to increase their number of broadband subscribers through discount promotions. Some providers have offered DSL for as low as $29.95 a month for a limited period, much cheaper than the $45 to $50 monthly fees for cable broadband.

The Bells are cutting prices to defend against cable's gains. Cable companies are bundling broadband and phone service into their existing video programming base, giving them an advantage in packaging services to consumers. The Bells are witnessing a decline in their coveted local phone business as cable gains and cell phones proliferate.

The Bells are also scrambling to figure out a way to compete with cable's most powerful asset: video. This summer, BellSouth struck a deal to sell DirecTV service to its local phone customers. That's on top of deals by Qwest and SBC to sell EchoStar's Dish Network as well.

These deals were viewed as attempts by the Bells to match cable's "triple play" package and may be a temporary measure until the Bells can offer their own video services over fiber-optic lines.