Verizon, Microsoft partner for DSL

Verizon Communications announced a broadband service deal with Microsoft on Thursday that combines Verizon's digital subscriber line (DSL) network with the software giant's MSN portal.

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"You can think of it as a strategic alliance, but it's actually a new service," said Microsoft Chief Executive Steve Ballmer on a conference call to discuss the agreement. The companies said they will create a new type of DSL experience: giving subscribers services and content with their high-speed Internet access. MSN's content, instant messenger service and Hotmail e-mail service will all be part of the deal. The companies said they would share revenues from the new service, but declined to give specific financial terms.

Microsoft's portal, as well as its basic instant messenger service and e-mail service, are typically free to the general public. However, Microsoft said the new service with Verizon will offer some unique features. The company declined to give details on how the service will be unique, since it will include new features designed for MSN 8.0, which will be introduced this fall.

Microsoft did say the services will be specifically designed for broadband connections, and that those optimized services will be available to MSN broadband subscribers when MSN 8.0 is released.

When the Verizon service is introduced in early 2003, the MSN 8.0 features will be co-branded for Verizon subscribers, and there may be special promotional offers and features, said Lisa Gurry, a product manager at MSN.

Gurry said, there may be "exclusive content" on MSN, though she added that it was too early to say for certain.

The service will vary in price from $39.95 and $49.95 per month, depending on the customer's location. For comparison, Verizon's DSL service is $49.95 a month, with the first three months priced at $29.95 a month. Microsoft offers its MSN broadband service for $49.95 a month, in partnerships with SBC Communications, BellSouth and Qwest Communications International.

The joint service will create a unified platform for wireless and broadband access, building on a deal struck last month between Microsoft and Verizon Wireless, the cellular division of Verizon Communications.

That service, dubbed "VZW with MSN," offers users of Verizon Wireless with Web-enabled phones access to MSN Messenger, Hotmail, Microsoft .Net alerts, a calendar and other information.

"What's unique is that this will create a common look and feel whether you use wireless or DSL services," Verizon Chief Executive Ivan Seidenberg said.

The new service will be available early next year to Verizon's 34 million customers and will be the same whether offered through Microsoft or Verizon, the companies said. Customers will have a choice of e-mail addresses with Verizon's or Microsoft's name, and they will be able to choose to be billed by either company.

Ballmer said the service would also include better privacy and security, which it will announce with the rollout of MSN 8.0 later this year. MSN's Gurry said the new security features will be better than anything Verizon or MSN customers currently have.

Clashing partnerships?
The tightening of Verizon's relationship with Microsoft led to several questions on the conference call about how the companies will proceed in their other partnerships. America Online, which competes with MSN, uses Verizon for its DSL service. Cable companies, which compete with Verizon, also have partnerships with Microsoft.

Seidenberg said AOL will continue to buy DSL from Verizon on a wholesale basis, and also said the MSN deal is different because it centers around a portal.

Microsoft's relationships with cable companies--it has stakes in Comcast and AT&T--will also continue, Ballmer said. He emphasized that the Verizon deal did not indicate a preference for DSL over cable.

"The U.S. is a big place," Ballmer said. "The Verizon deal lets us serve one-third of the U.S.; there are still two-thirds of the U.S. we have to figure out how to serve."

Analysts compared the deal to Qwest's deal with Microsoft as well as SBC's deal with Yahoo, and said it signaled a trend for DSL companies.

"Telecom companies don't want to get into the advertising and content business like cable companies," said Patrick Comack, an analyst at equity research firm Guzman & Co. "Telecom companies are going to stick with what they know best--transmission."

"Microsoft, like America Online and EarthLink, is interested in having a customer migration path from dial-up to broadband. I'm sure that's at the heart of this deal," said Richard Klugman, analyst at equity research firm Jeffries & Co., speaking before the deal was announced.

Microsoft struck a five-year deal with Qwest last April, under which Qwest markets the MSN service and MSN purchases Qwest's high-speed network capacity, digital subscriber lines, dial ports and billing services. The two companies said at the time that they expected to generate about $1.5 billion in revenue from the deal. The alliance was touted as a success by Microsoft, which has said the deal resulted in a tangible increase in new MSN subscribers.

Comack said the deal may have gone too far, since Qwest gave up its own brand in the process.

"They gave Microsoft their whole network," Comack said, since Qwest shifted not only its home page and content, but also its servers and e-mail addresses over to Microsoft.

The deal was also far from a success with Qwest's customers, according to analysts. Comack said the change in e-mail addresses from a "qwest.net" to an "msn.com" name frustrated customers.

"It was a rough transition," Klugman said.

Analysts also compared the deal to SBC's relationship with Yahoo. Last month, the companies quietly launched a co-branded dial-up Internet service, which tied the portal's content with SBC's access network. SBC formally announced the news in June and said a DSL offering would be launched later in the summer.