November 11, 1998 3:15 PM PST

Microsoft in transition online

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After nearly three years of ever-shifting Web strategies and $1 billion in losses, change may be the best thing for Microsoft's Interactive Media Group.

As reported by CNET News.com yesterday, the group's vice president, Pete Higgins, will step down to take an indefinite hiatus. Claiming that he rarely had a chance to step back from the fray during his 15-year tenure at the software giant, Higgins, 40, said he planned to spend time with his family and savor his open-ended vacation away from the Microsoft campus.

He leaves Microsoft at a critical moment in the company's push to become a dominant media property on the Internet. With the recent launch of its MSN.com portal, Microsoft has taken yet another big step toward competing in the cutthroat race for eyeballs--and the in-demand advertising and e-commerce dollars that go with them.

Higgins also leaves a division that Microsoft's upper brass has heavily touted since Microsoft first set its sights on the Internet in 1996. The overwhelming support from Microsoft's highest echelons--including CEO Bill Gates himself--did not guarantee success, however. To the contrary, the high-profile, heavily bankrolled Interactive Media Group (IMG) has been sailing rough waters since its inception.

Could a shake-up in the ranks of that group help the company in its ongoing pursuit to compete with the likes of giants Yahoo and America Online? Or will Redmond continue to pour money into a venture that has yet to see significant financial returns or fulfill lofty expectations to dominate the Internet space?

"Merely a change in leadership can be a positive," said David Simons, managing director of Digital Video Investments, an institutional investing firm. "It represents a change in patterns of thinking and politics. It has nothing to do with Higgins's talents or abilities. Changes in strategy are presumably to be applauded."

But other analysts suggest that Steve Ballmer's temporary assumption of IMG's leadership could signal an attempt by Microsoft to pour water over IMG's burn rate.

"What wouldn't surprise me is for Ballmer to say, 'Hey, I want to rein this group in a little bit,'" said Patrick Keane, an analyst at Jupiter Communications. "What he wants to impart on this group a little bit is frugality."

Thus far, Microsoft's foray into cyberspace has resulted mostly in frustration. Despite leveraging its staggering budget to invest in a spate of Internet-related projects and companies, IMG has seen its share of flops, and has been forced to impose a strategic overhaul.

In one of its first Internet efforts, Microsoft entered the online services market by introducing a subscription-based proprietary service, dubbed the Microsoft Network, or MSN. In an attempt to capture the Internet market, the company relaunched the service in October 1996 with television-style entertainment content as its best weapon against rivals AOL, CompuServe, and Prodigy.

But MSN jumped the gun in its effort to predict the patterns of Internet consumer behavior, according to analysts. At the time, Internet users by and large were not interested in using the Web as a passive entertainment medium. Instead, they were logging on primarily to get information, or to entertain themselves in chat rooms and with email.

MSN retooled its strategy, gradually eliminating television-like shows and channels. It moved other content out from behind its members-only firewalls into the free space of the Web, hoping to attract users to whom it could sell products and advertising.

"The strategy that failed is perceiving the Internet today as an entertainment medium, and trying to develop an entertainment service," Simons said.

Nevertheless, MSN's subscriber numbers reportedly have been dropping. Jupiter Communications estimates MSN subscribers today to be under 2 million, but Microsoft has refused for the past year to reveal any of its subscription figures.

Analysts give Microsoft credit, though, for its willingness to react and its ability to change along with the Web.

"They determined very quickly what was going to be successful and not successful, and carved away very ruthlessly at what was not going to work," said Bill Bass, an analyst at Forrester Research.

Microsoft has turned its focus to its more utility-driven sites, which are centered around commerce rather than entertainment-oriented content such as automobile buying resource CarPoint, and online travel planner Expedia, among others.

In July, Microsoft officially launched its portal effort, renaming it MSN.com and joining all its Web properties together under a single umbrella..

But the company still faces an uphill battle against established leaders that have maintained a stronghold of brand awareness and loyal users while Microsoft has been working out the bugs of its Internet efforts.

With 13.5 million subscribers, AOL has a virtual lock in the online service space. But Microsoft may have more room to compete in the new frontier currently occupied by Yahoo and a number other recently ramped-up portals, such as Lycos and Excite.

Still, the going won't be easy for Microsoft. Many industry observers and competitors have criticized the software giant for jumping into the portal game too late, yet they know better than to take the software giant's aggressive push lightly.

With Higgins gone, the future of Microsoft's IMG depends on his successor and on whether that person will focus on executing Higgins's vision of "stitching together" Microsoft's sites into one integrated network, with a consistent user interface and universal registration, said Forrester's Bass.

Finding a replacement to fill Higgins's large shoes will be difficult at best, analysts said..

"The Higgins figure is so important to the core of what the media group is, and certainly what Microsoft is," said Mark Mooradian, an analyst at Jupiter. "It puts them in a fairly catalytic moment. The question becomes: are they going to look within Microsoft or outside of Microsoft?"

 

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