• Chart: MSN Feature Comparison

In an effort to reverse declining subscriber numbers, the next release of the MSN client will be available in two versions. MSN Premium will be the direct successor to MSN 8, and includes improvements—notably, the ability to connect to e-mail using Outlook—designed to convince more ISPs to bundle it with their broadband service. MSN Plus, a lower-priced edition with certain features stripped out, is designed to attract Internet-savvy users who have so far balked at paying US$10 a month for the MSN client on top of their Internet access fees.

Two Clients, Two Audiences

Between late 2002 and July 2003, subscriber numbers for all fee-based MSN services—dial-up Internet access, the MSN 8 client software and associated services (e.g., online calendar and photo storage), TV-based services (e.g., MSNTV, formerly known as Web TV), and other fee-based online services (e.g., Hotmail Extra Storage)—declined from 9 million to about 8.6 million. The main reason for this decline is that customers are leaving MSN’s dial-up Internet Access as the deeply discounted promotions that originally drew them to the service end. Meanwhile, MSN 8 and other MSN services are not drawing enough of these customers—nor are they drawing enough customers away from competitors—to make up for declines in the dial-up user base.

In late 2003 or early 2004, MSN will update its subscription services and introduce two new clients, MSN Premium and MSN Plus. These clients address declining subscriber numbers in two different ways.

MSN Premium for Broadband Bundles

Today, Qwest and Verizon bundle MSN 8 as the default e-mail and Web browsing client with their DSL broadband services: customers pay a single monthly fee for broadband access and get the right to use MSN 8 if they wish. The ISPs then split revenues from these customers with MSN according to an undisclosed formula. However, as MSN's declining subscriber numbers illustrate, these deals have not garnered enough new subscribers to make up for dial-up defectors.

MSN Premium will remove certain limitations found in MSN and prior versions, such as the inability to use Outlook as an e-mail client, and will add new features that are particularly useful to broadband users, such as improved digital photo management and a firewall. Through these improvements, Microsoft hopes to attract more ISPs to bundle MSN Premium with their broadband service, and to convince MSN users to choose these partner ISPs when they move from dial-up to broadband.

MSN Plus for BYOA

MSN 8 is also offered on a "bring-your-own-access" (BYOA) basis—that is, users of any ISP can pay MSN US$10 a month for the right to use MSN 8 and associated services. MSN Premium will continue to be available on a BYOA basis at the same price as MSN 8. However, Microsoft is also introducing a lower-priced client, MSN Plus, in an effort to increase BYOA subscriber numbers.

MSN Plus will be geared toward younger, Internet-savvy users without families, who are probably not interested in features such as parental controls, the ability to create multiple e-mail accounts, or the Encarta reference encyclopedia. However, Microsoft believes these users might be willing to pay a few dollars per month for features that improve their everyday Internet experience, such as Web-based e-mail and calendar services and a pop-up advertisement screener.

There is some evidence to support this belief: the Hotmail Extra Storage service, which offers 10MB of Web-based e-mail storage and costs US$19.95 per year (less than US$2 per month), has amassed more than 1 million subscribers since its introduction in fall 2001.

Microsoft has not revealed the BYOA price for MSN Plus, except to say that it will fall between MSN Premium and Hotmail Extra Storage.

(For an overview of the differences between MSN 8, MSN Premium, and MSN Plus, see the chart "MSN Feature Comparison".)

Improvements to MSN Premium

MSN Premium offers the following improvements:

Outlook Connector for MSN. For the first time, Microsoft is supporting full access to MSN with Outlook. The MSN Premium client ships with a new piece of software—the Outlook Connector for MSN—that will enable Outlook 2002 or later to access MSN-based e-mail, calendar, and contacts data. In addition, users will see significant integration between MSN and Exchange. For instance, Outlook users at work can have their Exchange-based work calendar appear alongside one or more MSN-based calendars on a single screen, and they can drag appointments and tasks between the calendars.

This improvement removes a limitation that has caused headaches for MSN's broadband ISP partners and their customers. Previously, MSN offered little support for Outlook, forcing all but the most technically proficient customers to use either the MSN client or Outlook Express—even if they had bought Office (which comes with Outlook) for home use.

Removing this limitation will also help MSN compete against the fee-based Yahoo Mail Plus service, which has offered Outlook-based e-mail access for some time. It may also make MSN more appealing for customers who already use Outlook and Exchange for their work e-mail and who want to access their personal e-mail using the same software.

However, the Outlook Connector for MSN will only work with Outlook 2002 (which shipped with Office XP and Exchange 2000) or later, which could limit its appeal.

Digital photo options. MSN Premium includes many new features for displaying and organizing digital photos online, including many features otherwise found only in Microsoft Digital Image Suite, which retails for US$129. These features should also increase MSN Premium's appeal to broadband users, who are more likely to upload digital photos to an online repository than dial-up users.

With MSN Premium, customers can do the following:

• Assign keywords, which can be used to group and search photos
• Use batch editing; for example, the ability to apply color correction on multiple images simultaneously
• Create slide shows, complete with music (Windows Media Audio, .wav, or MP3 files are all supported), fades, zooms, and other effects, then post these slide shows to MSN Groups, send them via MSN Messenger 6, or burn them to a CD in Video CD (VCD) format, which can be played on many DVD players.

Antivirus and firewall software. MSN Premium will also include bundled antivirus and firewall software. Firewall software is particularly important because broadband users' Internet connections are always on. (MSN has not revealed whether this will be provided by a partner or by Microsoft—for example, the antivirus software could be based on technology gained in the June 2003 acquisition of GeCAD.)

MSN Plus: Subset of Premium

MSN Plus does not include any of the previously mentioned improvements. Nor does it include certain features that are found in both MSN 8 and MSN Premium:

• Encarta Plus, an online version of the Encarta reference encyclopedia
• Money Plus, a "light" version of the Microsoft Money personal finance organizer
• The ability to create multiple e-mail accounts
• Parental controls.

Nonetheless, MSN Plus does have a number of improvements over MSN 8 (all of these improvements are found in MSN Premium as well). Microsoft believes that these improvements will be significant enough to convince users of non-partner ISPs to pony up a few dollars a month.

Improvements found in both MSN Plus and Premium include the following:

Pop-up guard. A new pop-up guard can be set to allow some useful pop-up windows—such as an authentication window for a banking site—while blocking the pop-ups that are likely to annoy users. An icon will appear every time a pop-up is blocked, and users can view a black-and-white thumbnail image of the pop-up, then select it if they wish to see it; the filter will gradually learn users' preferences and adjust its blocking capabilities accordingly. Users can also set the pop-up guard to block all pop-ups.

Shared calendars. MSN enables users to keep their appointments and tasks in an online repository accessible from any computer with an Internet connection. However, unlike Yahoo Calendar, MSN 8 subscribers cannot expose any information on this calendar to other users.

With MSN Plus and Premium, all MSN subscribers will be able to publish their calendar to MSN Groups (free Web sites that contain message boards, chat rooms, and photo albums and are accessible to a specific group of individuals), other MSN subscribers, or anybody with a Passport ID. Users of the new clients will be able to view their own and others' calendars side-by-side in a single pane and drag appointments between calendars.

Photo storage and sharing. All MSN Plus and Premium users will be able to store up to 500MB of photos for up to 30 days, and 30MB of photos permanently on MSN Groups. In MSN 8, users only got 100MB of storage (although all this storage was permanent).

In addition, a new "Share Photos Online" button in the MSN Plus and Premium e-mail clients will allow users to send thumbnail versions of online photos to any recipient who can read HTML e-mail; when recipients click on the image, the full-resolution photo will be downloaded from the MSN repository.

Separate mailboxes for POP3 accounts. MSN Plus and Premium users with multiple POP3 accounts (such as users who have recently switched ISPs) will be able to receive e-mail from each account in a separate mailbox. Previously, all messages from other POP3 accounts appeared in a single mailbox.

Dashboard. The MSN Dashboard—a toolbar with Internet-based information that can be decoupled from the MSN client—will display the subject lines and sender of unread e-mails in the user's inbox; previously, it only displayed the number of unread messages. It will also be able to scroll through multiple pictures from MSN Photos in a slide show mode; previously it could only display a single image.

Broadband Partnerships Best Chance for Success

Beginning with MSN 8, Microsoft made a fundamental bet that consumers want more from an ISP than Internet access, an IP address, and POP3 e-mail. In particular, Microsoft believes that consumers are willing to pay extra for the convenience of storing their information—e-mail messages, contacts, calendars, photos, and the like—in a Web-based repository, where they can access it from any computer with an Internet connection and certain Microsoft software.

Nonetheless, the BYOA model still faces a significant price barrier: as consumers switch from dial-up to broadband, their monthly ISP bill increases significantly, and they are unlikely to spend additional money on extra Internet-based services—particularly since some broadband ISPs, notably Earthlink, already offer services such as pop-up and spam-blockers for free. The recently introduced MSN Broadband Marketplace, a Web site on MSN that guides dial-up users to broadband providers in their area and advertises MSN 8 as part of the sign-up process, seems unlikely to overcome this natural price barrier.

Thus, MSN's best chance of success will come through signing up more broadband partners to bundle MSN Premium with Internet access. This could capture many dial-up defectors as they switch to faster access—broadband access is largely limited by geography, and users might find that all of their possible broadband providers bundle MSN Premium. Microsoft's existing agreements with Qwest and Verizon are a good start, and Bell Canada will begin bundling MSN Premium in spring 2004. But similar agreements with cable and more non-U.S. ISPs will be necessary for long-term success. Two likely candidates are cable provider Charter Communications and U.K. telecom BT, both of whom have co-marketing agreements with MSN but still charge customers an extra fee for the MSN client.

Resources

MSN Premium and Plus will be available around the end of 2003 in 33 countries (MSN 8 is only available in seven countries). Existing MSN 8 customers will be prompted to download the MSN Premium client at log-on, or will be mailed CD-ROMs with the client. New customers will be able to get MSN Premium or MSN Plus via download from the MSN Web site and on CD-ROM in retail outlets (such as Best Buy).

For a preview of MSN Premium, see join.msn.com/?page=dept/preview&pgmarket=en-usz.

For background on the MSN Broadband Marketplace, see "MSN Broadband Marketplace" on page 20 of the Sept. 2003 Update.