• Chart: A Multitude of E-Mail Options

An advertising-supported e-mail client will give users offline access to Windows Live Mail (the planned successor to Hotmail), as well as access to other e-mail accounts, RDF Site Summary (RSS) feeds, and other features. The client will give MSN another method to display advertisements to users, and it could pave the way for other advertising-supported consumer software from Microsoft. However, the client adds to an already confusing array of e-mail clients and services from Microsoft and could foretell changes or cancellations for some of these other products.

Advertising-Supported Client

In Feb. 2006, MSN launched a limited beta test for a desktop e-mail application code-named Windows Live Mail Desktop (WLMD). Expected to be released in late 2006 as a free download, WLMD's main features will be the ability to access Windows Live Mail without a browser and to store messages offline. WLMD will also include other common e-mail features, such as POP3 and IMAP access, multiple accounts, and a spam filter, as well as relatively unique features, such as RSS feed management and the ability to automatically resize image files before sending.

The client will also show advertising, but Microsoft has not decided how it will display advertisements when the user is offline: it might simply display the last advertisement downloaded to the client, or it might refresh the advertisement from a local cache.

WLMD will be the first Microsoft e-mail product to combine three features: a free e-mail client, an advertising-based revenue model, and offline access to stored messages. For WLMD to succeed, consumers will have to prove willing to view advertisements in a desktop e-mail client, and MSN will have to make up for lost e-mail subscription revenue (from services such as Hotmail Plus and Outlook Live) through advertising sales. MSN is taking this risk because its current slate of subscription services, while increasing in both users and revenue, are not offsetting declines in its dial-up ISP business. Although subscribers to MSN services other than Internet access increased from 4.5 million to 6.4 million in the year ending June 30, 2005, these services and transaction revenue (such as music downloads) added only US$84 million in revenue from the prior year. MSN Internet Access, meanwhile, lost 1.6 million customers for a decline of US$219 million.

WLMD could also help MSN compete more effectively against Web-based e-mail services from other companies, particularly Google (Gmail) and Yahoo Mail. Microsoft has more experience building desktop e-mail clients and can reuse code from them, whereas its competitors would be starting from scratch. (WLMD is based on Outlook Express.)

If WLMD succeeds, Microsoft might release other advertising-supported software. The most likely candidates are consumer software packages that already have an online component, such as Encarta and Money. WLMD could also spell the beginning of the end for free clients, such as Outlook Express, that offer a comprehensive feature set but don't generate any incremental revenue for Microsoft.

What Happens To...?

Despite the significant overlap among WLMD and Microsoft's other e-mail clients and services, the company says it will continue to offer all of them for the foreseeable future. However, business considerations mean that some have a better chance of survival than others. (For a chart comparing all of Microsoft's e-mail offerings, see "A Multitude of E-Mail Options".)

Hotmail Plus. This subscription service is available from MSN for US$20 per year. Its main benefit, 2GB of e-mail storage, will be available for free in Windows Live Mail. Its secondary benefit, access to Web-based e-mail from a desktop client (Outlook or Outlook Express), will be available for free with WLMD. It's not clear that consumers will pay US$20 a year merely to avoid advertisements, so changes in branding, pricing, and features are likely. One possibility: Microsoft could rebrand Hotmail Plus with the Windows Live name, then change the service to allow advertisement-free access to a wide variety of Windows Live services, including Mail, Messenger, Search, and Spaces.

Outlook. Outlook will continue to be Microsoft's preferred e-mail client and personal information manager for businesses as well as the main focus of Microsoft's e-mail client development. It will also continue to ship with most future versions of Office. However, Microsoft appears to be downplaying Outlook as a consumer product: Office 2007 Home and Student Edition, a low-cost version targeted at consumers, will lack Outlook, while past equivalents of Office included it.

Outlook Live. This subscription service from MSN costs US$50 per year. Like Hotmail Plus, it allows consumers to access their Hotmail accounts from Outlook. Unlike Hotmail Plus, it also includes a copy of the Outlook client.

Given that Microsoft is shifting emphasis away from Outlook as a consumer e-mail client, the Outlook Live service may be discontinued or changed. One possibility: MSN could offer Windows Live Mail connectivity for business users who already have Outlook, but no longer ship the Outlook client with that service. (Today, Outlook users cannot access Hotmail without paying a subscription fee. For details, see "Outlook Access to Hotmail: Subscribers Only" on page 24 of the Nov. 2004 Update.)

Outlook Express. The next version of Outlook Express will be renamed Windows Mail and will ship as part of Windows Vista (the next version of Windows, expected in late 2006). It will have no relationship with WLMD—users will have to download WLMD separately and won't be able to transfer data between the two clients.

Microsoft has good business reasons to ship a free e-mail client with Windows. E-mail is the most popular use of a computer, and when consumers buy a new PC, they want to get e-mail without having to buy or download additional software. If Microsoft did not include an e-mail client with Windows, ISPs might bundle alternate e-mail clients with their startup kits, and OEMs might include these clients on new PCs. These competitors might eventually be able to use the popularity of their e-mail clients to begin competing with Microsoft in other areas, such as business applications.

At the same time, Microsoft earns no incremental revenue from Outlook Express (or Windows Mail). So in the version of Windows after Vista, the company might be tempted to replace its current client with WLMD, and thereby earn extra revenue from advertising.