IS MSN ON THE BLOCK?

By MICHAEL KRANTZ

When the Microsoft Network opened its virtual doors in August 1995, most people assumed that the new online service would swamp all comers. MSN put the Internet just a mouse click away on Microsoft's ubiquitous Windows 95 operating system, which seemed to guarantee that the company whose software dominated the desktop would soon dominate the Net as well. How on earth, or in cyberspace, could anyone compete?

Imagine, then, the, er, disappointment that must have been building in chairman Bill Gates' office as membership in his main competitor, America Online, soared to 9 million, while MSN's stalled out at 2.6 million. Making matters worse, MSN has hemorrhaged money--according to one analyst, up to $250 million as of last year. By last week rumors were flying through Wall Street that Gates was ready to put his online flagship on the block. A Web journal, TheStreet.com even posted a suggested retail price--$1 billion, about what AOL paid for CompuServe--and quoted an unnamed Microsoft executive to the effect that the sell-off was set to go within six months.

Microsoft treated the reports with practiced scorn. "They're just false," said spokesman Greg Shaw. "They probably came from the same source that said we were buying CBS." As proof that the rumors are baseless, company insiders pointed to several upcoming MSN initiatives, including the release this week of a new upgrade, MSN 2.5, that offers better E-mail service and smoother integration with Microsoft's latest Web browser, Internet Explorer 4.0.

But MSN has struggled since the day it was born. It was conceived as a proprietary online service, a la AOL, then hastily recast just before launch as a Web service much of whose programming was available only to subscribers for a fee. Since then, the tight-knit community of Internet content developers--on whom MSN is dependent for its programming--has been retailing stories of editorial confusion, marketing failures and internal reorganizations.

To its credit, Microsoft has embarked upon what is probably the Web's most ambitious content-development program to date, creating offerings ranging from family fare (such as Click & Clack's wacky Car Talk site) to inside-the-Beltway political analysis (Michael Kinsley's highbrow journal Slate). But its haste to build an online empire has left Microsoft throwing lucrative contracts at pretty much any Web developer who knew how to work a mouse, hoping it would create something--anything--for MSN. A Web novice tells of walking into a meeting to pitch ideas and being asked instead for his company's business plan. "I walked out and thought, 'That was weird,'" he recalls. "I'd never been to a meeting where they asked, essentially, 'Are you guys for sale?'"

But with few exceptions--the popular Sidewalk and Internet Gaming Zone sites chief among them--MSN has failed to attract a mass audience. MSN executives have been shocked by how rarely customers stray beyond plain-vanilla E-mail and online access into the premium programming that was supposed to be the network's drawing card. According to an internal memo distributed last spring, the pay area's most popular channel at the time, Daily Disney Blast, was attracting a dismal 6,000 hits a week.

Such numbers aren't exactly good for morale. Indeed, one source close to Microsoft describes MSN today as filled with employees who are feeling whipped, uncertain of their project's mission and perplexed by hearing it referred to in some quarters as already a failure.

What to do? Despite its riches, Microsoft, like everyone else, is still groping for ways to make money online; the likeliest strategy will be to move MSN's acres of premium content from behind the pay service's forbidding walls to the free side, where their way would be paid not by subscriber fees but by advertising and online sales. A wholesale shift could come next January, when MSN plans to unveil its latest revamp.

In fact, the migration is already under way. Early next month, say MSN sources, four new content areas will land on the free site, including two established MSN channels, the women's community Underwire and the search site One Click Away, and two new ones: a job-search program called Get Working and Mauny's Kitchen, a cooking area with Seattle-based NPR correspondent Mauny Kaseburg as host.

There had better be more where that came from. Chairman Gates, a fearsome poker player, finds himself in the rare position of fighting for a very big pot with a rather mediocre hand. But he didn't become the richest man in America by folding after the first round. MSN is more likely to spend a few quiet months regrouping. Then look for the big guy to double down.

--With reporting by David S. Jackson/San Francisco

With reporting by David S. Jackson/San Francisco