Microsoft: If It Doesn't Pay, It Doesn't Play

Back in October 1996, when Microsoft was trumpeting its intent to turn the Internet into a mass entertainment medium, the company pointed to its new state-of-the-art multimedia development studio called the Digital Backlot. Microsoft also poured millions of dollars into a new online network for "original new media productions," thus turning that part of its empire from a software company into a media company. The experiment has been troubled from the beginning, as it has proven to be one of the few chronically money-losing propositions Microsoft has ever underwritten. By February, some 100 Microsoft Network contractors were sent packing when their "shows" were canceled, and now, as the experiment approaches its first anniversary, MSN is shutting down most of its content-creating operations. As one MSN producer puts it, Microsoft let out a $400 million leash last year to "pioneer" the creation of online content. Now the company is jerking back the leash. The cutbacks are coming as part of a reorganization/upgrade of the Microsoft Network, dubbed "MSN 2.5" and code-named "Metro," due to roll out by this Christmas. The upgrade began last week, when MSN tripled its capacity to handle network traffic. Among the benefits: a replacement for MSN's troubled e-mail server, a cut by half in the time it takes to download the start-up software, and easier navigation through the Microsoft Network."One of the things we've learned over the past year," explains MSN group project manager Jessica Ostrow, "is that people want Internet access, e-mail accounts, and even software technology to help them get started." Another thing Microsoft seems to have learned is that its heavily hyped original programming doesn't draw viewers and readers. Last year, 75 percent of MSN's content was developed in-house. Ostrow says that after the upgrade, Microsoft will be producing only 15 percent of MSN's content. Ostrow won't comment on which specific MSN programs will get the ax, but Variety reported two weeks ago that the film site Cinemania is to be canceled, with surviving critics and editors transferred to the Microsoft Sidewalk team, and while Microsoft denies that the site is shutting down, Cinemania film critic Sheila Benson says that the site's fate is "horrifying, in human terms." Rumors also persist that Music Central, another MSN site that channels content to Sidewalk, is to be canceled, that Mint, an MSN arts and culture fanzine developed with help from the Beastie Boys, will not be renewed, and that history site Retrospect 360 will go into syndication.In their places, MSN is bringing in "licensed content" developed elsewhere. Slated to come on line are Disney's Daily Blast, Hard Rock Live from VH-1 and Pontiac Sunbird, and a boomer-targeted site titled Forever Cool. Meanwhile, the remaining MSN in-house producers are in what one insider calls "justification mode." "Before, it was like a new venture: 'Let's do it because it's cool,'" this source says. "Now, everyone's nervous: 'How do we increase hit count or justify being here by driving traffic to a moneymaking site?'"In other words, the bottom line is back. Michael Goff, recruited last year to lead Microsoft's Sidewalk, then moved last month to MSN as its new editorial director, makes it clear that the Network has to become more of a business and less of an experiment. "My job is to make media business work," he said last week. "Not to be totally hardcore about it, but this is not art -- it's commerce." That message was made painfully clear during July's special Interactive Media Group powwow, where, according to Kim Brown of Mungo Park, one of MSN's few surviving titles, "It's been made clear that everyone wants to 'win.' And winning is a bottom-line game. A year into it, there's definitely a much greater bottom-line orientation."Another insider, who requested anonymity, puts it more bluntly: Projects now either have to prove profitable or "have some serious upstairs pull." (Slate, for example, doesn't make money and suffers from less-than-expected circulation, but is edited by executive darling Michael Kinsley.) Everyone has always known that cyberspace is a money pit. Last week, Mark Kvamme, CEO of interactive industry giant CKS Group, predicted (in an MSNBC interview, of all places) that mass-market online advertising is still at least 10 years off. But many believed that Microsoft's deep pockets and early-to-market strategy would keep the company investing in entertainment properties for years. When MSN launched last year, Microsoft CEO Bill Gates insisted, "We have enough in the bank, and money comes in every day. So we can afford to do these things on a fairly long time scale." Thus, while competitors like America Online eschewed original content development and scrambled to give subscribers online access, Microsoft hired Kinsley, Goff, and others in a massive content- creation effort. The media widely reported, as The Seattle Times put it in June, that "the communications side of the Internet is far less important strategically for Microsoft than the content." In fact, it appears from Metro's emphasis on distribution over content production that the opposite is true. Despite the changes afoot, Goff insists that "the criteria for these shows is the same as it's always been. There has to be an audience and there has to be a business model ... We're always looking for ways to leverage what resources we have -- that's the whole point. We have some of the best services on the Internet and we should network them together." Indeed, MSN's best and most financially viable shows have been Expedia, an online travel agent, and Investor, a personal finance site that tracks users' portfolios. Both earn money directly, as middlemen in airline tickets sales and stock market trades, and certain other MSN shows survive by funneling readers to these transaction sites. The adventure travel site, Mungo Park, for example, is now "Expedia's Mungo Park," with ready links to the travel agent. Re-runs of Retrospect 360 will drive traffic to Microsoft's Encarta site, where users can buy that wildly popular encyclopedia on CD-ROM.Even more telling changes will come September 30 when Microsoft releases Internet Explorer 4.0, a Web browser in which the television channel-surfing metaphor will be built in. As part of a deal whose terms have not been disclosed, Microsoft will provide instant access through the browser's channels to a content package produced by a 200-provider alliance that includes Time Warner, The New York Times, ESPN, National Geographic, and MTV. Once competitors with Microsoft producers, they now are productions on an IE 4.0 platform that threatens to make MSN irrelevant. Add all that up, and throw in Microsoft's recent investments in Comcast and Web TV, its billion-dollar joint venture with NBC, and its alliances with Time Warner and GTE, and it is clear that the company is more interested in lucrative distribution networks than money-losing content development. Although Ostrow and Goff insist that the current shift is not particularly dramatic -- "We're still going to create cutting-edge, unique, original programming," says Ostrow -- it would appear that the net effect of all these changes is the beginning of the end for MSN as a content producer. The company, after all, has never been particularly foolhardy or philanthropic. Or, as Ostrow also says, "You know -- we're Microsoft."

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