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A New Online Force

The online services market will change overnight when Microsoft Network debuts

By Clinton Wilder and Bruce Caldwell
Issue: 11/21/94

Staking out another big slice of territory in electronic commerce, Microsoft Corp. chairman and CEO Bill Gates will finally take the wraps off his company's much-anticipated online service at the Comdex trade show in Las Vegas Nov. 14 to 18. The service, called Microsoft Network, could reshape the online services industry and accelerate the process of businesses reaching their customers electronically.

Microsoft Network "ushers in a new era in which all businesses will be online and interconnected w ith each other," says Jesse Berst, editorial director of Windows Watcher, a newsletter in Redmond, Wash. "Microsoft's entry will force some standardization, bring down prices, and add services."

Microsoft's entry into online services should change that market almost overnight. Windows 95, the next versions of Windows, will feature close integration with Microsoft Network. Microsoft's installed base of U.S. Windows users is larger than the number of customers for all the U.S. online services; analysts say Microsoft could ship 6 million copies of Windows 95 next year.

Intuit, Visa Deals
The Microsoft Network announcement comes one month after Microsoft's spectacular $1.5-billion takeover of Intuit Software Inc. , maker of the Quicken personal-finance software. Microsoft plans to leverage Quicken's large installed base and online links to financial companies in its quest to be a major player in electronic commerce. Microsoft took another big step in that direc tion on Nov. 8, when it announced a deal with Visa International to make online credit-card transactions more secure.

Moving ahead on the Internet front, Microsoft also will offer an Internet connection in its Windows 95 operating system, due out mid-1995. That should shift the growth of commercial activity on the Net into a higher gear. "An Internet gateway from a company like Microsoft will cause Net use to explode," says Jim Clark, the former chairman of Silicon Graphics Inc. who now heads Mosaic Communications Corp, an Internet access tools startup in Mountain View, Calif.

Powerhouse Contender
These initiatives show that Microsoft wants to be an online powerhouse. Why? Savvy businesses are racing to establish an online presence. That trend is reshaping worldwide commerce by allowing businesses-or even single departments-to reach millions of customers cheaply and easily. "A wired society takes away the advantage of owning the distribution channels," says Joe Schoendorf, a principal in the San Francisco office of Accel Partners, a New York-based venture capital firm.

Some businesses already have jumped in. J.P. Morgan &Co.'s new Risk Metrics financial service is available on CompuServe and the Internet. And both United Parcel Service (UPS) in Atlanta and its archrival Federal Express Corp. in Memphis, Tenn., announced on Nov. 2 that within a month they will offer their order-entry software to their customers through online services.

The Microsoft online service, formerly code-named Marvel, enters the market at a time when large companies are stepping up information technology (IT) spending on applications and technologies that interact with, sell to, or automate their customers' systems. Forrester Research Inc. in Cambridge, Mass., estimates IT spending on customer connections will balloon from 7% of the IT pie this year to 45% in 2002.

That trend is fueling growth in a number of touch-the-customer technologies, including interactive voice re sponse systems, traditional electronic data interchange (EDI), multimedia kiosks, and online transaction systems. Within the next three years more retail banking will be handled electronically than at branch offices, according to a report released Nov. 9 by Ernst &Young and the American Bankers Association.

One banking IT executive shifting funds to customer interaction systems is Rick Sellers, president of the operations and technology division of Huntington Bancshares Inc. in Columbus, Ohio. "There is no way I am going to differentiate myself by which checking account system I run on my mainframe," Sellers declares.

Another significant development: the explosive growth of business on the Internet. Nearly 800 businesses have home pages on the Internet's World Wide Web (WWW), up from only a handful earlier in the year.

Lip Service
That's fine with corporate online users such as David Sims, director of IT at Schlumberger Ltd.'s office in Sugar Land, Texas. Schlumberger use s the Internet for communications but also uses the major commercial online services according to users' preferences. Sims is looking forward to Microsoft Network. "The more information online, the better," he says.

Online providers, despite paying lip service that they welcome the competition, aren't so happy. Top executives of America Online (AOL), Prodigy, and CompuServe express concern that Microsoft could tilt the playing field by restricting access from Windows 95 to their services, or by subsidizing cheap usage rates with profits from its near-monopoly in operating systems. "As a monopoly, Microsoft is obligated to show some restraint," warns Steve Case, AOL president and CEO. "Monopolies that didn't do that had restraints imposed upon them."

AOL made a competitive counterstrike of its own Nov. 9, acquiring two Internet access providers: BookLink Technologies Inc. and NaviSoft Inc. The move will give AOL users and content providers stronger and richer links to the Internet. AOL also will offer an "Internet only" service without AOL content.

Observers say Microsoft Network will attract scrutiny from the Justice Department's antitrust division, which is probing Microsoft's acquisition of Intuit. The online service "is certainly something they will look at, if for no other reason than Microsoft's penchant for going to the edge and sometimes crossing it," says Steven Newborn, a partner in the Washington law office of Rogers &Wells and former director of litigation for the Federal Trade Commission.

There will be plenty of debate about whether the Justice Department can slow down Microsoft. But nothing, it appears, can stop the wave of businesses moving online, and thus, ever closer to their customers.

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