MSN's Turnabout

One of the surprise nuggets revealed last month during Microsoft’s fiscal 2004 first quarter earnings announcement: MSN’s profitability. Yesterday, in a routine filing with the SEC, here, Microsoft revealed just how much: $58 million on revenue of $491 million.

MSN’s turnabout is no small feat, operationally, financially or psychologically.

The poor folks at MSN have taken ribbing from other employees for many years, as groups like Office and Windows--the money makers--carried MSN’s weight. Consider also that MSN launched with Windows 95 in August 1995 and had been, until the quarter just passed, in the red. Profitability lifts some of the psychological burden from the MSN group.

Financially, MSN’s profitability is a turning point for all Microsoft. In July 2002, Microsoft started operating as seven operating units: Client (Windows); Server and Tools (Server System and development software); Information Worker (Office System); Business Solutions (Great Plains, MS CRM, Navision); MSN; Mobile and Embedded Devices (Pocket PC, Smartphone, Windows CE); and Home and Entertainment (consumer products). But, only three groups--Client, Information Worker and Server and Tools--made any money. The other four groups lost money for Microsoft. MSN’s profitability tips the scales, so to speak, making four of the seven groups profitable.

Operationally, MSN’s success shows that maybe, just maybe, Microsoft can be successful in the consumer market. From one perspective, Microsoft is successful there because so many people run Windows at home. The business market pays the bills, though, as that’s where Windows and Office sales are overwhelmingly stronger.

The characteristics Microsoft’s other consumer groups could adopt from MSN: Perseverance and flexibility. The latter trait is the key. MSN underwent some mighty big makeovers during its eight years of existence. Remember, that MSN started out as a dial-up Internet Service Provider like AOL. Later on, MSN shifted much of its focus to the Web, building the MSN.com family of Web sites. During that time, MSN experimented with the likes of Expedia and MSN Autos as the Microsoft division looked for ways to make money, whether from fees or advertising, off of consumer services.

Late 2002 brought yet another makeover, as MSN started closing down ala carte, for-fee services and dumping them into the paid service. MSN also drew on Microsoft’s software development heritage, dramatically bulking up the MSN client with better spam filtering and parental controls, photo-editing and money-management capabilities and improved e-mail and calendaring, among other features.

Microsoft is testing the next version of MSN now, as the service prepares for yet another makeover. MSN is exiting the ISP business as Microsoft looks to re-position the bulked-up software client as a front-end to cable and DSL broadband access. Along with this change, MSN has been tightening up operations and so lowering expenses, which declined 25 percent during the quarter, according to yesterday’s SEC filing.

At the same time, MSN.com drives massive advertising revenue, which grew 51 percent in the quarter, offsetting a 6 percent decline in subscriber revenues.

Still, MSN isn’t out of the woods yet. One quarter of profitability in eights years is a milestone, but only consistent profits really matter. Out of that $58 million profit, $48 million came from a one-time tax refund, according to the SEC filing. So, the folks at MSN still have lots of work ahead if they want the second quarter to be a repeat performance of the first.

Posted by Joe Wilcox at November 14, 2003 09:46 AM