MSN Now A House Divided

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A perennial dog for years when it comes to profitability, Microsoft's MSN is splitting into two divisions, according to a report in Reuters.

It's essentially a split between its communications services (dial up and DSL , Hotmail, Passport and MSN Messenger) and its information services (MSN portal, search function and e-commerce) an area Microsoft is more comfortable with and where the Redmond, Wash., company sees future growth.

According to the report Yusuf Mehdi will take over operations on the software side while Blake Irving will head the communications side. Both will report to MSN's senior vice president in charge of MSN, David Cole.

In its quarter ending March 31, MSN lost $92 million, and only accounted for eight percent of Microsoft's total sales numbers.

MSN was created in 1995 to counter the threat of AOL (the ISP formerly known as AOL Time Warner and now known as a division of Time Warner) and its millions of dial up Internet subscribers. The company also grew a robust online portal at the same time, a marketplace and community area built along similar lines as AOL's own portal.

While the ISP business did well initially, MSN came nowhere near the numbers AOL had under its belt. And as Americans turn more and more to the possibilities of broadband, MSN found it could not keep the profit margins it needed with DSL or cable. Despite a $300 million marketing campaign last year for MSN 8.0, the division lost 400,000 customers.

Today, MSN sells a branded broadband service called MSN Premium through the telephone and cable companies but doesn't market as much as in the past.

It's online presence, however, is doing very well. Internet advertising, after hitting its nadir during the dot-bust period seems to be making a rebound and officials boast its ad sales are doing better than those of rival portal Yahoo

In August, Microsoft dumped LookSmart and looked at building its own search engine to rival the success of Google; in the interim, Overtu re is providing paid search listings for MSN's portal until 2005.

Reportedly, Microsoft has hired Overture's former chief technology office, Paul Ryan, to head up Microsoft's search engine development.

At nearly the same time, it started charging fees for some of its online chat rooms while many dumping others, in what many saw as a cost-cutting measure.

The signs seem to point to increased confidence in the viability of MSN as an online portal and decreased faith in MSN as an ISP. Does this mean the split is the precursor to selling off its dial up and broadband customers to another provider?

Earlier this year, research outfit IDC predicted that this is exactly what's going to happen.

An ironic twist would involve AOL, a company that experience a lot of growth through acquisition, buying up MSN's customer base.