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Microsoft Moves to Rule On-Line Sales By David Bank 06/05/1997 But he rarely acknowledges that Microsoft Corp. is preparing to become a new middleman, taking a cut of the action in return for bringing together buyers and sellers on the World Wide Web. The centerpiece of Microsoft's move to dominate electronic commerce is Sidewalk , a series of local arts, entertainment and recreation guides that Microsoft launched on the Web last month for New York and in April for Seattle, to be followed by sites for eight other cities by year end. The company has hired editors and reporters to tailor each Sidewalk site to local tastes. New York Sidewalk , for example, contains subway directions for all its events, and Seattle Sidewalk allows users to search for restaurants using such local criteria as "boat accessible." But Sidewalk is just part of a much larger plan. According to a detailed Microsoft strategy memo and interviews with key executives, Microsoft wants to make each Sidewalk site a port of entry into an array of commercial sites that already includes Expedia for travel services, Carpoint for automobile sales, Cinemania for movies and Music Central for compact disks. Microsoft will soon add real-estate listings, classified advertising and consumer guides that combine Yellow Page style listings with product reviews and promotions. (Microsoft's on-line financial services are in a separate division.) The targets of these on-line services are vast. According to the memo, prepared in December as part of a three-year planning process, Microsoft plans to win a major share not only of the $66 billion local advertising market but also of sales and distribution charges in the markets for airline tickets ($100 billion), automobile sales ($334 billion) and retail goods ($1.2 trillion). "We think there's a pot of gold here," says Pete Higgins , group vice president in charge of Microsoft's Interactive Media Group. "As we get to the turn of the century and beyond, we see this being a multibillion-dollar business." Like other information publishers, Microsoft hopes to win on-line advertising. But the memo provides the first details of a more far-reaching goal, a stream of transaction fees to supplement revenue from maturing software-upgrade sales. Nathan Myrhvold, Microsoft's chief technology officer, confirms that Microsoft hopes to get a "vig," or vigorish, on every transaction over the Internet that uses Microsoft's technology, though he says in some cases Microsoft's share could come from a one-time software licensing fee. (Vigorish is a slang term used by bookmakers that means, roughly, the profit made for bringing bettors together.) To win such fees, the memo says, Microsoft will offer consumers both electronic information and the means to act on it. "We are challenging old and established businesses like newspapers, travel agencies, automobile dealers, entertainment guides, travel guides, Yellow Page directories, magazines and over time many other areas," as well as other on-line services, the Microsoft memo says. "We must devise ways of working with them or winning away their customers and revenue streams." Already, Expedia, which books airline, hotel and car-rental reservations, is selling more than $1 million of tickets and travel services each week and is one of the three largest on-line travel agencies. Investor, which allows users to place trades and track their portfolios, is nearly profitable, according to recent statements by Mr. Gates. Traditional retailers, particularly in travel, autos and financial services, are already feeling pressure from a variety of electronic competitors, which are able to cut sales and distribution costs by half or more. Analysts estimate about 15% of new-car buyers do their research on-line and as many as 2% make their purchases from dealers they find on the Net. On-line travel is expected to grow from $827 million, or 0.4% of total travel revenue, this year to $8.9 billion, or 8.2% of the total, in 2002, according to Jupiter Communications, a New York market-research firm. But while others are looking at the same opportunity, Microsoft, with its presence on nearly every personal computer and $9 billion in cash, appears to be several steps ahead in its ability to integrate its offerings, enlist partners and undercut competitors both on- and off-line. Microsoft's advantages include a vast repository of information and the ability, with a single log-on, to call up a user's profile of personal preferences, whether the user is choosing a restaurant in Manhattan using Sidewalk or booking a trip to Paris using Expedia. The release of a new version of Microsoft's Web browser, Internet Explorer, this summer will further boost the visibility of the sites by placing them on the main screen of many PCs. Other high-tech executives are sounding the alarm. In a thinly veiled reference during a speech to analysts, Louis Gerstner, chairman of International Business Machines Corp., chided unnamed technology companies "that have decided they want to be in the newspaper business and the travel business and the banking business." Mr. Gates plays down the potential for conflict. Speaking to a convention of newspaper publishers in Chicago on April 29, he advised them not to get "overly paranoid," assuring them his company was a partner not a predator. "We're not doing local news, we're not doing classifieds," he said. Nonetheless, Mr. Higgins confirmed in a subsequent interview that Microsoft is indeed exploring selling classified advertising and has hired local reporters and editors for its Sidewalk sites. In any case, newspapers are girding for battle. Mr. Gates is "absolutely interested in newspapers' franchise in local areas," says Fred Tuccillo, director of new media at Newsday, a unit of Times-Mirror Corp. that is going head to head with Sidewalk in the New York area. But newspapers aren't writing big checks for their on-line efforts, and Microsoft is spending more than $200 million this year for what it calls "interactive service media." Expedia illustrates how Microsoft is reshaping the economics of the markets it's entering. Last year the company established itself as a travel agency and negotiated deals with major airlines to sell tickets for about half the standard travelagency commission rate, says John Neilson, who wrote the December memo and is vice president of Microsoft's Interactive Service Media division. Microsoft's on-line competitors decry the lowball pricing. "They really have drained the pool," says Ken Orton, president of Preview Travel Inc., another major on-line travel agency. "They went out intentionally to buy significant market share by reducing the amount of revenues their competitors could generate." Partners worry about competition, too. Microsoft enlisted Auto-By-Tel Corp. for its Carpoint site to let buyers complete purchases from new-car dealers. Auto-By Tel agreed to pay Microsoft to feed Carpoint users into an extensive network of auto dealers, who provide consumers with no-haggle offers. Auto-By-Tel takes a monthly membership fee from the dealers of between $500 and $1,500. Now, Microsoft is replicating such a dealer network on its own, says Mr. Neilson. We and Auto-By-Tel "will be doing the same things," he says. Last month, Peter Ellis, Auto-By-Tel's president and chief executive, moved to end the partnership. "What seemed to be mutually beneficial 14 months ago now appears to be less so," Mr. Ellis wrote in a letter to Mr. Neilson. Similarly, Christos Cotsakos, president and chief executive officer of E*Trade Group Inc., predicts Microsoft, now a partner, will eventually become a competitor. E*Trade pays Microsoft to bring customers to its on-line stock brokerage service through Microsoft's Investor Web site but keeps most of the $14.95 fee on each trade. Mr. Cotsakos figures Microsoft will want to collect those fees itself. "They learn, they assimilate, they copy," says Mr. Cotsakos. "Once they get done with all the other blips on the radar screen, you become the blip." This summer, Microsoft will introduce national used-car classified listings, a pilot project for a larger effort in classified advertising. Next year, Sidewalk will offer local "consumer guides" and possibly real-estate listings. The internal memo makes clear that Microsoft has no intention of letting up: "If we get our vision right and execute better than anyone else, we will radically change the way individuals make decisions in their lives. We will also radically change the way marketers of all types sell to their customers. We must be aggressive." Copyright © 1999 Dow Jones & Company, Inc. All Rights
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