MSN to End $400 Rebate Offer

How much is too much to pay for acquiring new subscribers for Internet services?

by ISP-Planet Staff [February 6, 2001]

Microsoft Corp. said late last week it would stop offering a $400 rebate to new subscribers of its MSN Internet access service. Instead, Microsoft will offer new PC buyers one free year of MSN access—an incentive which the Seattle-based firm figures will lure at least half a million new subscribers to MSN each quarter

Microsoft has been using the rebate to draw new users to its service over rivals like AOL Time Warner's industry leading America Online service, which boasts some 27 worldwide million subscribers to MSN's 4 million.

MSN said it added 500,000 new subscribers in the last three months of last year, and the firm believes it will continue on the same pace of new customer acquisition for the next three quarters.

MSN Internet service is $21.95 a month. New subscribers opting to take its $400 rebate would pay a total sum of $790.20 to MSN during the full term of service. Essentially, MSN would not turn one dime of profit from a rebated subscriber until the 19th month of service. While the incentive was designed to rapidly build its user base, some analysts say the deal put too much pressure on MSN's pocketbook.

Analysts had expected a rebate change since Microsoft's quarterly earnings report last month, in which Chief Financial Officer John Connors indicated that the offer was in effect too popular and was eating into its bottom line.

A $400 customer acquisition cost is pretty high, even for the Microsoft offshoot. The new offer for a year of free access means that MSN accelerates its return-on-investment by nearly six months, after the first year of free service has expired. MSN's revised cost of acquiring new subscribers is adjusted down to about $264 per user, or a little more than 34 percent less that the rebate scheme spent.

Of course, these customer acquisition figures do not reflect advertising fees. Microsoft kicked-off a $150 million advertising campaign for its MSN service at this time last year.

Even if MSN adds a half-million new users each quarter, it needs to add about 7 million total users to recoup advertising expenditures. After accounting for a free year of service, MSN needs to keep the acquired subscribers in its customer base for about 41-months before advertising fees are recouped. In the Internet access industry, three years is a long haul to profitability.

The $400 rebate for subscribers who signed a three-year contract will end in March. The new offer expands to other PC makers a deal initially given only Dell Computer buyers.

However, customers that purchase Compaq Computer's stripped-down Internet appliance could still get the $400 rebate when they opt for a three-year service contract with MSN. But MSN's service plan is also a stripped-down version of its services, delivering only Web and e-mail access on the inexpensive device.

The offers, combined with a massive marketing campaign, have helped MSN finally stand on own after years of missteps and blunders caused it to fall farther and farther behind AOL. But MSN has done so at a price most Internet service providers can not afford to rival.

—End