Will MSNBC's latest ratings erase Microsoft's unhappiness over its joint venture with NBC? Not likely.

The No. 3 cable news network, under the microscope ever since launching its talk-happy format headlined by Phil Donahue in July, last week released numbers it said demonstrated ?significant progress.? MSNBC's prime-time audience is up 16%, and Donahue was doing 20% better than what preceded it in the 8 p.m. time slot. The network still trails rivals Fox News Channel and CNN.

But MSNBC's periodic uncertainty over whether Bill Gates wants to pull out of the venture isn't about programming or even ratings. An MSNBC spokesperson denies Microsoft is unhappy at all saying ?they have been great supporters of the new format.?

But senior executives at MSNBC acknowledge that Gates has been upset for some time. The fact is that when NBC parent General Electric and Microsoft got together to create MSNBC, NBC CEO Bob Wright and then-NBC Cable president Tom Rogers got the best of the deal. (Rogers is now chairman and CEO of Primedia, owner of Cable World.) And it's something that comes up whenever executives of the two companies get together. Publicly, Microsoft CEO Steve Ballmer has said that if he had to do it over, Microsoft wouldn't have done MSNBC.

But no matter how often or how publicly Microsoft complains about the terms of the deal, former and current MSNBC execs say there's no way out. MSNBC staffers note that the partnership is a nearly unbreakable 99-year deal that would take a major breach of contract to break. ?All they can do is be kvetchy partners,? is how one MSNBC insider puts it.

?Finances were a big issue in the early days,? said Merrill Brown, who left his post as editor in chief of MSNBC.com earlier this year and is now an SVP at RealNetworks. ?Mainly the anxiety was on the Microsoft end, and basically my understanding is that Microsoft made its peace with it. I think the license fees that went between the companies were surely a bone of contention.?

?They got suckered,? said Andrew Tyndall, whose Tyndall Report follows TV news.

To launch MSNBC, Microsoft put up more than $500 million. On top of agreeing to help cover the fledgling channel's deficits, Microsoft agreed to pay NBC a big fat license fee of almost $30 million a year. So no matter how well the cable network fares, Microsoft is writing a check. And if Gates asks to change the terms, Wright can simply look at the revenue the deal delivers to NBC and reply ?no way.?

Scott Moore, GM of MSN News and Information, declined to comment on the terms of the agreement, but said ?we're very happy with the relationship and totally supportive of what NBC's doing with cable. Obviously we're disappointed with the ratings, but I think the new lineup that they've put in place is going to take a little while to get its footing.?

Microsoft got digital video rights to NBC News programming, including its vast archives, which is a tent pole in its plans to build its MSN networks and a source for an infinite variety of on-demand programming. But the online world has become a cash generator much more slowly than anticipated.

?MSNBC is the news provider for MSN. After e-mail, news is the No. 1 application for Internet users,? MSN's Moore said. ?MSNBC is really a crown jewel for MSN, and we place a very large value on the NBC partnership from the standpoint of the brand. I think that's only going to get more important as we enter a more broadly deployed broadband audience.?

One source said that Microsoft is losing $25 to $30 million a year on MSNBC.com.

Brown said the deal between the companies is complex. ?The two companies are intimately married together, and the process of unwinding it would be difficult, painful and not particularly strategic,? he said.

MSNBC insiders say the cable channel is running close to break-even and should be profitable in 2003.

With the success of Fox News and the staying power of CNN, is there even support for three all-news channels? David Zazlav, head of NBC Cable, has built a strong affiliate base, giving the channel 77 million subs, and doing news helps NBC amortize $80 to $200 million in news-gathering costs.

Nevertheless, the rumor mill percolates with word that NBC wants to use the channel to repurpose entertainment programming. That strategy may not make financial sense. Also, it would likely face opposition from cable operators, who would have to consent to the format change and who voiced complaints when Disney acquired Fox Family with the intention of rerunning ABC shows instead of original programming.

How premature is this discussion? ?I wish everything was doing better, but I'm very realistic about how slow a build these things are, particularly when you have the kind of limited platform that we do on cable,? said Jerry Nachman, editor in chief at MSNBC and host of his own show.

But even Donahue knows his days could be numbered. While a guest on Nachman's show last month, he said: ?If we don't make noise in six months, it's going to be hard for me to tell my family that I wasn't treated unfairly.?

THE NEXT QUESTION:

• Is the Internet truly a medium or is it simply a means of distribution?
• Is there enough viewer and advertiser demand to sustain the five major news/talk channels over the long term?

Back to this issue