*Exclusive* Microsoft Getting Ready to Sell MSN

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Is

Bill Gates

ready to admit failure? Could be.

The inside word is that Gates is readying to put

Microsoft Network

, his struggling online, subscriber-based content provider, up for sale with a $1 billion price tag.

Two insiders at the company say that executives at the mighty

Microsoft

(MSFT) - Get Report

, which owns MSN, are talking strategy for unloading a majority stake in the unprofitable venture, while still retaining a controlling influence. The for-sale sign is expected to go up as early as January.

"Content is something totally out of the realm of expertise for Microsoft and it doesn't fit the core competency of the company. Their strength is in creating software, not content," says Mike Stanek, the Microsoft analyst at

Lehman Brothers

.

(As originally published, this story incorrectly said Stanek worked for Goldman Sachs.)

"It's a losing venture for them. It's definitely on the for-sale block. They'll likely be rid of it within six months."

Adds an MSN executive, "There's no doubt this will happen. It's just a matter of the right time. If they announce plans for a sale at the wrong time, there could be a huge backlash and investor mayhem" because it would shake shareholders' confidence in Microsoft.

So who's buying? The MSN executive says that Microsoft has already had some talks with MSN's primary competitor,

America Online

(AOL)

. But the

Justice Department

could stand in the way of such a purchase.

George Koo of

Burnham Securities

figures that potential buyers also include

Netscape

(NSCP)

,

@Home

(ATHM) - Get Report

, with a $2.7 billion market cap and run by a former top executive of

Silicon Graphics

(SGI)

,

Yahoo!

(YHOO)

and

CUC International

(CU)

, which has a market cap of $14 billion.

Says Lehman's Stanek, "You can almost look at any media conglomerate ... as a potential buyer." He says that Gates and company would keep a minority share and board positions to ensure the use of the MSN name. "They'd have to find a trusted partner. They'd never give up the Microsoft name in any way, shape or form."

While the spin doctors at MSN and Microsoft have been flipping their wigs over questions about such a notion, they have also declined to comment on the rumblings.

"They've been plagued with email problems and have been having trouble getting rid of the image that they are anything but second rate" to America Online, says Alex Karamanoglou, president of

NGA.Net

(

http://www.nga.net/

), a Fort Lauderdale-based Internet consulting firm. "It is trying to do something outside of its core competency and it's not working. It would be a good idea to sell MSN. Microsoft thought that because of its name and clout, they would be able to take on AOL. But, it didn't happen."

One sign of MSN's inability to gain market share is its lack of subscriber growth. In its two years of operation, its core subscriber base has remained stagnant at around 2.5 million users, compared with 10 million for AOL. Considering that MSN is a preinstalled and prefixed icon on the millions of PCs sold in the U.S. annually, that number should have grown significantly.

"Even with that, they haven't become a big deal. Its content is not compelling. It goes to prove that this is not a business it should be in," says Karamanoglou.

Koo of Burnham Securities estimates that based on the recent $1.2 billion acquisition of

CompuServe

(CSRV)

by

WorldCom

(WCOM)

, MSN would likely be valued at about $1 billion, a tad under CompuServe's valuation.

Not everyone is a believer that the big, bad Gates will concede failure this early in the game. Even

Darth Vader

took two sequels before he was finally defeated.

"It is a possibility," says Neil Herman, an analyst with

Salomon Brothers

. "But not a likely one in my mind. Microsoft feels it needs to learn a lot more about the online world by being in the online business. In the long term, Microsoft wants to ship bits and bytes over networks, rather than ship out through the mail."

When the announcement finally comes down, investors are likely to breathe a sigh of relief and view it as a sign that Gates may be pulling in some of his tentacles and focusing back on Microsoft's core business, rather than trying to conquer every facet of the computer world.

"The stock isn't going to skyrocket on the news," says Stanek. "The impact on the financials will not be huge. But the feeling of relief amongst investors who feel they've spread themselves too far out will be pretty high. I don't know anyone who owns stock in Microsoft for its content business. I do know a lot of investors who would like to see them out of it though."