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Microsoft has unwrapped MSN 8, beefing up its Internet access service with a host of exclusive desktop-centric applications and premium MSN online offerings--including some from new partner Mickey Mouse.

MSN 8's launch is also a challenge to rival America Online, which released its AOL 8 software October 15. The Disney partnership announced Thursday morning at MSN 8's debut addresses one Microsoft shortcoming in that rivalry: AOL subscribers get more original content. Until now, MSN members have had few resources that are not widely available on the MSN.com Web site.

Most other new features of MSN 8 had already been revealed, especially with AOL touting its own update. The new version is designed to appeal to frequenters of MSN.com, to Outlook Express fans, and to parents seeking integrated, advanced parental controls. The Disney material--which includes a child-appropriate start page and free access to Disney's Blast Web site, as well as a subscription to Disney Adventures magazine--gives MSN members another perk, though they must sign up for the service as "Disney on MSN" subscribers to get access.

Microsoft charges $22 per month for dial-up membership to MSN, and between $40 and $50 monthly for broadband access. If you use another Internet service provider, MSN 8 software and access to associated services will cost $10 monthly. Disney will also market dial-up "Disney on MSN" Internet access at its theme parks and stores.

Microsoft Chair Bill Gates called MSN 8 a "breakthrough product" for Web surfers, at the launch event in New York City on Thursday. MSN 8 adds a layer of software and services that advance the online experience beyond basic Web browsing to something more "practical," he said.

"The Web is important. But the software that connects you to the Web has gotten a lot better," Gates said. "The boundary of what you do online and what you do on your PC doesn't exist with MSN 8."

Desktop Tie-Ins

Analysts see Microsoft's move to break boundaries between desktop applications and online services as a viable competitive challenge to AOL.

"This is MSN's first offering [that is] compelling enough that it might just entice AOL customers to defect," says Matt Rosoff, analyst with the independent research firm Directions on Microsoft.

With this release, Microsoft deemphasizes MSN Web services, previously marketed as .Net My Services, and draws instead on Microsoft's dominance in desktop applications, says Michael Gartenberg, research director at Jupiter Research. "Microsoft is hoping its close ties to the Windows operating system give it a competitive edge," he says.

Microsoft is beefing up its marketing budget for this battle, launching a $300 million ad campaign with MSN 8's release. It may need all its ammunition. Jupiter Research estimates MSN has 8.7 million users to AOL's 35 million, an unaccustomed position for the software giant. And AOL claims a record 5 million downloads of its latest update since AOL 8 became available just over a week ago.

New in MSN 8

Chief among the new software offerings are parental controls powered by technology from smut-blocking firm SurfControl. MSN's parental controls can be applied to MSN Messenger, while AOL's parental controls do not extend to AOL Instant Messenger. Parents can configure the parental control settings to request a weekly report on what Junior has been doing online.

MSN Mail is getting a boost with the bundling in MSN 8 of a hybrid version of Outlook Express. It features advanced antispam controls and preview panes, so you can flip through messages and easily drag and drop them into folders.

Other MSN 8 highlights include online versions of several Microsoft applications. Among them are Money, for online bill payment; Encarta, with access to premium content both offline and at Encarta Online; Picture It photo editing; and a download manager. A co-browsing service allows users on the same account--a single MSN 8 account supports nine screen names--to share browsing sessions. Microsoft has also cut a deal with antivirus firm McAfee to provide VirusScan protection as part of an MSN 8 subscription.

New as well is Dashboard, which appears within the MSN service or can park on your desktop. You can customize MSN Dashboard with links to local weather and headlines, or a favorite photo.

Comparing the Eights

The availability of MSN 8 stokes the fire fueling a fierce competition between tech giants.

Until version 8, MSN subscribers had access to very little exclusive online content. Unlike AOL, which bars nonmembers from accessing premium content, "MSN People & Chat" and "MSN Entertainment" remain free through the Web site.

Now, "Disney on MSN" subscribers will have access to all MSN 8 content but will also gain access to premium Disney content. And some free services will cease.

Effective immediately, Microsoft no longer offers a free download of its MSN Explorer software, an MSN client browser that's different from the Internet Explorer browser bundled with Windows. This browser lets users access a free MSN e-mail account, MSN Calendar, and online photo-editing tools; it also allows them to use their MSN screen names to get e-mail or send instant messages. Services will remain available to current MSN Explorer software users but will no longer be offered free to newcomers.

Portal Wars Revisited?

Microsoft's move in the direction of paid services is the first step toward reviving a longer-term strategy to promote .Net My Services, which have yet to catch on with consumers, analysts say.

"Microsoft has been trying to figure out how to get people to switch from buying its software once and [how to get them] to pay over and over again," says Michael Gartenberg, research director at Jupiter Research. He says MSN 8 is an example of Microsoft trying to warm up consumers to the idea of renting applications, not owning them.

Even as action heats up between Internet titans Microsoft and AOL, other access providers will join the battle to acquire and retain monthly subscribers, says Forrester Research analyst Charlene Li. She expects SBC Yahoo--a partnership between SBC Communications and Yahoo to provide DSL bundled with a proprietary Yahoo browser--to join the fray.

Li likens the online battle among MSN, AOL, and SBC Yahoo to the portal wars of the late 1990s.

"These three large portals used to be about trying to grow site traffic," she says. Now, it's about persuading dial-up customers to ditch service providers and sign up for high-speed access from them. The target: the growing number of new broadband customers who rarely switch providers. And on the line is the ad revenue and earnings from premium services.