The revelations that hackers had been rummaging around Microsoft's precious source code for some time, almost drowned its launch of an effort to win a larger share of the portal business.
This has long been considered a battle that had been won hands down by AOL. But Microsoft said it would spend up to $1bn to promote its new, improved MSN subscriber service.
The massive expenditure marks an escalation of the portal wars and one that underscores just how threat ened Microsoft feels by the AOL-Time-Warner merger.
While the company has made considerable strides with its MSN subscriber base over the past year, adding 1.5 million new users and becoming one of the most visited portals on the web, it still lags far behind AOL.
After signing 2 million subscribers five years ago, MSN stalled while AOL climbed to become the industry Goliath with 25 million users. Then it purchased the world's largest entertainment company, Time-Warner.
Moreover, AOL trounced its rival by introducing or taking over consumer-friendly applications, such as chat and instant messaging, and services, such as exclusive content and commerce, leaving MSN to play catch-up.
The timing of Microsoft's web push is no accident: it comes on the same day that AOL launched a drive to push its new version 6 software, focusing on integrating features such as HTML-based mail and a media player. Users can also access their email by phone.
Microsoft's new MSN Explorer software also aims to relieve users of the need for separate browsers, media players, and email applications. It includes a colourful interface with cartoon-like icons and a built-in media player for watching video or listening to music on a computer.
Along with changes aimed at making MSN's finance, shopping and search features simpler, Microsoft's new browser takes square aim at the area on which AOL has built its reputation - ease of use, said Deanna Sanford, product manager for MSN.
Part of Microsoft's $1bn battle plan is not just to seduce new computer users (specifically women, the fastest growing sector of new internet accounts) but to steal away AOL's customers.
US computer retailer Best Buy made a deal with Microsoft to offer a rebate on its computers for purchasers who signed up for the service. That alone has added 1m new users since last December, though many have since left.
Microsoft is also focused on selling services such as music subscriptions or digital photography services and regards web access, according to MSN's Yusef Mehdi, as a commodity.
The implication is that the internet is no longer about reading or looking at things, nor is it about buying things. Rather, it is utilitarian in function whether that's paying bills online, working away from the office, making free long distance calls or playing chess with someone on another continent.
The $1bn Microsoft has earmarked for the MSN push has raised eyebrows in the industry. On a simple maths basis, the cost approaches nearly $700 dollars a head to match the previous year's gain in subscribers. Set against the 210 million unique visitors to MSN.com the figure computes at $5 to $10 a-head. "I think we're on to something here," said MSN product manager Mike Nichols. "We're going to be building on the tremendous momentum we've established in the past 12 months."
But the collapse of internet advertising may make MSN's recruitment drive more costly still. Many of the web businesses that advertised on AOL and MSN have already shut down or are struggling for life. In August, online advertising declined by 7.6% and is likely to keep falling. Merrill Lynch analyst Henry Blodgett said in a recent report that the market in dot.com advertising "is likely to decelerate as dramatically as it accelerated".
Though Microsoft does not break down its MSN revenues, 40% of Yahoo's revenue comes from other internet companies. Though advertisers consider subscribers to paid online services like AOL and MSN more valuable than visitors to portals like Yahoo, the implication is clear. Microsoft chief executive Steve Ballmer said last week that the revamped MSN portal could be profitable in a relatively short time, "substantially less" than the four years some have suggested.
Ballmer emphasised that MSN was committed to helping users to customise their content as opposed to using the content provided to them on AOL. "AOL and Time-Warner want to produce content and give it to everybody," he said, whereas Microsoft wants "to help people with their own financial information, their own pictures, their own movies_"
The differences in approach may go a long way to defining what broadband internet will look like. Will MSN and others remain routing points or be forced to become content purveyors like AOL?
And as the internet becomes accessible to handheld organisers, cellphones, pagers and television sets, what role will proprietory services and portals play?
It's a gamble, and Microsoft is willing to pay $1bn to stay in the game.
• MSN Explorer can be downloaded free from http://explorer.msn.com
