According to company president and CEO Steve Ballmer, Microsoft will reinvigorate its MSN efforts, leveraging its compression and streaming media technologies to create a platform for distributing Web content over DSL, cable, and satellite links.
As part of this effort, Microsoft hopes to recruit a broad range of content partners and service providers that currently compete with AOL.
"If you look at the implications of the AOL acquisition of Time-Warner, it creates huge potential for partnerships for us among their competitors," said Ballmer, speaking at the PC Forum conference in Scottsdale, Arizona.
Ballmer said that while Microsoft does offer content on its site, company officials do not see themselves as a media company and have no intentions of making any major acquisition in this space to counter a combined AOL/Time Warner entity.
But industry analysts said partnerships, or indeed any move to punch up MSN and position the ISP for broadband, is a sound move for Microsoft.
"MSN has been stagnant for the past year. And they have been talking about reinvigorating MSN for a year, yet we've heard very little from Microsoft," said Steven Harris, an analyst at International Data Corporation (IDC).
Harris, who just completed a comprehensive report on ISPs, said MSN has fallen from its number two slot in terms of ISP rankings based on subscribers.
Mindspring, now merged with Earthlink, comes in right behind AOL, which holds down the number one position, he said.
"Although Microsoft doesn't release subscriber figures to us, there is some evidence to indicate an actual decline in MSN users," he said.
To keep up with the nation's largest ISP pack, Microsoft must come up with a broadband strategy, Harris continued.
"Broadband is going to be very important. AOL noticed that even before they merged with Time-Warner," he said.
And other ISPs have followed AOL's lead on broadband. For example, ISP Juno has cooked up a new DSL service through a partnership with Covad, according to Harris.
"It wouldn't surprise me if this mention from Ballmer amounts to a pre-brief - before a formal alliance with a DSL company like Covad or Northpoint," he added.
Microsoft has already staked early claims to the emerging fixed wireless broadband market. Along with other investors, Microsoft announced recently a $900 million infusion in Winstar Communications.
Microsoft earlier made a similar investment in Teligent - a Northern Virginia-based fixed wireless and integrated telecom company.