Microsoft vs. the World

You might not realize it yet, but Microsoft has big plans for your future. The company has shown its cards for what it calls its "next big platform waves." In about 2 years, if all goes well, Microsoft customers will be lining up for a "spending wave" to pay for the Longhorn wave of technologies--which will include new versions of Windows, Windows Server, Microsoft Office, and various other products. Longhorn will be a huge leap over current technologies and will interoperate in ways that are impossible today. Microsoft's bet--and frankly, it's a bigger gamble than any of its public "bet the company" claims for Microsoft .NET or Windows Server 2003--is that customers will be so amazed by Longhorn's capabilities that they'll sign up for the full-meal deal, upgrading to not just the Windows client but also Windows Server, Office, and the other products.

How this integration strategy will play out is unclear at the moment, but I did observe last year that Microsoft underwent a not-so-subtle shift in its public attitude about technology bundling in the wake of its antitrust settlement with the US government. During the original antitrust trial, the company was accused of bundling Microsoft Internet Explorer (IE) in Windows, not to benefit its customers but to harm Netscape, which was then emerging as an Internet powerhouse. According to court depositions, Microsoft executives saw Netscape's Web browser as a potential platform competitor to Windows because developers could choose to target Netscape's APIs rather than those of Windows. If that happened, Microsoft executives felt that Windows would be relegated to just another platform on which Netscape's browser ran.

To counter this perceived problem, Microsoft acted aggressively. It quickly created ever-improving versions of IE, eventually surpassing Netscape technologically. It bundled IE in Windows, making IE the de facto browser for millions of customers. It exhorted ISPs to sign exclusive deals, effectively shutting out Netscape. And it cajoled PC makers to ignore Netscape, shutting off another potential distribution source for its competitors: PC makers that complained were threatened with an end to their crucial Windows license or were forced to pay higher prices for Windows.

Some of these acts were deemed illegal and some weren't, but in the end, Microsoft was able to fashion a favorable settlement; even its strongest backers admit that the company emerged from its antitrust battle essentially unscratched. IE and other products are still bundled in Windows, and the company continues to push ahead into new markets, often using its OS as a base for distributing new technologies.

What's interesting is the way the company has begun openly touting its integration approach in the wake of its legal victory. Nothing suggests Microsoft understands its victory more clearly than the way company executives have been talking up integration in the days since the settlement. When Windows 2003 launched last spring, the company said that add-on products such as Microsoft Exchange Server 2003 would work better on the new platform because of the way the technologies integrated. And Microsoft Office 2003 is a fine standalone suite, but coupled with Windows XP on the client and Windows 2003, Exchange 2003, and Microsoft SharePoint Team Services on the server, it's apparently capable of miracles--if I'm reading the marketing materials correctly. The wonders of integration are pervasive in the company's current wave of products.

Integration has positive and negative ramifications for customers. For the short term, getting free bundled disk defragmentation, Internet browsing, antivirus, and firewall technology improves the value of Windows and makes life easier and arguably cheaper for companies and individuals. However, the long-term effects can be devastating. If Microsoft's bundled products are good enough for most customers, third-party markets can be adversely affected, resulting in fewer add-on products and, potentially, less innovation. And Microsoft has already shown that it can put on the innovation brakes when competition lessens. At the height of the browser wars, the company constantly updated IE, releasing six major revisions between 1996 and 2001. Since that time, IE has garnered 95 percent of the market, and development has stopped: We won't see another IE update until Windows Longhorn ships in 2005.

Here is where the European Union (EU) steps in. Its antitrust arm, the European Commission (EC), has been investigating Microsoft's alleged antitrust violations for 4 years, and although it wasn't getting as much press as the US case against the software giant, that situation is going to change. Last week, the EC announced that it had completed its investigation of the company and found that its antitrust abuses were ongoing. As a result, the EC will issue a punishment for these crimes after it receives an official response from Microsoft, which is due within 30 days. That punishment could include fines of up to $3 billion and remedies that would require the software giant to change its products.

The EC is primarily concerned with two issues--both tied to product integration. First, the EC says that Microsoft is harming competitors such as Apple Computer and RealNetworks by bundling Windows Media Player (WMP) for free with Windows. Second, the EC says that Microsoft is unfairly locking out competitors in the server space by making its server products interoperate in a way that is impossible for third parties because the company doesn't publicly release the necessary APIs. To address these problems, the EC is proposing that Microsoft decouple WMP from Windows or sell a version of Windows that also includes competing products such as Apple QuickTime Player and RealNetworks' RealOne. On the server side, the EC is seeking to force Microsoft to release the technical information competitors need to create server products that interoperate with Windows Server as effectively as Microsoft's products do.

Suddenly, Microsoft touting its integration strategy looks a bit premature. While the company's fate at the hands of European antitrust regulators is running its course, I have to wonder whether any of the EC's actions against Microsoft ultimately harm the company's customers, and what effect will the actions have on Microsoft's ongoing plans? Is integration a good thing or a way to shut out competitors and help the company maintain and extend its dominance? Let me know what you think.

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