Business

BACK IN THE FAST LANE

FLUSH WITH A BIG COURT VICTORY, MICROSOFT IS OUT TO EXTEND ITS DOMINANCE

CHRIS WOOD July 9 2001
Business

BACK IN THE FAST LANE

FLUSH WITH A BIG COURT VICTORY, MICROSOFT IS OUT TO EXTEND ITS DOMINANCE

CHRIS WOOD July 9 2001

BACK IN THE FAST LANE

Business

FLUSH WITH A BIG COURT VICTORY, MICROSOFT IS OUT TO EXTEND ITS DOMINANCE

CHRIS WOOD

Lots of companies have their own culture. Microsoft has something very like its own language—part propeller-head geek-speak, part relentless positive thinking. At executive briefings for journalists and corporate customers, phrases like “rich experience,” “on-the-fly,” “extending the desktop" and “going forward” pop up as often as that irksomely verbose animated paper clip embedded in Microsoft’s most popular software. In an interview, the Canadian product manager for Windows, Erik Moll, asked whether Maclean's had spoken to a certain person. Or, as Moll put it: “Is that who you were interfacing with?”

We may as well get used to the lingo. Just over a year after a U.S. judge found Microsoft to be a predatory monopoly, an appeals court last week overturned his order that the company be broken apart. Hie decision leaves the Redmond, Wash.based software giant not only intact but unveiling new products that brazenly replicate many of the same tactics the original court took to task. In their unanimous decision, a panel of U.S. Court of Appeals judges did not dispute trial judge Thomas Penfield Jackson’s findings that Microsoft used illegal means to extend its effective monopoly of the personal computer’s operating system into other areas. But the appeal judges slammed Jackson for talking to the media and displaying “the appearance of partiality,” and sent his break-up order back to the lower court for reconsideration—by another judge.

T he ruling surprised hardly anyone; certainly not Microsoft. Founder Bill Gates and CEO

Steve Ballmer have insisted often and loudly in the last year that the company would never be split up. Asked recently whether anything—anything at all—might derail the Microsoft express, the ebullient Ballmer boomed out an immediate “No!”

Well, maybe something. In the next beat Ballmer added: “We could screw up.”

Despite its legal victory, Microsoft has seen its world change in the past year. Personal computer sales have fallen for the first time in history. Many businesses, bled by the market collapse in technology stocks, are going slow on new software investment. Consumers and corporations alike may be spending more time on the Internet, but they are more often using devices (like hand-held units) that don’t operate on Microsoft programs.

Meanwhile, software piracy—long a thorn in Microsoft’s side— continues to drain off revenue.

But Microsoft is striking back, big time. The May 31 launch of a new version of Office—Microsoft’s suite of word-processing, email, calendar and spreadsheet applications—will be followed in October with a new edition of Windows—its flagship PC operating system.

Both new products are dubbed “XP,” for the allure of their enhanced “eXPerience.”

Or it could be for the way both once again eXPloit Microsoft’s overwhelming market dominance, to extend the company’s reach into potentially lucrative new realms.

According to Gates, two beliefs underlie company strategy. The first is that people will increasingly forsake desktop hard drives in favour of using programs and keeping files on the Internet (what Gates calls “in the cloud”). The second is that as users migrate to the Net, providers like Microsoft will be able to switch from selling software to renting it. “That,” Gates says, “is what we’re betting the company on.”

With its new Office-XP suite and the coming “XP” version of Windows, Microsoft is trying to hedge the bet. Both contain new features designed to link (or “extend”) desktops to the Web—and bind users ever more tightly to Microsoft.

One of the craftiest is something called a “Smart Tag.” These little onscreen menus pop up when someone types a phrase that the software can relate to information held in another application, which may be located in some far corner of a corporate network or on the Web. Type “Jane Smith,” for in-

stance, and a Smart Tag might open with a link to Jane’s phone number, e-mail address and buying history, all recorded in your customer database.

Plans to embed the same feature in the newest Windows attracted controversy months before its official release. In early versions of the software, someone who used Windows XP to surf the Web found certain words in pages they viewed triggered Smart Tags with a hidden corporate agenda. “I could be at Quicken.com,” says Michael Silver, an analyst with Gartner Research of Stamford, Conn., “and get a Smart Tag that brings me to MSN Investor. This is an example of Microsoft using dominance in their desktop operating system to improve business on their Internet properties.” Last week, Microsoft moved to defuse the furore, saying Smart Tags wouldn’t be ready for inclusion with Windows XP. Still, Smart Tags remain part of Office XP and, the company made clear, might be added to Windows in the future.

Other elements of the new Office suite are meant to make it easier for people to work together over the Web. The latest Windows, too, will boast new Webbased features when it debuts on Oct. 25. The system will come with souped-up instant messaging—allowing file-sharing and video and audio conferencing between PCs—and Microsoft’s latest digital media player built in. Also included: an Internet firewall and Passport, which lets users create a secure digital “identity” for online transactions. Such add-ons may please consumers, but could be marketkillers for independent software firms whose products do much the same thing. “The third-party developer in Kelowna,” suggests Greg Michetti, an Edmonton-based software consultant and columnist, “will be like the guy who makes brake pads and supplies just for Toyota.”

Both new XP releases also beef up Microsoft’s defences against software piracy. Purchasers who install either software on their computers must negotiate something called “product activation,” which will match a code they type in against a dozen pieces of hardware in the user’s computer (including its central processor and hard drive) to create a digital ID which it sends to Microsoft via the Net. The company replies with an “activation key” that, in effect, switches on the user’s software. Microsoft says it will let each Office purchaser install the same copy on up to two computers. Windows XP buyers will only be able to use the product on one machine. Microsoft badly wants home runs from both newXP offerings. Sales of Office account for 37 per cent of its revenues, while Windows gives it a presence on 92 per cent of the worlds PCs. By contrast, Microsoft’s forays into handheld computing, Internet services and video games have largely failed to meet expectations (its oft-delayed X-box game console has cost $1.5 billion to bring to market, and will only hit store shelves this fall). With so much at stake, Microsoft has turned once again to its dominant market share to help drive up profits from Office in particular. In a recent rejig of its licensing agreements, Microsoft obliged most existing business users of older versions of Office to buy the newXP edition by October—or face sharply higher upgrade costs. “If you’re a small business that was upgrading Office every four years,” says Chris Le Tocq, a Los Altos, Calif.-based industry analyst, “you’re going to be paying 70 per cent more than you were before.”

Bundled software and ruthlessly leveraged market share were what set off the antitrust case against Microsoft in the first place. But if Microsoft’s tactics haven’t changed, the playing field has. In giant AOL Time Warner Inc., a revived IBM Corp., and Net-based heavyweights Oracle Corp. and Sun Microsystems Inc., Microsoft confronts rivals much closer to its own size. Technology companies in general have lost the aura of invincibility they boasted in the mid-1990s. And while last week’s ruling left intact the finding of Microsoft’s wrongdoing, federal and state prosecutors must now decide whether to go back to the lower court to fight for a less severe penalty. Few expea the Republicans in charge in Washington to fight very hard, and Gates suggested a setdement might now be possible.

For Redmond’s ever-optimistic techno-lords, the way is clear. “We will prevail,” Ballmer says. “We will stay one company and continue to deliver tools of empowerment for people and companies.” Microsoft, you might say, is going forward, with every intention of reaping a rich experience for itself by extending its desktop into every aspect of online life. The rest of us will simply have to learn to interface.