The Colossus of Redmond: Stronger Than Ever?

Yes. Still, Microsoft's Appeals Court victory is somewhat hollow as the tech landscape is so different from what it was three years ago

By Alex Salkever

Wouldn't you be smiling today if you were Bill Gates? With the June 28 federal Appeals Court decision overturning an antitrust action against Microsoft, he and the Redmond crowd have plenty of reasons to celebrate. Not only did the panel remove Gates's chief nemesis, Judge Thomas Penfield Jackson, from the case, but it also struck down the punishment Jackson had mandated -- splitting Microsoft into two companies.

Now the case goes back to the lower court, with a more laissez-faire Bush Administration making the tactical decisions rather than the Clintonites. And Microsoft? It's still, well, Microsoft. Just look at the dustup it had with America Online recently about stripping out the RealNetworks media player from AOL software. Privately, AOL execs were shocked -- shocked! -- at the bullying tactics by the Microsofties. Had those tactics worked, they might have struck a major blow against Real and given Gates's boys a leg up in an area they covet.


  Is the Colossus of Redmond mightier than ever? The short answer: yes. Expect more brass knuckles in the months ahead. The company will apply more muscle than ever to get its .Net initiative wired into every machine, and Microsoft software and services aimed at consumers will become more ubiquitous.

The long answer to that question is more complex. While the ruling gives Microsoft more room to maneuver, it solidifies the company's hold most strongly in the slower-growing area of technology for PC platforms. In faster growing areas such as enterprise software, Microsoft has far less purchase and market power. Also, Microsoft is squaring off against behemoths its own size now. For example, it's taking on AOL Time Warner in the Internet service provider realm and Sony in the video-console and -games arena.

Microsoft knows what it has to do: Expand beyond delivering software and upgrades to PCs, a business that will continue to provide boatloads of cash but not much growth. Tech consultancy IDC is forecasting a 6.3% decline in PC shipments in the U.S. for 2001 over last year. In 2002, IDC sees anemic growth of 4.3%, a far cry from the mid-'90s go-go days of double-digit growth. Meanwhile, customers are feeling less need to upgrade their existing operating systems, as evinced by the second-quarter numbers Redmond has reported to Wall Street.


  So where to grow? In the new areas Microsoft has targeted, it has either hit a wall or is facing very stiff competition. Take the ISP market. The company has already thrown tens of billions of dollars into taking over the consumer Internet, launching its own content sites, and buying others. But with 5 million subscribers, Microsoft's MSN service plays a very distant second to AOL, which has 29 million subscribers.

Through Time Warner, AOL has something Microsoft can only dream about: direct access to one of the largest cable-TV systems in the world. Not for lack of trying, however. Redmond has sunk billions more into cable companies with the aim of buying precisely such access, but the markets have devalued its investments, and cable companies have remained largely indifferent. Recently, AT&T dumped Microsoft as the provider of software for interactive-TV set-top boxes, an area closely related to ISP development.

AT&T isn't alone. AOL had no qualms about publicly snubbing Redmond in mid-June, when AOL negotiators angrily walked away from a deal to closely tie their software with Microsoft's soon-to-be-released XP operating system. The sticking point? AOL refused to be strong-armed by Redmond into stripping RealNetworks' media players out of AOL's software package.


  In this light, the big winner from the antitrust decision could be construed as AOL and not Microsoft, according to independent research firm Precursor Group. Any of the antitrust restraints AOL agreed to in its merger concessions with Time Warner are likely moot or weakened. Federal Communications Commission Chairman Michael Powell has stated he wants to pursue a more hands-off regulatory approach. Let the big dogs hunt.

How about the enterprise software market? It's generally more lucrative than anything on the desktop, and it's becoming more and more key as companies move toward more centralized architectures and off-load more of their computing burdens to corporate servers and the Internet. Microsoft has mounted a big push there in everything from hosting databases to Web servers to offering the basic guts of networking operating systems.

Free Linux products remove Microsoft's trump card for gaining market share -- giving away software

While it has made some headway, Redmond's position remains far from dominant. The open-source Web server program Apache continues to gain market share against Microsoft and other proprietary software companies. In databases, Microsoft has made inroads, but still lags far behind Oracle and IBM in mid-tier and larger installations.

The much-ballyhooed Windows 2000 enterprise operating system is making a splash and could take a chunk out of the hides of less-user-friendly Unix-based systems. But Linux appears to be hanging tough, in part because some of the biggest Unix companies, such as IBM and Hewlett-Packard, have thrown big bucks into developing Linux and now offer full support for many open-source products.

More worrisome for Gates, free Linux products take away Microsoft's trump card used to gain market share -- giving away software. Add it all up, and Microsoft remains far from omnipotent -- or even in a position to twist arms.


  Finally, let's look at a new area of the consumer market, the video-gaming and -console industry. Microsoft has made a huge push to roll out its Xbox game system. That will compete directly with Sony's extremely popular PlayStation2. Microsoft won kudos early on by making it easier for developers to build games that run on Xbox, and it plans to spend $500 million on marketing the systems.

One problem: Microsoft has yet to successfully take on a consumer marketing juggernaut such as Sony, which dominates that game market. The Japanese company also holds other assets that are increasingly important in the $11 billion per-year video-game market: one of the five largest record labels, which can produce and distribute accompanying music, and a major motion picture studio that can be used to help structure video-game tie-ins.

Sony is a formidable foe for Microsoft, a company whose blind spot has been marketing to consumers anything beyond operating systems, computer mice, or keyboards.


  That said, Microsoft's monopoly sway in the PC market is no small thing. Expect companies that make software that can be easily bundled into the Windows operating system to get the royal treatment. (Translation: When you dance with Microsoft, Microsoft chooses the song.) That would range from outfits making security software such as personal firewalls (NetworkIce, Symantec) to those making music and video players (RealNetworks, MusicMatch) to companies making Internet phone software.

Lately, handheld devices built around Microsoft's stripped-down CE operating system have made significant headway against Palm OS competitors. This could foretell an instant replay of Microsoft's previous path to PC domination.

Expect Microsoft to use its PC and Explorer leverage to put .Net everywhere

Above all, Microsoft's nascent .Net initiative could be the company's biggest cudgel yet to wield against competition. Though still murky, .Net would create packages of software that would enable e-commerce and personalized Web services. The thrust: Making the Internet use far easier for consumers. That would be achieved essentially by allowing Microsoft to serve as an intermediary between individuals and businesses, a critical crossroads atop the rising tide of Web commerce and content.

Even the thought of something as pervasive and powerful as .Net would have sent Judge Jackson screaming from his chambers. Now, .Net looks set to go ahead with far less resistance. Redmond will undoubtedly try to use its leverage over the PC desktop and dominant Web-browser Internet Explorer to put .Net everywhere.


  The upshot of all this? Yes, Microsoft will certainly benefit from the decision. It now holds sway over the PC sector and is unleashed to compete far more aggressively in almost every other one. But never before has Microsoft tried to face down such an able group of adversaries, many of which are in areas that have proven particularly difficult for Redmond to get into.

At least one of these adversaries, AOL, could stand to benefit as much from the ratcheting down of antitrust surveillance as Microsoft itself. That's a lot different than the world of three years ago, when Microsoft looked like the king of it all.

Salkever is Technology editor for BusinessWeek Online

Edited by Douglas Harbrecht

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