A Hollow Victory for PC Makers

Microsoft's looser licensing terms count for little in bad times

For years, PC makers quietly fumed over Microsoft Corp.'s efforts to control what they could do to spice up their PCs. Indeed, when Microsoft (MSFT ) was preparing to release its last consumer version of Windows in the summer of 1998, executives from Gateway, Compaq, Hewlett-Packard, and others testified to regulators about its heavy-handed licensing terms for the new program.

For good reason: Microsoft had employed a host of tactics to force PC makers to install its software rather than rivals', especially its browser in lieu of Netscape Communications' navigation program. Nor could they delete Explorer itself. The software giant also tried to steer customers to its own Net partners, which threatened to cut PC makers off from millions paid by ISPs and others for pre-installing their software.

TOO LATE. Given that backdrop, Microsoft's July 11 announcement of looser licensing terms for PC makers using its next generation operating system, Windows XP, should have been big news. Although Microsoft originally planned to prohibit computer makers from installing any icons on the main screen--including such non-Microsoft offerings as Intuit Corp.'s Quicken finance software or AOL's on-line service--those prohibitions are now gone. They can even remove the icon and Start-menu listing for IE.

Trouble is, Microsoft's moves come too late and at the wrong time to matter much. The huge falloff in PC sales has squashed PC makers' independent streak. When sales were brisk, they were willing to fight for their right to innovate. Now, all their focus is on cutting costs.

Moreover, identifying, marketing, and supporting beyond-the-box arrangements, such as letting e-merchants download promotions to consumers' hard-drives, never generated the revenues PC makers hoped. So now, most are fine withMicrosoft's controversial decision to embed digital photography and videoconferencing right into XP's innards. "Ironically, [the right to offer non-Microsoft software] has become less important," says Andrew I. Gavil, a Howard University Law School professor.

Today, PC makers want only one thing: for XP, which will be standard issue on home PCs after its Oct. 25 launch, to come out on time. With sales expected to fall 5% in 2001, according to Merrill Lynch, they want to get shoppers back into stores. No one cares to waste time in a big fight with the Seattle giant as it rolls along while they struggle with huge layoffs and red ink. Indeed, on July 11, Microsoft announced its fourth-quarter profits would slightly exceed expectations. Says IDC analyst Roger Kay: "The radicals among the PC makers have all disappeared; orthodoxy [to Microsoft's view of the world] is now all the rage."

Just check out Gateway. For years, CEO Ted Waitt was the industry's most vocal Microsoft critic. Now Gateway is publicly congratulating Microsoft for its cooperative ways. "We're pretty excited about some of the things they're doing, because it lines up with our strategy," says vice-president of product marketing Michael Ritter.

So why is Microsoft finally offering up to PC makers control over the desktop they no longer seem to want? Sheer pragmatism. The fact is, the recent Appeals Court decision upholding the finding that Microsoft had abused its monopoly position in Windows all but declared some of Microsoft's proposed PC licensing restrictions illegal. And in earlier settlement talks, Microsoft had already agreed to give them up. So the company, knowing they'd be unlikely to survive future settlement talks, put them on the table now. That way it also avoids having to rejigger XP during or after its launch.

Is Microsoft really giving up anything of significance? PC makers won't likely leave off the Explorer browser since it vanquished Netscape's Navigator long ago. And in areas where Microsoft still faces competition, such as AOL'S instant-messaging, the company is sticking by its no-delete clauses. So the leap forward really amounts to not taking a giant step back.

By Peter Burrows in San Mateo

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