Christine Larson


Home About Me Writing Samples My Book		US News & World Report May 24, 2004 Will you be my friend? To grow, Microsoft loses its hard-nosed edge By Christine Larson A fter a firm scolding from the European Commission in March, Microsoft suddenly seems eager to play well with others. In the past week alone, the company struck up two new friendships. After two years of wrangling, game developer Electronic Arts agreed to adapt its popular video games for Microsoft's online Xbox Live. And Microsoft and business software maker SAP pledged to make their respective products more harmonious. These companies are the latest to join Microsoft's growing buddy list. Barely a week after the EC fined Microsoft some $600 million for using its desktop monopoly to squelch competitive media players, Microsoft and longtime nemesis Sun Microsystems made peace after Microsoft paid $1.95 billion to settle an antitrust suit filed by Sun in 2002. Microsoft also cozied up to InterTrust Technologies, shelling out $440 million last month to end a long-standing patent dispute over InterTrust technology that helps companies protect their digital information. Also in April, Microsoft settled a class-action antitrust suit with the state of Minnesota . The sudden burst of bonhomie toward Sun is easy enough to understand. Microsoft is appealing the EC's ruling and, since Sun instigated the EC investigation, good relations between the companies can only help Microsoft's case. But the company's congenial conduct may be more than making nice in front of the grown-ups. Tighter IT budgets, the fusion of computers and entertainment, and the increasing need for networks to talk to each other are all making cooperation more vital than ever. Indeed, the company's growth may now depend on its ability to put the "soft" into Microsoft. "We want to have a better relationship with others in our industry," says Brad Smith, Microsoft's general counsel. Me mories. That's quite an about-face for a company that's been found gui lt y on two continents of abusing monopoly power to gain sway over new markets. "Nobody's going to forget that Microsoft trampled little Netscape like an elephant stepping on a mouse," says Laura DiDio, senior analyst at the Yankee Group, a Boston-based research firm. Clearly, Microsoft has a lot of bad blood to overcome. So why bother making friends at all, when Windows owns more than 90 percent of the desktop market? Because changes in the technology industry demand that companies work more closely together. And Microsoft's very dominance on the desktop poses a problem for its growth. "Where does your revenue growth come from when you're as big as Microsoft?" asks Ted Schadler , vice president of Forrester Research, based in Cambridge, Mass. "You have to pursue markets where you're not dominant, and that means you need to play well with others." One playground where Microsoft longs to romp is the growing field of digital media--the convergence of computers, digital devices, video, music, and other technologies. But the digital media field requires teamwork among software firms, entertainment companies, and computer, phone, and PDA makers, as well as providers of Internet, cable, and wireless service. With so many players, there's simply no way for one company to hog all the revenues. That's a whole different ballgame from the browser wars, when Microsoft could use its power over computer manufacturers to force competitors off the desktop. To succeed in digital media, Microsoft needs to convince old rivals that it has finally learned to share. "A lot of what Microsoft is doing is to alleviate the concerns of potential partners," says David Smith, vice president of research firm Gartner in Stamford , Conn. Indeed, Microsoft's settlement last year with Time Warner, which had sued on behalf of its subsidiary Netscape, concluded their bickering over the browser and cleared the way for their current partnership. SinceApril, the pair have been the two major investors in ContentGuard, which builds digital-rights-management technology to protect electronic content from piracy. Games. Microsoft's ambitions in digital media and home entertainment also depend on its ability to make chums in the related world of video games. Microsoft's Xbox still holds only 15 percent of the market worldwide, compared with Sony PlayStation2's 69 percent. But Microsoft's new alliance with Electronic Arts may help close the gap. "It's a big triumph," says David Cole , president of DFC Intelligence in San Diego . "Electronic Arts had been exclusive to Sony in online gaming because they were afraid Microsoft was trying to control too much of the revenues and user experience." A lt hough details of last week's deal were not revealed, Microsoft's Cameron Ferroni, general manager for Xbox Live, said that both companies will receive subscriber revenues. The two companies are working on the next generation of their game consoles, which analysts expect to see in late 2005 or early 2006. The winner of the next round may gain an advantage in the larger battle for the living room, as Sony and Microsoft are vying to dominate the converging worlds of home entertainment, consumer electronics, and digital media. "These systems are a Trojan horse. There's a lot of potential for them to do much more than play games," says Cole. Another compelling reason for Microsoft to be a better partner is the changing nature of corporate networks and IT departments. Since the dot-com crash of 2000, tech budgets have plummeted and companies have sat on their existing software and hardware for longer periods. Corporations long frustrated by the fact that their accounting systems can't talk to their customer databases or their E-commerce network are insisting that rival companies get their products in sync. Customer pressure for such interoperable systems led Sun and Microsoft to bury the hatchet and drove last week's deal between Microsoft and SAP. It also prompted Microsoft to join the two-year-old Web Services Interoperability Organization, which is creating guidelines to make various platforms, languages, and applications work together more fluidly. Me anwhile, Microsoft also needs allies to help ward off increasingly powerful enemies, notably Google and Linux. Google is way out in front with its search ability, prompting Microsoft to step up its own search efforts. But winning that battle will take more than smart technology. "Search has a lot to do with trust," says Gartner's Smith. "Google has earned the trust of people, and it has a squeaky-clean reputation, which is one reason Microsoft is trying to improve its image." Aside from the business case, some analysts point to a far more personal reason for the mellower tactics. "Microsoft is still very much the cu lt ure of Bill Gates and Steve Ballmer. As they mature, the company matures, because everybody's getting older together," says Forrester's Schadler. Rivals are skeptical. "A leopard can't change its spots," says Matthew Szulik, CEO of Red Hat, a Linux provider. "I think their strikes are much more surgical and not as strong handed, but nevertheless just as lethal." Still, many observers say the changes at Microsoft are more than skin deep. "They want to polish their image, but they're also smart enough to realize if they don't make real changes,they're not going to fool anyone," says DiDio. While last month's settlements called attention to its new strategy, Microsoft's Smith says the company began taking a more conciliatory approach two years ago. (For good reason: The Department of Justice decision against Microsoft lowered the burden of proof in private antitrust cases, making them much tougher battles for Microsoft to win.) And since 2000, it has been courting Silicon Valley , previously a maelstrom of anti-Microsoft sentiment, by basing its outreach program to venture capitalists and start-ups at Microsoft's Mountain View , Calif. , campus. U lt imately, the true measure of Microsoft's sincerity will be money in the bank--for both Microsoft and its newfound friends.

US News & World Report
May 24, 2004

Will you be my friend?
To grow, Microsoft loses its hard-nosed edge

By Christine Larson

A fter a firm scolding from the European Commission in March, Microsoft suddenly seems eager to play well with others. In the past week alone, the company struck up two new friendships. After two years of wrangling, game developer Electronic Arts agreed to adapt its popular video games for Microsoft's online Xbox Live. And Microsoft and business software maker SAP pledged to make their respective products more harmonious.

These companies are the latest to join Microsoft's growing buddy list. Barely a week after the EC fined Microsoft some $600 million for using its desktop monopoly to squelch competitive media players, Microsoft and longtime nemesis Sun Microsystems made peace after Microsoft paid $1.95 billion to settle an antitrust suit filed by Sun in 2002. Microsoft also cozied up to InterTrust Technologies, shelling out $440 million last month to end a long-standing patent dispute over InterTrust technology that helps companies protect their digital information. Also in April, Microsoft settled a class-action antitrust suit with the state of Minnesota .

The sudden burst of bonhomie toward Sun is easy enough to understand. Microsoft is appealing the EC's ruling and, since Sun instigated the EC investigation, good relations between the companies can only help Microsoft's case. But the company's congenial conduct may be more than making nice in front of the grown-ups. Tighter IT budgets, the fusion of computers and entertainment, and the increasing need for networks to talk to each other are all making cooperation more vital than ever. Indeed, the company's growth may now depend on its ability to put the "soft" into Microsoft. "We want to have a better relationship with others in our industry," says Brad Smith, Microsoft's general counsel.

Me mories. That's quite an about-face for a company that's been found gui lt y on two continents of abusing monopoly power to gain sway over new markets. "Nobody's going to forget that Microsoft trampled little Netscape like an elephant stepping on a mouse," says Laura DiDio, senior analyst at the Yankee Group, a Boston-based research firm.

Clearly, Microsoft has a lot of bad blood to overcome. So why bother making friends at all, when Windows owns more than 90 percent of the desktop market? Because changes in the technology industry demand that companies work more closely together. And Microsoft's very dominance on the desktop poses a problem for its growth. "Where does your revenue growth come from when you're as big as Microsoft?" asks Ted Schadler , vice president of Forrester Research, based in Cambridge, Mass. "You have to pursue markets where you're not dominant, and that means you need to play well with others."

One playground where Microsoft longs to romp is the growing field of digital media--the convergence of computers, digital devices, video, music, and other technologies. But the digital media field requires teamwork among software firms, entertainment companies, and computer, phone, and PDA makers, as well as providers of Internet, cable, and wireless service. With so many players, there's simply no way for one company to hog all the revenues. That's a whole different ballgame from the browser wars, when Microsoft could use its power over computer manufacturers to force competitors off the desktop. To succeed in digital media, Microsoft needs to convince old rivals that it has finally learned to share. "A lot of what Microsoft is doing is to alleviate the concerns of potential partners," says David Smith, vice president of research firm Gartner in Stamford , Conn.

Indeed, Microsoft's settlement last year with Time Warner, which had sued on behalf of its subsidiary Netscape, concluded their bickering over the browser and cleared the way for their current partnership. SinceApril, the pair have been the two major investors in ContentGuard, which builds digital-rights-management technology to protect electronic content from piracy.

Games. Microsoft's ambitions in digital media and home entertainment also depend on its ability to make chums in the related world of video games. Microsoft's Xbox still holds only 15 percent of the market worldwide, compared with Sony PlayStation2's 69 percent. But Microsoft's new alliance with Electronic Arts may help close the gap. "It's a big triumph," says David Cole , president of DFC Intelligence in San Diego . "Electronic Arts had been exclusive to Sony in online gaming because they were afraid Microsoft was trying to control too much of the revenues and user experience." A lt hough details of last week's deal were not revealed, Microsoft's Cameron Ferroni, general manager for Xbox Live, said that both companies will receive subscriber revenues.

The two companies are working on the next generation of their game consoles, which analysts expect to see in late 2005 or early 2006. The winner of the next round may gain an advantage in the larger battle for the living room, as Sony and Microsoft are vying to dominate the converging worlds of home entertainment, consumer electronics, and digital media. "These systems are a Trojan horse. There's a lot of potential for them to do much more than play games," says Cole.

Another compelling reason for Microsoft to be a better partner is the changing nature of corporate networks and IT departments. Since the dot-com crash of 2000, tech budgets have plummeted and companies have sat on their existing software and hardware for longer periods. Corporations long frustrated by the fact that their accounting systems can't talk to their customer databases or their E-commerce network are insisting that rival companies get their products in sync. Customer pressure for such interoperable systems led Sun and Microsoft to bury the hatchet and drove last week's deal between Microsoft and SAP. It also prompted Microsoft to join the two-year-old Web Services Interoperability Organization, which is creating guidelines to make various platforms, languages, and applications work together more fluidly.

Me anwhile, Microsoft also needs allies to help ward off increasingly powerful enemies, notably Google and Linux. Google is way out in front with its search ability, prompting Microsoft to step up its own search efforts. But winning that battle will take more than smart technology. "Search has a lot to do with trust," says Gartner's Smith. "Google has earned the trust of people, and it has a squeaky-clean reputation, which is one reason Microsoft is trying to improve its image."

Aside from the business case, some analysts point to a far more personal reason for the mellower tactics. "Microsoft is still very much the cu lt ure of Bill Gates and Steve Ballmer. As they mature, the company matures, because everybody's getting older together," says Forrester's Schadler.

Rivals are skeptical. "A leopard can't change its spots," says Matthew Szulik, CEO of Red Hat, a Linux provider. "I think their strikes are much more surgical and not as strong handed, but nevertheless just as lethal."

Still, many observers say the changes at Microsoft are more than skin deep. "They want to polish their image, but they're also smart enough to realize if they don't make real changes,they're not going to fool anyone," says DiDio. While last month's settlements called attention to its new strategy, Microsoft's Smith says the company began taking a more conciliatory approach two years ago. (For good reason: The Department of Justice decision against Microsoft lowered the burden of proof in private antitrust cases, making them much tougher battles for Microsoft to win.) And since 2000, it has been courting Silicon Valley , previously a maelstrom of anti-Microsoft sentiment, by basing its outreach program to venture capitalists and start-ups at Microsoft's Mountain View , Calif. , campus.

U lt imately, the true measure of Microsoft's sincerity will be money in the bank--for both Microsoft and its newfound friends.