Microsoft's Strategy Unchanged Despite Concessions

Microsoft has put to rest two minor restrictions it faced after last month's appeals court ruling, saying last week that PC makers could disable access to its Internet Explorer Web browser and put icons on the desktop in its upcoming Windows XP operating system that link to non-Microsoft software. But if the company hopes to settle its antitrust case brought by the federal government and several states, more concessions may be demanded--accommodations that could threaten Microsoft's plans to promote its new Web-services software through its desktop systems, servers, and Internet properties.

Microsoft isn't feeling very threatened--yet. Late last month, the Court of Appeals for the District of Columbia found the vendor guilty of illegally maintaining its Windows monopoly, but absolved Microsoft of attempting to dominate the Web-browser market and opened the door for bundling more software with Windows while overturning a prior breakup order. The decision, said chairman Bill Gates, "sets a high bar for any ruling against the inclusion of new features in any software product."

Concessions aside, Microsoft is charging ahead to make its operating-system monopoly a powerful asset for boosting its new products to market-leading positions, just as Windows 95 helped Internet Explorer win the browser wars. Due in October, features in Windows XP integrate the system with new Web-services software, code-named HailStorm. The operating system interprets messages encoded with the Simple Object Access Protocol, Microsoft's Net-friendly format for running remote components. Users logging on to Windows XP will be automatically signed on to Microsoft's Passport digital wallet service, which stores credit-card and billing data on secure servers, so users can expedite purchases. "Over time, I'd expect more capabilities in Windows that take advantage of HailStorm services," says Microsoft business development director Charles Fitzgerald.

That's no surprise, says Bob Crowley, CEO of Bowstreet Inc., which sells software for assembling Internet application components. With Internet-based apps threatening its franchise, Microsoft is "going to be proactive to be the next-generation view you have to go through" to access Web services.

Windows XP also includes instant-messaging software that will communicate with business-collaboration apps from companies such as Groove Networks Inc., and a new Media Player that directs users to Web sites run by Microsoft and its partners. Pressplay, an online music service from Vivendi Universal and Sony Corp., will offer songs that MSN users can stream and download in the Media Player format.

Rival AOL Time Warner, which has a deal with media software company Real Networks Inc., last month pulled out of talks with Microsoft to give AOL better exposure on Windows XP--in part because it says Media Player, Passport, and Windows Messenger shut out its services. AOL is fuming that Microsoft is bolting new software onto the operating system. "It's the same kind of business act the court has ruled was inappropriate," an AOL spokesperson says.

Microsoft isn't backing down on other fronts, either. It says it's only temporarily removing its Smart Tags feature from XP--the tags create pointers to Microsoft-approved Web sites within public Internet pages--until the technology is ready. And Active Directory in the upcoming Windows.Net Server will recognize Passport accounts, so IT managers can query and browse them as objects in the directory and enable global logons to certain Web sites.

The vendor's plans haven't escaped government notice. While New Mexico withdrew from the antitrust case last week, 18 state attorneys general say they'll press ahead even if Microsoft settles with the Justice Department. Iowa's and Connecticut's state attorneys general said last month that they're keeping a close eye on whether Microsoft illegally ties its HailStorm code to XP.

Meanwhile, Microsoft plans to begin competing in other markets to boost sales. It expects annual revenue to grow about 12% when it reports 2001 financial results this week. But earnings will come in at only 1 cent per share due to losses on telecom and cable investments. Microsoft plans to ship a data-visualization add-on to Office this fall that lets users graphically interact with data in SQL Server 2000 databases.

That approach may be dated. "All the growth in business intelligence has come from Web-based analytics," says Clay Young, VP of marketing at OLAP vendor ProClarity Corp.--not on client-side computing, where Microsoft is focused. Microsoft is working to revise that business model to remain influential, but industry pressure and the government's doggedness will make it harder for the company to succeed.