Microsoft Lock-in?

The recent announce­ment of a part­ner­ship between AOL Time Warner and Microsoft rep­re­sents an inter­est­ing new twist in the shap­ing of the Internet.

For the past few years, Microsoft has been try­ing to fig­ure out how to remain rel­e­vant in an era of increas­ing open­ness. The rise of HTML and of HTTP as the under­ly­ing pro­to­col for dis­tri­b­u­tion on the Inter­net have chal­lenged the level of con­trol that Microsoft had on the com­put­ing world. The ini­tial con­trol was borne out of a part­ner­ship between Intel and Microsoft, which allowed them to estab­lish both com­pa­nies as the essen­tial play­ers in the desk­top com­put­ing world (the part­ner­ship often being rec­og­nized as the Win­tel (Win­dows plus Intel) behemoth.

When the Inter­net started to rise, the net­work jeop­ar­dized that rela­tion­ship as open stan­dards offered the abil­ity to move more of the soft­ware logic to servers and rely less on the client desk­top, with HTML being pretty much the uni­ver­sal inter­face to those new sys­tems. With the advent of Linux, a cheap alter­na­tive to Win­dows, Intel found itself remain­ing in a very strong posi­tion (as Linux can run on Intel boxes) and Microsoft sees the pos­si­bil­ity of being increas­ingly mar­gin­al­ized. The prob­lem comes from the fact that Microsoft, as holder of the soft­ware com­po­nent is really only work­ing as a mid­dle tier in a rela­tion­ship that involves proces­sors, net­work band­width, soft­ware, and con­tent. Let’s review why this devel­op­ment is sig­nif­i­cant in the new world.

Ten years ago, the big chal­lenge in com­put­ing was pro­cess­ing power. Soft­ware was always com­ing out that needed to gob­ble up more pro­cess­ing power and more mem­ory. In the last cou­ple of years, though, the equa­tion has shifted rad­i­cally. Increas­ingly, users have more pro­cess­ing power on their desk­top than they can use. Unless you are a hard­core gamer, the com­bi­na­tion of Moore’s Law (which has pushed CPU speed to a point where any gain is of lit­tle rel­e­vance to most users) and the steady decline of prices for mem­ory has meant that today’s user is find­ing himself/herself with a com­puter that is only gated by one fac­tor: speed of access to the Inter­net. The chal­lenge here is that, for most peo­ple, access to the Inter­net still hap­pens over a reg­u­lar modem, hence lim­it­ing what they can do online. While adop­tion of broad­band access is grow­ing, it still rep­re­sents a gat­ing fac­tor in what most users can do. As a result, most peo­ple are now look­ing at how they can access the Inter­net faster, mov­ing the dis­cus­sion away from the desk­top and onto that bit of the net­work that has tra­di­tion­ally been the realm of tele­phone companies.

With the rise of cable com­pa­nies as access providers to the Inter­net, Microsoft now needs to find part­ners in two access camps: on the one hand, it needs to part­ner up with cable com­pa­nies, and on the other, it needs to part­ner up with phone com­pa­nies. For the first time in its life, Microsoft is actu­ally forced to play in an arena where the monop­oly play­ers are some­where else than in its own company.

With the AOL part­ner­ship, Microsoft is clos­ing one part of the equa­tion, by get­ting access to the pipes offered by Road Run­ner, the high speed access com­pany offered by AOL/Time Warner. Cou­pled with rela­tion­ship estab­lished with Ver­i­zon and Qwest, Microsoft has gained a foothold in the access space. How­ever, this is poten­tially short-lived, as Microsoft could eas­ily be replaced if any of those com­pa­nies decided that they wanted to part­ner them­selves with some­one else.

So secur­ing access to the pipe is one way to ensure con­tin­ued rel­e­vance but it does not ensure the level of con­trol that the desk­top monop­oly once allowed. In order to get that level of con­trol, one must find a way to lever­age the exist­ing plat­form (win­dows) and cre­ate a lock-in with it. This is where part­ner­ships on con­tent can become useful.

In order to cre­ate a long term strate­gic con­trol, Microsoft must ensure that it will be dif­fi­cult to move away from its offer­ing. This is where the Win­dows media strat­egy comes in. If Microsoft man­ages to get con­trol of con­tent cre­ated on the Inter­net, it will be much more dif­fi­cult to unseat it in the future. With last week’s announce­ment that AOL would col­lab­o­rate with Microsoft on dig­i­tal media, the com­pa­nies have started to estab­lish some­thing that may give Microsoft much more con­trol in the future. Once con­tent is encoded using the Microsoft Win­dows Media solu­tion, it will be dif­fi­cult to move away from it. A part­ner­ship on Dig­i­tal Rights Man­age­ment also ensures that Microsoft will hold the keys for con­tent encoded using its solu­tion, hence ensur­ing its tight con­trol of a very lucra­tive market.

The ace card Microsoft holds in this is its installed base. By mov­ing the dia­logue from web servers (a bat­tle it lost long ago) to video and audio servers (a bat­tle that has yet to be fought), Microsoft is posi­tion­ing itself for the future of the Inter­net. This early posi­tion will ensure that it will be able to offer Win­dows Servers that power the next gen­er­a­tion of Inter­net con­tent. The key in mak­ing its case is that, because it has con­trol of the desk­top, Microsoft can offer mil­lions of users with a media player already run­ning on their machines. This is an attrac­tive pub­lic, and allows the com­pany to make a strong case for an inte­grated suite of prod­ucts and ser­vices (“here’s the player, here’s the server.. oh and while you’re using our stream­ing media server, how about using our rights man­age­ment sys­tem… and you know all that stuff actu­ally runs bet­ter on our win­dows platform…”)

So this is the worst case sce­nario. But, one can eas­ily say, there are com­peti­tors and there’s no guar­an­tee that this will work. Fur­ther­more, the open stan­dards are always cre­at­ing a limit on the company’s power, right?

Well, that’s not even a guar­an­tee. As we know, Microsoft came from behind in the browser wars. First, there was Netscape, and it was con­trol­ling 80% of the mar­ket. Then Microsoft launched IE but things didn’t really change much in the begin­ning. As Microsoft improved its browser (and Netscape, drunk on its own hype, believed it couldn’t be defeated), the per­cent­age of con­trol shifted.

AOL, with its estab­lished cus­tomer base of 30 mil­lion, and its own­er­ship of the Netscape browser (bought as the com­pany was already los­ing mar­ket­shares), was the only com­pany that could have change the bal­ance back. By bundling Mozilla first in Com­puserve and then in the mac client for AOL, it indi­cated to Microsoft that this was some­thing they might be will­ing to do, if Microsoft didn’t work with them. It quickly became obvi­ous to Microsoft that they could be locked out of the browser mar­ket if they didn’t play nice with AOL. So they cut a deal and gave AOL a roy­alty free license to use the browser for the next seven years. That seemed to pretty much lock every­thing in place to keep tight control.

But the story doesn’t end here…

Appar­ently, Microsoft does not intend to build a stand­alone ver­sion of IE any­more. The rel­e­vant lines in that dis­cus­sions are as follows:

Q: when / will there be the next ver­sion of IE?A: As part of the OS, IE will con­tinue to evolve, but there will be no future stand­alone instal­la­tions. IE6 SP1 is the final stand­alone installation.

Zeld­man points out that IE will be built into future ver­sion of MSN for the mac but that oth­er­wise, it will be part of the OS. This is an inter­est­ing development.

Let’s extend this con­cept out to beyond seven years: Microsoft and AOL are at the end of the cur­rent agree­ment. AOL did indeed use the Win­dows Media suite and is using the OS-embedded IE. Microsoft decides to rene­go­ti­ate terms. AOL balks. Microsoft says that it will change its browser so that AOL doesn’t work on it. What hap­pens then? What is AOL’s fall­back posi­tion? On one hand, it’s got 7 years worth of media now encoded in Win­dows Media for­mat (and would need to refor­mat all that in order to move off the Microsoft plat­form, a huge under­tak­ing unto itself), and is locked into the Microsoft OS.

It seems that, unless AOL is keep­ing Mozilla alive, it is about to sign a deal that could even­tu­ally put it in a tough posi­tion on the browser end. It also seems that unless it hedges its best and encodes con­tent in win­dows media and another for­mat, it risks lock-in.

On the web devel­op­ment end, this also has huge reper­cus­sions. If we all develop solely to Microsoft, and agree to exten­sions they might make to HTML once its in the OS, we run the risk of all becom­ing win­dows devel­op­ers, beholden to Microsoft.

This is a really all about a fight for the soul of the Inter­net. In the 90s, Microsoft announced a strat­egy of “embrace and extend”, which was often derided as “engulf and devour”. We’re now start­ing to see the exten­sion hap­pen­ing, and it seems to point back to win­dows. Do we want to be locked in?