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?

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