Excellent article.......Microsoft, AOL spat may lead to all-out
war
by Jay Greene
Seattle Times technology reporter
Think of the ongoing spat between Microsoft and America Online
over instant messaging as a preliminary bout.
The main fight is just about to begin. And it promises to be a
battle of heavyweights.
Microsoft, once vanquished by AOL in the business of providing
access to the Internet, is coming back for more. The company
may have its hands full with competitors such as Oracle, Sun and
even the Linux operating system. But if Microsoft were to list
competitors it fears most, AOL would top the list.
"They are a platforms competitor more than ever," said Yusuf
Mehdi, director of marketing for Microsoft Consumer and
Commerce Group. "That just means we'll bump into them more
and more on the dance floor."
That's Microsoft-speak for watch out.
AOL has been a threat for years, offering its proprietary online
service that gives consumers less reason to use Microsoft's
Internet business. But the Dulles, Va., company's recent
acquisition of Netscape Communications made it the dominant
company on the Internet, and the one with the greatest customer
reach.
But AOL isn't stopping there. The company is considering
developing an AOL-PC, a low-priced computer that connects to
AOL when launched. Such a device wouldn't need Microsoft's
Windows operating system.
AOL is also developing AOL-TV, an interactive television
offering that would compete with Microsoft's WebTV.
And like Microsoft, AOL is working on extending its service to
smaller devices too, such as cell phones and palm computers.
The online-chat spat
If the instant-messaging skirmish offers any insight into how the
battle will unfold, it's going to be a doozy. Last month, Microsoft
launched MSN Messenger Service, which allows Internet users to
"chat" in real time with each other.
But the software also offered users the opportunity to incorporate
AOL's market-leading product, Instant Messenger. That meant
Messenger Service users could chat among themselves and with
Instant Messenger users, while Instant Messenger users could talk
only with each other.
That bit of engineering has sparked a tit-for-tat offensive between
the two companies. Microsoft claims it developed the feature in
the name of "interoperability" - the ability to let Internet users talk
with each other regardless of the kind of instant-messaging service
they have.
AOL, though, compares Microsoft's actions to hacking, since
Messenger Service hijacks Instant Messenger customers and uses
AOL's messaging servers without permission.
A day after Microsoft launched the product, AOL rewrote its
software to block the interoperability. Within a few hours,
Microsoft posted a software patch on its Web site that
sidestepped AOL's barrier. The two have gone at it ever since
and were on their sixth round of blocking and patching late last
week.
The companies have been just as aggressive criticizing each other.
AOL's president of interactive services, Barry Schuler, compared
Microsoft's actions to the sort of bullying alleged in the
Department of Justice's ongoing antitrust case against the
company.
"I would think that Microsoft would try to employ 'new think,' try
to build partnerships, not flip the bird to the DOJ and the
American people," Schuler said.
Schuler suggested that AOL may wind up suing Microsoft over
the issue.
"It's unauthorized access to our servers, and we sue hackers all
the time over that," he said.
But Microsoft has put AOL in the awkward position of fighting
something that consumers may ultimately want.
"Instant messaging has been a good litmus test . . . to see how
they handle renewed competition," Mehdi said.
17 million can't be wrong
The real battle, though, promises to be for consumers who want
to get online. AOL is king of that mountain right now with 17
million subscribers.
But that market is changing, and Microsoft is banking that the
change offers it some opportunity. The most important change is
the advent of broadband technology, which allows computer
users to connect to the Internet at dramatically higher speeds than
conventional modem connections allow.
The two businesses most likely to deliver those services - the
cable company and the phone company - have shown some
reluctance to allow AOL users to connect over their lines.
The other significant challenge comes from the movement toward
"free" PCs and Internet service. Within the past few months,
companies including Microsoft have offered free computers to
users who sign long-term deals for Internet access.
Microsoft recently partnered with such companies as the office
supply chain Staples and PC-maker Lan Plus, to give away
computers in exchange for long-term Internet access commitments
for $20 or less a month.
Additionally, companies such as Federal Way-based Freei.net
offer consumers free Internet access, hoping to make their money
selling ads that run while the computer is connected to the
Internet.
Microsoft believes those changes can only mean dislocation for
AOL. "Half their base is at risk," Mehdi said, referring to internal
research.
"It's a tremendous opportunity," Mehdi said. "That's something
we're going to go after."
AOL's strength right now is that, for many customers, leaving is
more painful than staying. Schuler acknowledges that one of the
company's greatest assets is the simple reluctance of customers to
part with such things as their e-mail address or a stock portfolio
tracker, which they would have to do if they leave the network.
At some point, though, it seems clear that new technology -
particularly broadband - will be too strong a lure for AOL's
existing customers and the millions of new ones that log on each
year. Even AOL expects that the first wave of broadband
adopters will be their own customers, people who have grown
accustomed to making the computer part of their everyday lives.
"The majority of people who want to buy broadband are our
customers," Schuler said. "They want to buy it from us."
AOL won a big victory in June, when a federal judge in Portland
upheld a city ordinance that required cable operator TCI to open
up its high-speed network so that AOL and others can provide
the fast connections to their own customers. AOL also has lined
up deals with GTE and Bell Atlantic to provide access over the
telephone version of broadband, digital subscriber line service.
Because Microsoft is less entrenched in the access business, it has
less to lose as the market shifts to broadband, and recent deals
with cable companies may give it an advantage in tapping those
markets.
Schuler is convinced that AOL has the advantage as the online
world evolves.
"We're a brand company," Schuler said. "We've really defined
what the online world is."
'We will bury you'
It's easy to look at the track record of Microsoft's Internet access
business and wonder what Microsoft is thinking. Microsoft picked
the same fight with AOL four years ago. The company didn't just
lose. It was embarrassed.
Six years ago, Microsoft Chairman Bill Gates invited AOL Chief
Executive Steve Case to Redmond and encouraged him to sell
AOL to Microsoft.
"I can buy 20 percent of you or I can buy all of you," Gates told
Case, according to the book "aol.com" by journalist Kara
Swisher. "Or I can go into this business myself and bury you."
Case didn't back down and went on to make AOL the dominant
Internet brand. Microsoft's Internet access business, the
Microsoft Network, is the one that got buried.
Microsoft tried to match AOL on content, with such offerings as
adventure magazine Mungo Park, which failed to catch on. It
created online "programs," such as the soap opera 475 Madison,
hoping to hook customers the way television shows do. Perhaps
most important, Microsoft bundled the service with its Windows
95 operating system, figuring to gain market share with ties to its
ubiquitous operating system.
Despite all those efforts, AOL extended its lead over Microsoft,
which today has about 1.8 million subscribers to The Microsoft
Network. The service was such an afterthought that Microsoft
was actively shopping it last year, hoping someone would take if
off its hands.
With new leadership running Microsoft's Internet business, the
strategy has been reconsidered. Vice presidents Brad Chase and
Jon De Vaan took control of those businesses when Microsoft
reorganized its corporate hierarchy in March. The two are still
trying to put the finishing touches on their vision for the Internet
operations, but clearly the Internet access business is going to be
core.
The bet is that connecting to the Internet is central to establishing
and maintaining a relationship with the Web surfers Microsoft
wants to draw to its other Internet sites. It wants to sign up
businesses that want to set up Web sites and advertise with little
hassle. It wants to hook customers who want to set up Web
pages for their daughter's soccer team to post scores, schedules
and even team dinners at the local pizzeria. To Microsoft, Internet
access is at the core of that.
Microsoft has already beefed up its effort to sign up users. In
addition to playing the free-PC market, Microsoft has simplified
Internet access sign-up in the recently released Windows 98
Second Edition. It plans to carpet bomb mailboxes across the
country with MSN Internet Access CDs.
Those moves have already led to a 50 percent growth in
Internet-access signups with MSN in the past six weeks, Chase
recently said.
"We've made a lot of gains, but they (AOL) are also far ahead,
and we have a long way to go," Chase said at the company's
annual gathering of analysts last month.
Chase said Microsoft is spending more money, relative to the size
of its current business, than AOL. Additionally, Microsoft has
$17.2 billion in its reserve and a willingness to continue to lose
vast sums in its online operations in order to establish that
business.
"You'll see we're doing a lot more and we're willing to commit a
lot more," Chase said.
'Are we scared? No'
It's that sort of talk that gets AOL's attention. As strong as AOL's
position may be, the company recognizes that Microsoft isn't just
any other competitor. Microsoft has deeper pockets and more
engineers and marketers than any other company AOL has had to
face.
"We have enormous respect for Microsoft," Schuler said. "But are
we running around with our hair on fire because they proclaimed
us Public Enemy No. 1? No. Are we scared? No."
Perhaps the biggest reason is that AOL has been here before and
withstood Microsoft's challenge. History is on its side.
"AOL is synonymous with the Internet," said Mark Winther, an
International Data Corp. analyst. "It's a really hard thing to
dislodge."
To Winther, Microsoft is less of a challenge for AOL than
broadband. And he expects AOL to handle that challenge as well.
"Their biggest weakness right now is that they are blocked out of
broadband," Winther said. "I just don't see how that will continue.
It seems counter to everything the regulators are saying."
If AOL is able to offer their service over high-speed cable and
phone lines, Microsoft will have little opportunity to topple them.
"Microsoft is going to have a hard slog here," Winther said. "AOL
is no dummy. AOL is the elephant."
All of which means this boxing match will likely go the distance.
Copyright © 1999 Seattle Times Company
Report has Gates giving it all away; untrue, say Gateses
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