Interesting article on Microsoft and Internet telephony.
June 12, 2001, Tuesday New York times.
Microsoft Is Ready to Supply A Phone in Every Computer
By JOHN MARKOFF
Microsoft's new Windows XP operating system for PC's goes further than ever before in commandeering the
capabilities of the most widely used desktop tool in America: the telephone.
The ability to use the personal computer as an ''intelligent'' phone has been viewed largely as a curiosity by the
computer and telecommunications industries, not to mention by consumers. Internet telephony has mostly not been
high quality, and conversations are frequently plagued with static and delays. It has also been difficult for computer
telephone callers to find each other without inconvenient and sometimes costly third-party directory services.
That is likely to change rapidly as Microsoft's new software prepares to exploit the next generation of the Internet,
offering computer-based telephony with better-quality voice than before and with more powerful features than the
traditional phone.
And that has some high-technology executives wondering whether the telephone companies are going to be the next
target in Microsoft's sights.
Microsoft is preparing to include both high-quality telephone and directory features in Windows XP, which is
scheduled to be commercially available on Oct. 25.
Weaving improved versions of features Microsoft already offers, like online video meeting software and Internet
voice chat, and integrating them with a more sophisticated version of the company's identity system, known as
Passport, Microsoft asserts that it will transform the very nature of the telephone.
In the future, not only will Internet telephone calls be higher quality than on today's telephone network, but the
personal computer will offer new features like the ability to tell whether the person being called is at her desktop
computer before the call is made and ''follow-me'' capabilities that let the network track a person's location whether she
is at the desk, at home or reachable by cellular phone.
One favorite voice and computer capability described by Microsoft's chairman, William H. Gates, is the ability to call
a restaurant and have its menu pop up on a computer screen during the call.
Moreover, Internet telephony may offer Microsoft powerful new revenue potential from subscription services, like
Caller ID and voice mail, in which it will begin to compete with traditional telecommunications companies. The
company has said that it is trying to generate new subscription revenue from all of its software products as part of its
new Internet strategy, known as .Net.
That new power has some of the company's competitors worrying that Microsoft is planning to steal revenue from the
telecommunications industry in the same way it undermined competitors like Netscape in the software business -- by
adding free features to its operating system.
If telephone calling becomes a standard free feature of the Microsoft operating system, they say, it could bring huge
changes to the telecommunications landscape.
''Microsoft is going to suck the value out of the telecommunications companies,'' said David Isenberg, a former Bell
Laboratories researcher who has written about the impact of the Internet on traditional communications networks.
''Microsoft is going to do end-to-end Internet telephony, and they're going to do it right.''
For longtime experts on the communications and computer industries, Microsoft's move is not a surprise.
''I don't think it's shocking at all,'' said Reed E. Hundt, a former Federal Communications Commission chairman who
is now an adviser on information technology at McKinsey & Company and a member of the board of the Intel
Corporation. ''It's like predictions of earthquakes: you know it's statistically certain to occur, but it's still kind of rattling
when it happens.''
Microsoft executives said that the company was discussing the relationship of Windows XP with telecommunications
and Internet companies and that it might announce new alliances before it begins its operating system this fall.
''I think it's highly unlikely that we will become a network carrier,'' said Craig Mundie, Microsoft's senior vice
president for advanced strategies. He acknowledged, however, that the company was looking to produce revenue from
new telephone-based services. ''To the extent that we can add a cool capability, maybe it's possible that we can make it
a subscription service.''
That is likely to mean that the line between the telephone industry and Microsoft's emerging .Net Internet strategy will
be increasingly blurred.
Even if Microsoft does not become a network carrier, it presents a potentially formidable challenge to the regional
phone companies.
It is clear that the regional phone companies ''wonder the same things the Netscapes have wondered: are they friend or
foe?'' said Brad Garlinghouse, chief executive of Dialpad Communications, an Internet telephony company in Santa
Clara, Calif. ''Any time you have a competitor with $20 billion to $30 billion in cash that's a scary proposition.''
Currently, to make a call from a PC to a telephone it is necessary to have a subscription with a third-party Internet
telephony service like Dialpad or Net2Phone.
But in the future, Microsoft competitors say, the software company will move to rely less on third-party providers and
more on Microsoft's own emerging .Net software strategy, known as Hailstorm.
Hailstorm is intended to aggregate a wide range of personal information, including buying habits, calendar and contact
information as well as ''presence'' information. Whether a computer user is in front of the computer and available for
calls or traveling in a foreign country is a piece of information that will be held by the company's network, raising
privacy and competitive issues.
Industry executives say the telephone companies have until now believed that voice over the Internet was a
competitive threat that was in the distance and they are only beginning to awaken to the challenge.
''The phone companies should be increasingly worried,'' said Andrew J. Kessler, a partner at Velocity Capital
Management, a Silicon Valley investment firm.
The phone companies themselves argue that they are very much aware of Microsoft's looming presence, but they
argue that it will face obstacles entering their markets.
''I think we've woken up to Microsoft,'' said David Nagel, AT&T's chief technology officer. ''There is an enormous
difference between putting a piece of software code in a box and having a working service.''
Microsoft's major current competitor in this realm, America Online, has voice features similar to those found in
current versions offered by Microsoft, but has yet to announce any plans for an improved and integrated service of the
type expected in Windows XP. AOL declined to comment on Microsoft's plans or its own.
For Microsoft, the voice communications system is perhaps one of the best examples of how its legendary persistence
can lead to the creation of a formidable capability that has long been dismissed by competitors.
Microsoft has already begun shifting its focus to the personal computer as a hub of home services and entertainment.
In recent weeks, ads for Microsoft's MSN online service have focused on the idea of shifting telephone conversations
away from the home phone.
In one commercial, a teenager who has had her phone privileges taken away by her mother jokes with a friend about
her mother's not being aware that it is possible to have a voice conversation on the PC.
The company began putting voice features in its operating system as long ago as 1996 with its Net Meeting program,
with the idea of making voice, video and data collaboration possible. Now it will take that technology and integrate it
with its Windows Messenger software and the .Net Passport service, creating a single consistent mechanism for using
the computer as a telephone in Windows XP.
''One of the things we were really committed to in Windows XP was to provide an integrated customer support
mechanism,'' Mr. Mundie said. ''Once we achieved that, it doesn't matter if you call Microsoft because you have a
problem with Office or you call a friend'' because all calling will be done in the same way.
Consumer advocates are concerned about the Microsoft voice strategy. They say that both Microsoft and AOL are
creating proprietary platforms for new voice services that will limit competition and hurt consumers.
''This is extremely troublesome from the point of view of market competition,'' said Gene Kimmelman, co-director of
Consumers Union's Washington office. ''Consumers are not well served by two enormous fortresses. There needs to
be more openness rather than less.''
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