MSNBC

Silicon Valley is afraid a snake lurks in Microsoft’s New Windows XP

By Rebecca Buckman THE WALL STREET JOURNAL

June 22 — Last week, at a day-long get-to-know-you session that Microsoft Corp. hosted for venture capitalists, one attendee told a fable in which she compared Microsoft to a snake and asked Microsoft executives to respond.

AND IN AN ON-THE-SPOT audience poll, only 40% of the attendees agreed that the Redmond, Wash., software company would make a good partner for the fledgling companies in their investment portfolios. Granted, Silicon Valley is one of Microsoft’s toughest constituencies. But the venture capitalists’ continuing concern underscores a growing sentiment that Microsoft’s efforts to bundle new Web services with Windows XP, the iteration of the computer operating system due out in October, may represent an even bigger power play than its earlier efforts to expand Windows. (MSNBC is a Microsoft - NBC joint venture.)

One of the latest examples that’s causing a stir: Microsoft is pushing content providers to its MSN network of consumer Web sites to adopt Microsoft services such as Passport, a “single sign-in” Web-registration service that stores credit-card information and passwords. It also is pushing content companies to adopt Windows Media, the Microsoft format for playing digital music and video. Some partners say they now have such terms written into their MSN contracts.

Analysts and technology executives say they’re surprised that Microsoft is still behaving aggressively on the eve of a major court ruling in its antitrust case. “It would be fair to say, aren’t they risking potentially raising the eyebrows of the Justice Department and providing their antagonists fuel for saying, ‘See? They’re going to do it again,’” says Bob Crowley, chief executive of Bowstreet Inc., a Lynnfield, Mass., Web-services firm. But “they’re smart guys,” Mr. Crowley adds. “They’ve run the calculations and figured it’s more important for them to claim the territory right now."

Apparently so. Some venture capitalists at Microsoft’s closed-door meeting last week, held at its Mountain View, Calif., campus, were blown away by new Web features, such as instant messaging, in Windows XP, according to people who attended. Some of them probably “went home and threw away three business plans sitting on their desk,” worried that small companies wouldn’t be able to compete in businesses Microsoft has linked to Windows, says Lise Buyer, a partner at Technology Partners, a Palo Alto, Calif., venture-capital firm.

She adds: “I realize my challenge is going to be no different today than it was five years ago: How do I build a business that doesn’t get crushed?” But she says things are harder this time around because Microsoft now has a foot in so many different businesses, from business software to cellphone services to digital media.

Microsoft says it has every right to integrate new features into Windows if it believes they will benefit customers. Indeed, in a speech in San Francisco Thursday, Microsoft chief Steve Ballmer touted many of Windows XP’s new features and said they should make computing easier for people — even his mother-in-law, whom he said calls him about once a week for technical help.

Even so, continuing controversy over Web services tied to Windows XP “could put a temporary damper on the positive sentiment that has helped Microsoft’s stock over the last several months,” Merrill Lynch & Co. analyst Henry Blodget said in a research note Thursday. And two state attorneys general involved in the antitrust case, Tom Miller of Iowa and Connecticut’s Richard Blumenthal, said they will press the XP issue in any new legal hearings.

But Microsoft is forging ahead, even as it awaits a federal appeals-court ruling that is expected to throw out a trial judge’s order to break up the company. Microsoft officials said this week, for instance, that they will move ahead with plans to include a controversial feature in the company’s Internet Explorer Web browser — also included in Windows XP — that could turn any word on any Web site into a link to Microsoft’s own Web sites and services. The links would appear without the knowledge or permission of the Web site owner.

The feature, called Internet Explorer Smart Tags, will be turned off by default, however, Microsoft says. And officials now say it will ship in a less far-reaching form that won’t automatically include the links to Microsoft’s own sites. Instead, users will be offered a choice between viewing links to Microsoft sites and links to the sites of certain other companies or entities.

Still, Ms. Buyer gives Microsoft “huge kudos” for trying to work more closely with venture capitalists and talk to them about Windows XP and other products. Microsoft Vice President Dan’l Lewin calls the Silicon Valley meeting last week “really constructive.” He points out that in response to other poll questions, “three-quarters of the audience felt there was opportunity” to partner with Microsoft. Responding to the snake comparison, Mr. Ballmer talked about the good relations Microsoft has with large and small technology companies.

But some companies may have to accept new business terms to work with Microsoft. Several companies that provide content to MSN, such as online match-making and student homework help, report that Microsoft has asked them to adopt the Passport service, software that will underpin future Internet services Microsoft may sell. “It was a requirement of our contract,” says Nick Goodman, director of business development for New York education outfit Tutor.com Inc. The company signed its contract with MSN in the fall.

Match.com (www.match.com), the online-dating subsidiary of Ticketmaster, which is majority-owned by USA Networks Inc., says Passport adoption isn’t now in its MSN contract, which it signed two years ago. But Microsoft has recently asked Match.com to connect to the service, and “I certainly get the impression it’s a priority” for Microsoft, says Cindy Hennessy, president of Match.com. Match.com also provides services to Microsoft rival AOL Time Warner Inc.’s America Online, and it hasn’t pushed Match.com to adopt a similar, single sign-in service, she says.

Ms. Hennessy says she wouldn’t mind linking up with Passport — it could allow people to visit multiple Web sites, such as hers, without having to reregister each time — “it is a technical issue that we’re going to have to throw resources against.”

Another provider of content to MSN says it committed in its contract last year to adopting both Passport and the Windows Media format for music and video, but hasn’t yet complied. Now, an official at the Web company, which asked to remain anonymous, says, “they’re pushing us to implement it.”

Microsoft Vice President Yusuf Mehdi, who oversees MSN, said, “We’re asking more and more people to use Passport. It’s an option,” and not normally a condition of a contract. Microsoft started asking online-shopping partners to adopt Passport last year, he said, so people could purchase things more easily on the Web. — John R. Wilke contributed to this article.

Copyright © 2001 Dow Jones & Company, Inc.

-- Anonymous, June 22, 2001