MS back to old tricks with new instant messenger?

Regardless of how it is characterized, a familiar cycle is being accelerated by a confluence of seemingly disparate events--the momentum of Microsoft's federal antitrust case, contract negotiations with archrival AOL Time Warner, and the pending release of new operating system Windows XP. Instant messaging has emerged as the nexus this week as Microsoft prepares a test version of XP that will include a powerful new form of the communications software.

The software giant on Monday announced Windows Messenger, a text, chat, video, audio and telephony service that will be integrated with Windows XP. The feature has until now been a relatively muted part of the roughly US$200 million marketing blitz for the new operating system. But its new multimedia features and its central role in the planned integration of Microsoft's Internet properties elevate the software well beyond a vehicle for text communication.

Analysts said Microsoft views instant messaging--a key element of Windows Messenger--as glue for its new Internet services such as Passport and HailStorm. Such services promise to simplify Web surfing by giving people a single online identity and providing secure access to personal information such as credit card numbers with one click.

"Instant messaging is a potential platform for advertising and for things to piggyback onto it," said Gartner analyst David Smith. "It's also a carrier of the screen name, and Microsoft wants people to use Passport and HailStorm."

Microsoft has long used its ubiquitous Windows operating systems to distribute related products or effectively shut out competing technologies--thereby stifling innovation, in the view of opponents.

In the case of instant messaging, Microsoft has embraced America Online's popular services for sending short text messages and extended the communications technology to work directly with its operating system.

No one is suggesting that the final "E" will materialize anytime soon. But Microsoft is putting new pressure on AOL just as it is struggling to digest Time Warner.

Huge threat to AIM
Windows Messenger, due out in October with the release of Windows XP, is threatening to force AOL to make its IM networks interoperable with competing instant messaging services, an outcome that could seriously erode its market leadership.

"What Microsoft is doing here is leveraging its monopoly on the desktop and extending it onto the Internet," said Mark Cooper, research director for the Consumer Federation of America.

Microsoft faces a markedly different opponent in AOL Time Warner, hardly the kind of start-up with limited resources that the software giant has commonly left in its wake. And the launching pad for its messaging weapon is an operating system that is shaping up to be the highest-profile product release in the company's history, making the much-hyped Windows 95 debut pale in comparison.

Although Microsoft has added enhancements in recent months to its current instant messaging client, MSN Messenger, its latest move takes the important step of embedding the software directly into the operating system, making it far more difficult to separate the two products. It is this tactic that triggered the landmark antitrust investigation and lawsuit by the US Justice Department, which accused Microsoft of unfairly using its dominance in operating systems to foist other products on customers.

"It's 1996 all over again," said Ed Zander, president of Sun Microsystems, a longtime mortal enemy of Microsoft. His remarks, made Monday at his company's annual JavaOne conference, were directed at parallels he sees between Microsoft's current strategies and the beginning of its assault on the Web browser market that eventually buried rival Netscape Communications.

The resulting government lawsuit focused on the linking of Windows 95 to the Internet Explorer browser, but Microsoft has long used its operating systems to promote its products in many other areas, including word processing, desktop databases, multimedia streaming, music downloads, content and Internet access.

Deja vu all over again
Andy Gavil, a professor at Howard University School of Law, said Microsoft's integration of instant messaging with new features in Windows XP recalls the same well-worn practice.

"I think it does have a déjà vu quality to it based on Netscape and all the issues that are very alive in the government's appeal of Microsoft," he said. "The question is, if Microsoft folds these features into the operating system so we all get them like we got IE, will that destroy the separate marketplace for these small software programs? Will it allow them to compete better with AOL, or to push AOL off the desktop?"

Some consumers also expressed worries about Windows' growing footprint.

"I know how aggressive they are. I'd like them to back off a bit," said Tom Wesson, a computer programmer in Schaumburg, Ill. "I think they'd be more successful if they showed a little more respect and didn't try to dominate everything."

Yet for all of Microsoft's critics, the legal assessment of its competitive practices remains anything but clear, and some antitrust experts even give the corporation good odds to win its pending appeal in federal court. That may encourage Microsoft to push harder with plans to tightly integrate its instant messenger and other software with the XP operating system.

Microsoft spokesman Jim Cullinan concedes that the integration of an instant messaging technology within Windows XP has some parallels to the company's approach in integrating Internet Explorer with Windows 95. But he offers no apologies.

"It's about business decisions and technology," Cullinan said. "When Netscape was on top of its game, it tried to build a Java browser and 50 other things that didn't work. Those were business decisions that had nothing to do with Microsoft. In this case, AOL was the leader in instant messaging for years and did nothing with it."

As it has with previous Windows versions, AOL would prefer its software to be packaged with XP. But in this tenuous relationship, it has always been suggested that Microsoft has the upper hand.

An AOL spokesman downplayed the importance of the talks. "If we don't come to a deal, then that's fine," he said, adding that the company is confident it can compete on the merits of its products.

Analysts were more skeptical. "Long term, these negotiations matter. Windows XP effectively embeds many components of the online service directly into the operating system," Internet analyst Henry Blodget wrote this week in a report for Merrill Lynch. "It would obviously not help AOL over the long term if these features gained a significant amount of traction."

Indeed, the timing of this week's XP announcements appear more than just coincidence. But history has shown that Microsoft rarely bluffs when it senses even a hint of a threat to its operating system franchise.

The reason for the software empire's paranoia is simple: Microsoft knows how easily a leader can be toppled because that's precisely what it did on its way to the top of the operating system market, first with IBM and later with Apple Computer. In a telling 1996 interview that remains insightful today, Microsoft's Steve Ballmer explained why his company seemed obsessed with Netscape's Navigator browser at the time.

"Let me tell you a story. Once upon a time there was a piece of software that was an extension of an operating system, and it had a nice little user interface and it had some programming interfaces and people kind of liked it, and over time they built on top of it. One day, the thing that it was built on top of wasn't all that important anymore," said Ballmer, a close friend of Microsoft chairman Bill Gates, who would later become chief executive. "I'm telling you, of course, the story of Windows 95, Windows and DOS. And when we tell the story about what's happening today with browsers 10 years from now, I want the thing that replaces Windows to be Windows."

Hailstorm motives
To understand the motives behind HailStorm, one needs only to substitute messaging for browsers in that statement. The communications software is but the latest potential encroachment on Windows, and for more than a decade Microsoft has had one primary goal: protect the operating system's dominance at all costs.

If the company wants to make sure that Windows is the first thing a person sees and uses when turning on a computer, it is understandable why Microsoft is so aggressively competitive. In case after case, the company has thwarted or slowed the success of technologies that could conceivably sit on top of the operating system, much the same way Ballmer said Windows did with DOS: word processing (Corel's WordPerfect), calendar (Lotus Development's Notes), e-mail (Qualcomm's Eudora), directory services (Novell's NDS), Web browsers (Netscape's Navigator), audio and video streaming (RealNetworks' RealPlayer and Apple's QuickTime), and, of course, competing OS products (Apple's Mac and IBM's OS/2).

Just buy the competition
Nor has Microsoft been shy about using its considerable war chest to buy successful competitors such as Hotmail or purchase companies just to keep their technologies out of the hands of rivals. In 1996, Microsoft became so concerned with Sun's Java programming language that it sought to acquire or partner with several companies to "take mind share away from Sun," according to internal Microsoft documents. Among those companies were Metrowerks, Apple, Hewlett-Packard and Fujitsu.

AOL is well aware of this track record and does not want its Instant Messenger to be the latest entry on any listing of the software company's conquests. That is why it has gone to such great lengths to combat Microsoft on this front, going so far as to block repeated attempts by the architects of MSN Messenger, Yahoo Messenger and other rivals to connect their subscribers with AOL members through the various communications networks.

Some in the industry believe that the controversial blockade, which drew criticism as an affront to the open philosophies that founded much of the Web, may have backfired on AOL by limiting its growth potential. Market research commissioned by Microsoft indicated that the gap between MSN Messenger and AOL Instant Messenger narrowed significantly last year.

At the same time, instant messaging has become increasingly important to the HailStorm project and the company's overall .Net initiative, which aims to make all Microsoft software and services available through the Web to any type of computing device, handheld organizer or cellular phone with the company's Passport security technology. The initiative is one way Microsoft hopes to maintain the dominance of Windows as the world moves beyond the traditional desktop PC for its technological needs.

Moreover, Microsoft intends to charge for this service, making it a major test to determine whether people will be willing to pay to use the Web. All online companies are watching the experiment closely for clues to their own future now that advertising revenues alone have proven insufficient to sustain many businesses.

"The trend is towards charging for services as opposed to giving consumers a free lunch," Gartner's Smith said. "HailStorm and Passport make that easier by offering a standard for enabling transactions. That will help accelerate the adoption of payment technologies such as single sign-on and micropayments."

Talk like that is exactly what Microsoft wants to hear. After years of losing billions of dollars on various online services, executives at the company compound outside Seattle in Redmond, Wash., are more than ready to start making some money. And if that can be done at the expense of AOL, it will be that much sweeter.

As group product manager for the Microsoft Network, AOL's main but distant competitor in the dial-up Internet access market, Bob Visse is one such executive. He is spearheading MSN's effort to lure disgruntled subscribers from AOL since the service raised its monthly rates.

"The general rule that we're trying to follow is to add value on top of what people are getting for free," Visse said, such as multiplayer games, music services and video on demand, as well as the type of enhanced video and voice communication envisioned through instant messaging. "We will introduce paid-for services on MSN."

Mike Yamamoto and Evan Hansen contributed to this report.