In Apple, a lesson for streaming business

special report Three years ago, federal antitrust regulators dropped a brief inquiry into the nascent streaming media market.

Since then, Microsoft has acquired one streaming company, invested hundreds of millions of dollars in others, created a streaming media division and, most recently, has begun taking stakes in firms ranging from content sites to Web-hosting services. These companies, in turn, use Microsoft's Windows Media streaming technologies.

Although the streaming business has been involved in the federal antitrust case against Microsoft, industry executives and legal analysts say the Justice Department decided instead to focus on a full-scale investigation of the browser market, partly because streaming was at a relatively nascent stage. But as parallels emerge between Microsoft's strategies in browsers and in streaming today, some question whether the government prematurely abandoned its 1997 inquiry.

"If the DOJ pressed on with its investigation, I think there would have been more small companies around today (that would be) able to compete with Microsoft directly at the server level," said Peter Dougherty, president of Digital Bitcasting.

Given the massive complications of the last Microsoft case, it is not known whether the department would be anxious to begin a new inquiry into streaming. Antitrust experts say the issue is more likely to be re-examined through a complaint or a new lawsuit filed by another company emboldened by Judge Thomas Penfield Jackson's ruling.

The Justice Department could become involved in such a case or could look into the streaming business again if a significant merger or investment merits renewed attention. Streaming issues may also arise in the remedies phase of the government's latest case.

Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif., said the government might ask that Microsoft be barred from packaging its streaming technology with the Windows desktop operating system. "It's not the lead issue or the major issue in the case, but it's in there. So the judge could take this issue during the remedies," he said.

Microsoft spokesman Adam Sohn sees no need for examination of his company's moves in streaming, noting that RealNetworks continues to lead the field. RealNetworks itself says it does not believe that the streaming media industry needs the government to regulate Microsoft, though it does acknowledge increasing threats from its chief rival in government filings.

Nevertheless, questions about Microsoft's tactics in the business persist. "If the DOJ was genuinely interested in fostering competition, they could have had Microsoft compete with just their own product, rather than allow it to fund one company, be on the board of another, and buy another one out," said Marty Falaro, former chief executive of VDOnet.

RealNetworks was cited along with leaders of other technology industry segments in Jackson's decision. "The same ambition that inspired Microsoft's efforts to induce Intel, Apple, RealNetworks and IBM to desist from certain technological innovations and business initiatives--namely, the desire to preserve the applications barrier--motivated the firm's June 1995 proposal that Netscape abstain from releasing platform-level browsing software," according to the ruling.

"This proposal, together with the punitive measures that Microsoft inflicted on Netscape when it rebuffed the overture, illuminates the context in which Microsoft's subsequent behavior toward PC manufacturers, Internet access providers and other firms must be viewed," Jackson added.

A Justice Department representative declined to comment on the possibility of a new review into streaming, noting only that issues surrounding the multimedia technology were an important part of its antitrust lawsuit.

In the summer of 1997, DOJ investigators interviewed streaming companies such as VDOnet, Digital Bitcasting and RealNetworks, which was Progressive Networks at the time.

As part of their inquiry, regulators reviewed Microsoft's acquisition of VXtreme and investment stakes in VDOnet and RealNetworks. Some sources said they also were looking into Microsoft's widely publicized $150 million investment in Apple Computer, a deal that included access to Apple's multimedia QuickTime patents.

"They were trying to understand Microsoft's role in streaming video," Falaro recalled. "They wanted to know why Microsoft would be involved with three competitive companies when it had its own streaming product. It was the early days of streaming video, and Microsoft wasn't sure what would be the leading technology."

But in September, only a month after the inquiry began, regulators notified VDOnet that they were dropping their review.

"The DOJ concluded there wasn't enough big business to warrant further discussions," Falaro said. "It was the beginning of the industry, and no one was making money. So the DOJ went off to focus their attention on other areas like the browsers."

Howard Morse, a former antitrust attorney with the Federal Trade Commission, said the government needed to pick and choose its battles, given its limited resources. Others have said regulators needed to muster all their strength to deal with the browser issues alone.

Today, the stakes are considerably higher in the streaming business. A rising number of consumers are using the Internet at high speeds with such technologies as cable modems and DSL connections, broader pipelines that are expected to drive the market for delivering audio and video online.

In competing for this business, however, legal experts say Microsoft must be careful not to aggravate its already sensitive legal predicament. In fact, some in the streaming industry say the company has appeared uncharacteristically chastened at times since the Justice Department's browser scrutiny, despite public statements by Microsoft of its need to forge ahead.

"In the early days of Internet Explorer, when it was starting with a tiny market share relative with Netscape, the IE guys were incredibly aggressive," said an executive at a major Web media site that uses both Microsoft and RealNetworks streaming technologies. "My suspicion here is the DOJ lawsuit has maybe had some impact. They've not been nearly as aggressive as they could be given the relationship of the streaming player with the operating system."

Still, others say the government could have taken some steps at the time of its first inquiry, despite the small size of the market and lack of any clear industry leaders at the time.

[PLACE_STOCKBLOCK] In the course of three years, the industry has already undergone substantial consolidation. Microsoft acquired VXtreme, while industry leader RealNetworks snapped up Vivo Software. VDOnet was sold to server software company Citrix Systems in late 1997. And last year, audio-video streaming software company Vosaic was acquired by videoconferencing systems maker VTEL.

Digital Bitcasting and Apple--along with Microsoft and RealNetworks--are among the few independent companies that remain to offer streaming media technology.

Sohn said Microsoft has done nothing improper in its multimedia business dealings. "We continue to compete in the marketplace, but we do it fairly," he said.

In public, RealNetworks contends that it is doing fine without any government intervention. "RealNetworks continues to have the dominant market share," said Dave Richards, vice president of consumer products. "We're so far down the road, we're baked into the Internet."

But other companies have expressed similar confidence in previous contests with Microsoft, only to encounter the software behemoth's legendary--or infamous--influence on the rest of the high-tech industry.

That was reflected vividly in testimony by a senior Apple executive during the government's antitrust case, in recounting how Microsoft had proposed to split the multimedia software market with the computer maker.

In a series of meetings in 1997, Microsoft allegedly pressured Apple to withdraw products that computer users needed for playing multimedia files, according to Avadis Tevanian, Apple's senior vice president of software engineering. In return, he added, Microsoft said it would allow Apple to market tools that software developers used to create multimedia content.

"Microsoft made it clear that if Apple refused to relinquish the playback market, Microsoft would use its monopoly power to drive Apple out of the entire multimedia market," Tevanian said in testimony that was strongly disputed by Microsoft.

So contentious were those negotiations that Apple chief executive Steve Jobs emailed Microsoft's Bill Gates on Feb. 3, 1998, "expressing Apple's concerns about the threatening behavior of Microsoft's employees."

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