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Tech Industry

Microsoft's Faustian bargains

The secret of the software giant's success lies not in its ability to innovate, but in its negotiating skills, says CNET's Michael Kanellos.

Some chalk Microsoft's success up to innovation and technical ability. Others attribute it to the software maker's knack of exploiting other people's inventions. Personally, I give the credit to its negotiating skills.

There are few, if any, organizations in the world today with the same prowess in drafting contracts as the Redmond, Wash.-based behemoth. Time and time again, Microsoft manages to craft cagey deals that make friends out of enemies--or that compel friends to engage in alliances they might not otherwise want to make.

Founder Bill Gates isn't evil, as conspiracy theorists like to allege--he's just the Otto von Bismarck of his day.

Witness last week's deal with AOL Time Warner. The two companies have been attacking each other for years. Now, AOL will promote Microsoft's digital rights management (DRM) technology, work with it on ways to promote digital entertainment and drop its antitrust lawsuit against the software maker.

In return, Microsoft will pay $750 million to AOL, but it essentially gets an easy avenue into the consumer entertainment market. Chairman Bill Gates himself initiated talks by calling AOL Chairman Richard Parsons after most of the inconveniently antagonistic AOL execs had been nudged out of the picture.

The "Software Assurance" plan, with its Select licensing program, stands as another example of Microsoft's ability to cut clever deals. The plan, unveiled in May 2001, essentially took away cheap software upgrades and replaced them with a three-year subscription-like service that would require institutions to update their software more rapidly.

Customers and analysts were outraged, claiming the plan would raise software fees. What was the result? It did raise software costs for many, but a number of large customers signed up anyway, because Microsoft threw in an early-bird discount.

Certainly, the company's awesome wealth and influence help swing some of these deals, but there's also a level of diplomatic genius in some of these agreements that von Metternich himself would admire. A major software reseller once described Microsoft's dealer programs as "intelligent entanglements," because the complete implications of these agreements only became apparent weeks after they were signed.

Chris LeTocq, an analyst at Guernsey Research recalled that, when he worked at a PC maker, his company sent "the nicest guy possible" to negotiate a licensing agreement with Microsoft. "After he got back, he took a week off," LeTocq said.

"You can be wealthy by making us rich"--that really is the offer Microsoft makes to hardware and software developers. And most are willing to enlist, or at least to not rock the boat too much.

Poker faces
In a lot of ways, psychological mastery is embedded in the company's genetic code. Chairman Bill Gates is said to have spent a good chunk of his time at Harvard University playing, and winning, at cards. The company scored one of its first victories in 1981, when it got the nod to supply the operating system for the first IBM PCs. Big Blue went that way, in part, because: 1) the lead candidate Digital Research dickered over the nondisclosure agreement; and 2) the Microsoft guys showed up to the meeting wearing suits.

In the deal, the company got IBM to grant them the right to license DOS to other PC makers. IBM didn't think a clone market was going to be easy to develop.

Another Gates masterpiece came in 1985 when he suggested to then-Apple Computer CEO John Sculley that the Mac maker license the Macintosh OS to Sony and others. It was a no-risk situation. If Apple took his advice and licensed its OS, Microsoft would emerge as the leader in desktop applications across two platforms and reduce IBM's influence in the then-emerging PC market.

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Senior department editor Michael Kanellos scrutinizes the hardware industry in a weekly column that ranges from chips to servers and other critical business systems. Enterprise Hardware every Wednesday.

On the other hand, if Apple recoiled against accepting a suggestion from the uncouth goons from Washington, that reluctance would secure the entire OS market for Microsoft. No need to recount what happened here.

But some signs that the company's ability to persuade are fading have begun to appear. Many foreign governments have begun to adopt Linux over Windows. In addition, Hewlett-Packard has begun selling Linux-based laptops in Thailand. And Microsoft last week also discounted its Office XP suite, a rare example of a price cut.

In short, a number of customers have become comfortable with the cheaper alternatives to Microsoft's products. Last week, the company put extra services in its Software Assurance.

These moves all seem to point to a changed Microsoft. Or are they just part of Microsoft's subtle strategy in another industry coup?