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Windows XP: A bundle of trouble?

Consumers and analysts are asking whether Microsoft's new operating system will be a benefit or a detriment to smaller software companies.

When Microsoft releases Windows XP in October, will smaller software companies benefit from jumping aboard the bandwagon or be run over by it?

That's a question Microsoft critics, consumers and some software companies are asking as the software giant prepares to dump more features into Windows XP than into any version of its ubiquitous operating system since Windows 95.

Windows XP--the upgrade to versions 95, 98, Me and 2000--goes on sale Oct. 25. Microsoft says the new OS will be the company's biggest and costliest product launch ever--twice as much as Windows 95's coming-out party.

Among the new features: an Internet firewall, an integrated media player with CD-burning and DVD-playback features, remote access tools, moviemaking and photo-editing software, wireless capabilities, broadband networking and Internet messaging.

The long list of new features potentially puts an even longer list of companies in Microsoft's crosshairs, including Adobe Systems, Apple Computer, AOL Time Warner, Corel, InterVideo, MGI, Netopia, Network Ice, RealNetworks, Roxio, Ulead, Zone Labs, Symantec and as many as 20 other companies.

These companies should be concerned about the new Windows features competing against their standalone products, said Guernsey Research analyst Chris LeTocq. While some of the additions are inferior in capability to third-party products, according to analysts, many buyers will likely be content to use what Microsoft provides.

"So those features don't look like much, but then what happens?" LeTocq said. "The next release of Microsoft's operating system comes out with enough features so that, for most people, they don't need anything else. The range of the market that is addressed by the others' products is diminished dramatically."

Forrester Research analyst Frank Gillett added: "People could look at what's there and use that as a jumping-off point to another product with more features. But the opposite is just as plausible, where they think what Microsoft put in is enough and they don't look for anything else."

Gillett noted that Windows XP extends some features from Windows Me, such as Web publishing, photo printing and photo manipulation, that could create new road kill. "Adobe certainly is potentially affected," he said.

Adding more features to Windows is not unusual, Gartner analyst Michael Silver said. "We've seen this before with compression tools, IP stacks and whatever. It does hurt to some extent, but there's not a lot you can do about it."

Microsoft has long maintained that not only does it have a right to add new features to the OS, but its customers benefit from the improvements.

For smaller competitors, however, Microsoft's decision to bundle technology into Windows can be devastating. As an extreme example, Microsoft's decision to bundle its Web browser with Windows in 1996 is credited with helping Microsoft win the browser war against Netscape Communications' Navigator and has been a key issue in the antitrust case that is awaiting a decision by a federal Court of Appeals.

When the company included data-compression software into its DOS operating system in 1993, it triggered a legal battle with Stac Electronics, then the market leader in compression software, over patent infringement. Microsoft later lost the Stac case for $120 million and was ordered to recall versions of its software with the technology. It later settled with Stac for $83 million by promising not to appeal.

From another perspective, some of the new features In Windows XP are so inferior to third-party products that they pose no threat at all, say analysts and software developers. Windows Media Player, for example, relies on third-party products to fully function and so doesn't necessarily work the way Microsoft promises without them. Some software companies say that being included in the operating system actually boosts sales.

In the crosshairs?
Companies caught in the Windows XP crosshairs fall into three categories: those that may benefit from new features, those insisting they aren't affected, and those that may lose business because of what XP offers.

The first category is easily defined and has more to do with hardware makers than with those developing software, analysts say. By adding moviemaking and photo-editing features, for example, Microsoft could help digital camera and camcorder sales. Support for wireless could be boon for 802.11B wireless networking.

But other features, such as the inclusion of a personal firewall or broadband sharing, could hurt some companies selling routers used for home networking and cable connections, Gillett said. "There's no question these could hurt these hardware manufacturers," he said.

Interestingly, few companies appear concerned about Windows XP's newest features--at least publicly.

"We're very excited about Windows XP and are doing whatever we can to take advantage of what Microsoft is introducing there," said MGI spokesman Shelly Sofer. The Toronto-based company is best known for its PhotoSuite image-editing and VideoWave moviemaking software.

Sofer said that adding moviemaking capabilities to Windows Me was viewed by MGI as a good thing. For example, MGI's video business has doubled since that operating system's introduction.

"In some ways there's an advantage to being included in the operating system, because everyone gets a taste of that functionality," said NPD Intelect analyst Stephen Baker. "If you can provide a solution that enhances what's in the operating system--that has some demonstrable benefit--and you're good at sales and marketing, you can turn that to an advantage."

In the case of Windows XP, Microsoft has added so many digital media features that some companies could benefit "if they recognize the opportunity," Sofer said.

"What XP does is it creates a whole new playing field," he explained. "It creates an opportunity for new players to come into the market almost on an equal footing with more established companies. XP almost helps the little guy become a big player."

But Tom Powledge, Symantec's security products group product manager, said staying ahead of Microsoft means offering more before the features show up in Windows.

"If you look back on the utility and how Microsoft has put things in the operating system, there's always the need for us to stay innovative and close to the customer to add value beyond what's in the operating system," he said. "We compete against the operating system by staying ahead technologically, staying close to customers and solving customer problems."

Media player or media bust?
One of the most compelling new Windows XP features may pose the least threat of all. That's because the product doesn't really deliver what Microsoft claims, analysts say.

With Windows XP, Microsoft will for the first time integrate Windows Media Player into the operating system. Unlike earlier versions, Windows Media Player will be available only with Windows XP "because it relies on features that are part of the operating system," said Shawn Sanford, Microsoft's group product manager for Windows.

Roxio provided the basic CD-burning engine, which Tom Shea, the company's chief operating officer, described as "very limited CD-burning functionality. What they are getting from us is a very limited CD-burn engine. They have done their own version on top of that to integrate that into their file manager and some of their applications."

In fact, Microsoft did so little to improve the core burning capabilities that Shea sees "huge upgrade potential" to Roxio's flagship CD Creator 5 software. Already, 40 percent of Roxio's business comes from upgrades of its software shipped with the CD burner. Shea said he "doesn't see that changing."

Still, Windows Media Player 8 could pose problems for other companies offering streaming video players, such as Apple and RealNetworks.

Steve Banfield, general manager of RealNetworks' consumer products, dismissed any threat Windows XP poses on the streaming media front. "That Microsoft is bundling Windows Media Player in XP is pretty much a non-event."

Guernsey's LeTocq sees a more obvious reason for Windows Media Player 8 to cast off users: With this version, Microsoft reduced the recording quality of MP3, the most popular digital music format.

"What Microsoft has done is cut the record quality in half, so that people will want to use the Windows Media Audio (WMA) format instead," LeTocq said. While the typical minimum for recording MP3s is 128kbps, Windows Media Player offers one option: 56kbps.

"They want to force people to WMA and make it the standard for digital music," LeTocq said. "But I think Microsoft will have a tough time displacing MP3.

The other major feature of the new media player is DVD playback, for which Microsoft offers sophisticated controls and smooth full-screen viewing. There's just one problem: On its own, "the DVD doesn't work," LeTocq said.

Microsoft doesn't provide the decoder necessary to make the playback work. For that, Windows XP users need software such as InterVideo's WinDVD or MGI's SoftDVD so that Windows Media Player can function fully.

Sanford said Microsoft doesn't need the decoders because PC makers include them with the hardware. But the same could be said of CD-burning software, analysts noted.

"They're kind of apples to oranges," Sanford said about comparing CD-burning software and DVD-playback software provided by PC makers. "When you look at a DVD decoder, you're talking about rights to playback. There's a licensing fee involved there."

Silver said the reason is clear: "Microsoft tries not to pay royalties on most of the stuff."