Windows XP's mission: Internet domination

By Joe Wilcox
Staff Writer, CNET News.com
October 17, 2001, 4:00 a.m. PT

If there is any doubt about Microsoft's determination to expand its Internet strategy through Windows XP, consumers may be reminded of it no fewer than five times as soon as they try the new operating system.

In the second through sixth attempts to connect to the Net, Windows XP will implore consumers to sign up for something called Passport--an identification technology that, in many ways, is a key to Microsoft's future.

"In regards to Windows XP prompting me to sign up for Passport, to be frank, I don't like that at all," said Darnell McGavock, a database administrator from Suwanee, Ga. "I don't need Microsoft prodding me to sign up."

Tactics of persistence are nothing new to Microsoft, but its pleas involving Passport represent a new urgency that pervades the software empire's headquarters in Redmond, Wash. As the PC market remains uncertain, Microsoft is embarking on an ambitious campaign to transform itself from a traditional software manufacturer into a services company that provides everything from communications and calendaring to one-stop online shopping and Net banking.

If Microsoft is successful, Windows XP will eventually resemble an online service like America Online, which runs on top of Windows and other operating systems. That would allow consumers to bypass AOL and other rivals altogether, essentially turning Windows into a one-stop destination that combines AOL-like services with easy access to Microsoft desktop products such as Word and Excel.

By itself, Windows XP may draw only tepid demand from the marketplace. In a broader context, however, it is the first operating system to test key components of Microsoft's widely publicized .Net strategy to connect all its products and properties, as well as the basic technologies behind it: HailStorm, the overall software architecture for Microsoft services, and Passport, the mechanism designed to let consumers use all of them.

Through HailStorm, recently renamed .Net My Services, Microsoft envisions offering consumers and businesses a consistent set of information and services to any devices, whether they be personal computers, handheld devices or cellular phones--often at a cost to the receiver, the provider or both.

From an industry perspective, the move could trigger the long-anticipated direct confrontation between Microsoft and archrival AOL Time Warner for domination of the commercial Internet and its paying subscribers. As struggling Web companies are increasingly forced to charge for content and services, Microsoft and AOL are considered to be among the few online leaders capable of providing the security and technology necessary to handle payment systems on an Internet-wide scale.

"What they want is to build direct relationships. Everybody's got Windows, but Microsoft doesn't enjoy that direct billing relationship AOL has with its customers," said analyst Matt Rosoff of Directions on Microsoft, an independent research organization. "XP is sort of a step forward on that route."

That, needless to say, is easier said than done. Windows XP faces a number of obstacles: The .Net initiative will require a massive technological infrastructure that's daunting for even the world's largest software company; the high-tech recession has hit the Internet services industry particularly hard; and controversial issues ranging from privacy to antitrust will only escalate as Microsoft extends its reach into nontraditional computing areas, such as music, photography and telephony.

Posing perhaps the most immediate concern of all is that consumer demand for the operating system remains uncertain.

In addition to seeing a questionable need to replace the Windows systems they use now, many consumers have grown suspicious of Microsoft's intentions as its aggressive business practices have come to light during years of courtroom skirmishes. Windows XP tester Chris Child reflects a generation of savvy young consumers who are already wary of Microsoft's actions.

"The integration of Passport into XP seems to be pointless," said Child, a high school student from Atherton, Calif. "I don't know why Passport can't just stay in Web sites where it belongs. The only explanation is that Microsoft wants to begin to integrate Passport into applications as well."

Not everyone, of course, thinks this is a bad thing. Many people would welcome the convenience of a reasonably secure mechanism that would instantly find whomever and whatever they were looking for online while allowing them to use various sites and services with a single password entered only once.

Jim Allchin, group vice president in charge of Windows, said any service requiring "presence"--knowing who the person is--necessitates an authentication vehicle like Passport: "There's got to be some central place where you can find it if you want to add the value in the system of having a point-to-point call or a conference call with somebody. You've got to find where they are."

Such explanations, however, are of little comfort to people like McGavock. "Sure Passport is free today, but with Microsoft's revenue slumping they will seek other methods to gain income," he said. "So Microsoft will eventually need to squeeze the public for additional revenue. Then a Passport account will cost me money."

In some ways, Passport is an apt metaphor for the way Microsoft has grown its business, by leading people from one of its products to another. Windows has long been used to sell related software applications, such as the Microsoft Office business package, which accounts for about half the company's income.

Microsoft is "going to leverage their new operating system to promote their other products and services. They've always done that," Rosoff said.

In this case, a primary instrument of that leverage may be something that has gotten relatively little attention in the hype surrounding the new operating system: a Web browser integrated in Windows XP called MSN Explorer. Although the company usually hopes to cross-promote many of its products through various technologies such as instant messaging, MSN Explorer in particular could become the gateway to hundreds of subscription services, building on basic dial-up Internet access available today.

Gates unveils Windows XP in Redmond, Wash. Bill Gates, chairman, Microsoft, and Jim Allchin, VP, Microsoft platforms group August 24, 2001

MSN Explorer is more tightly tied to Microsoft's Web properties. Buttons for such services as "Money," "Shopping" and "Music" that sit horizontally across the top of the browser all lead to sites where Microsoft sells or brokers goods and services.

Still more important to the .Net strategy are buttons that run down the left side of the browser, linking to Microsoft services bearing such labels as "My Calendar," "My Stocks" and "My Photos," some of which can be used only with Passport accounts. These links are prime candidates for the first 14 .Net services Microsoft plans to offer with .Net My Services, with either gentle encouragement or relentless prodding.

"If you look at the .Net services Microsoft is going to introduce, MSN Explorer will be the front end for that," said Guernsey Research analyst Chris LeTocq. "These are the premium services Microsoft is going to make money from."

It is interesting to note that a similar strategy--bolstering the browser as a major conduit to other products and services--raised questions about Microsoft's business practices not long after the Justice Department filed its antitrust case against the company in 1997. At that time, Microsoft was planning to fully integrate its browser with the Windows operating system and to add something called "Active Channels" that would point to other sites and services run by Microsoft or its partners, which included such media stalwarts as Walt Disney and Dow Jones.

Microsoft eventually dropped the Active Channels concept and some of the exclusive partnerships behind it in the face of politicians and rivals who charged that the move would kill competition in the browser market, most notably from Netscape Communications, which is now owned by AOL Time Warner.

In the past, the company bundled its Microsoft Network software with Windows, hoping that consumers would turn to the proprietary service as their first stop online, rather than to AOL. It also planned to charge content companies for links to their sites. But that strategy failed early on, as many people shunned online services in favor of direct dial-up connections offered by Internet service providers such as EarthLink.

Microsoft's cross-promotional practices came under unprecedented scrutiny during its government trial, when a federal judge ruled that the bundling of Windows 95 and the Internet Explorer browser violated federal antitrust law. But while the case proceeds unresolved, Microsoft is tying its products together more closely than ever before with Windows XP and its larger initiatives.

"The integration across applications is pretty tight and pervasive," Gartner analyst Michael Silver said, adding that he believes Microsoft will eventually make more money on services than on its software alone. "It's the whole razor and razor-blade model, and XP is going to be a pervasive platform for selling services."

A hidden cost behind new features
Certainly, Windows XP will offer some compelling new features in their own right, such as a media player with DVD playback and CD-rewriting capability, and a new instant messenger with Internet and video-phone functions. But many of these offerings are linked to services that will work best or only with other Microsoft products and technologies.

The use of Windows Messenger, for instance, requires a Passport account. Windows Media Player directs consumers to Microsoft Web sites and includes "digital rights management" software that could allow the company to broker songs for major music labels. And Internet Explorer 6, which also is available for other versions of Windows, will automatically send Web surfers to an MSN search engine if a Web address cannot be located, rather than resorting to the standard "page not found" message.

Some features will drive customers to services provided by other companies, giving Microsoft an opportunity to collect a finder's fee of sorts. For example, the Scanner and Camera Wizard offers consumers some services for additional costs, such as the printing of digital photos by another company that partners with Microsoft for that business. Similarly, Windows Media Player could promote online gaming subscriptions and services.

Nevertheless, while all these features are important to the Windows XP arsenal, analysts say they will play a secondary role to MSN Explorer in the bolstering of other Microsoft properties.

"They are a magnitude less significant to Microsoft," LeTocq said. "Services that they're going to get you to haul your credit card out for, they're going to get you through MSN Explorer."

In an interview with CNET News.com this summer, Microsoft Chairman Bill Gates adamantly defended his company's right to evolve Windows with new features to meet market demand. "Our customers do want us to make Windows richer and more reliable," he said. "So Microsoft's commitment is to add features that customers want. If we can't add any features, then what is Windows?"

Gates questioned why AOL has not received as much criticism as Microsoft for bundling products and services. "Has AOL ever added any new features to their products?" he asked rhetorically. "They have dominant market share of all their stuff. They actually added features? Unbelievable! Who are these people adding features? What's going on here? Well, what's going on is that the PC industry is the most competitive industry that has ever been in terms of software availability and advances."

Evolving to avoid extinction
Although issues such as software bundling and integration have been at the center of Microsoft's legal troubles, the company has more incentive to leverage and cross-promote its properties today than ever before. The twin blows of a sluggish economy and a saturated PC market have virtually stalled new computer sales, hurting Windows revenue in the process.

Even before the economic malaise that followed the Sept. 11 terrorist attacks in New York and Washington, PC shipments had already hit record lows--down 8.1 percent for the second quarter in the United States, according to market researcher IDC. As consumer confidence erodes further, IDC projects that PC sales in the United States will decline 15 percent in 2001 from last year.

Adding insult to injury, Microsoft has been one of its own worst enemies: Competition from previous Windows operating systems has slowed the sale of newer versions.

The last two major launches--Windows 2000 for businesses and Windows Me for consumers--fizzled. Less than 10 percent of the Windows 95, 98 and corporate NT desktop computers were upgraded to 2000 last year, according to Gartner. This year, businesses have finally started using Windows 2000, but systems administrators plan to hold off on XP for at least a year or to skip it altogether.

Tony Dempsey, manager of technology for the American Association of the Colleges of Nursing, said he has "no interest in Windows XP right now." After ordering five new IBM ThinkPad notebooks, he said, "I had the choice of Windows 2000 or Windows XP--I chose Windows 2000."

Other Windows XP testers complained that the operating system's graphical appearance, which resembles that of MSN Explorer, looked like a cartoon. Some added that it made no sense to include two Web browsers with XP.

"One of the first things I did was delete it," Joshua Daniel Franklin, a network administrator for Iocc.com--an Internet service provider in Arkadelphia, Ark.--said about MSN Explorer. "They're competing with themselves in the browser market, just when Netscape's (browser) is starting to come out with some actually useful features."

Yet this kind of apparent contradiction is nothing new to Microsoft, which has long operated on the Darwinian assumption that the fittest of products will survive--as long as they are part of the Windows family.

Gary Hein, an analyst at Burton Group, said Microsoft has never been shy to influence that evolutionary process where the consumer is concerned.

"It reminds me of the old story about how to boil a frog," he said. "If you throw a frog into a pot of boiling water, it will immediately jump out. But if you put a frog in a pot of warm water and slowly raise the temperature until the water boils, you have frog soup.

"Consumers aren't going to be thrown into a kettle of boiling water from the get-go, but rather enticed into an inviting, lukewarm bath, and then the temperature will be slowly raised over several release cycles."  

News.com's Mike Ricciuti contributed to this report.

Strategy: Blueprint shrouded in mystery