Microsoft protecting rights--or Windows?

The giant recently released a free digital rights management toolkit it says will help record labels win consumers over to copy protected CDs. Is it just another market grab?

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Can Microsoft be trusted?

How music labels, Hollywood studios and consumers answer that question could determine whether the software giant dominates digital media the way it does Web browsers or desktop productivity applications, say analysts.

The Redmond, Wash.-based company is engaged in a tried-and-true tactic of giving away highly valuable technology as a means of getting a foothold in an emerging market. The strategy, which was instrumental in Microsoft's victory in the so-called browser wars, is being replayed in the digital media market.

The stakes may be as high; analysts see digital media, like the rise of the Web, as driving the next great wave of PC sales. Microsoft, not surprisingly, wants to make sure Windows becomes a "preferred platform" for using digital media," said Directions on Microsoft analyst Matt Rosoff.

In mid-January, Microsoft unveiled a new toolkit that would let record labels create music CDs containing, along with the normal tracks, preripped Windows Media versions suitable for uploading to a buyer's MP3-type player or PC, but protected by Microsoft's digital rights management (DRM) technology to prevent copying and swapping. The toolkit, the DRM license and the use of the Windows Media Audio format is free for the labels, despite Microsoft's $500 million investment developing what many analysts regard as the best DRM technology available today.

"Windows Media, that whole division, is an investment," Rosoff said "They're not making money on it, and they don't plan to make money on it."

By providing free use of the DRM technology and the accompanying toolkit, Microsoft hopes to make Windows Media audio and video formats more popular with record labels and eventually consumers. The strategy follows marginally successful partnerships with device makers and content creators designed to further the adoption of the format.

"Microsoft hopes that filling a perceived need by the labels to create a DRM solution will help drive Windows Media forward beyond the PC and into the arena of consumer electronics," said Jupiter Research analyst Michael Gartenberg.

At the same time, Microsoft is licensing its Windows Media 9 Series file formats for use on non-Windows operating systems and on devices. Many analysts view the low cost of the licensing as an attempt to undercut the licensing cost for MPEG-4, the successor to MPEG-2 used on Hollywood movie DVDs and the biggest potential competitive threat to Windows Media technologies.

"The long-term strategy is the ubiquity of the Windows Media Format," Rosoff said. "If that becomes the default format, suddenly they're selling a lot more Windows Servers, because you need Windows Server to administer the DRM and host and stream the files if you're doing it that way. And you need the licenses for the devices to play the files."

Giving DRM technology away for free--particularly a version that's as good as Microsoft's--also makes it that much more difficult for other companies to compete. Already, for example, RealNetworks has found it difficult to sell its server-based content creation and streaming software when Microsoft bundles Windows Media technologies for free with Windows 2000 Server and the forthcoming Windows 2003 Server.

But Microsoft's DRM toolkit giveaway and low-cost Windows Media 9 Series licensing is no assurance of success, say analysts. Record labels and Hollywood studios remain wary of Microsoft's motives. Is the software giant sincerely trying to generate interest in a compelling and useful technology or is the ultimate goal something else, such as protecting the Windows monopoly?

"The question is whether they're going to use their technology as a pawn for Microsoft proliferation or whether they're going to sell good technology," said Yankee analyst Ryan Jones. "That's really the concern."

Past behavior indicates, "it's the proliferation play," Jones said. "It would be disappointing if Microsoft screwed it up because of that. Their technology is really good."

Motives questioned Music and technology companies have been moving toward including "second session" content on compact discs for years. Early experiments often included multimedia content such as games or videos, often in Apple's QuickTime format.

In the last several years, record labels have been adding Web links, videos and other promotional material, although such content remains the exception rather than the rule.

However, as labels have increased their interest in copy protected CDs, they have increasingly looked to this second session as a way to ameliorate consumer concerns. Providing digital tracks that can be transferred to a computer, copied to an MP3 player, and ultimately even burned onto a CD will defang critics who say copy protection eliminates consumers' flexibility to use their own music, the labels say.

For at least the last year, the leading technology companies working on copy protection, including Macrovision and SunnComm Technologies, have already been planning to use the Microsoft Windows Media format for this second session content. Many CD production facilities have already installed technology for adding Windows Media Audio files to CDs.

As a result, Microsoft's toolkit falls into an industry already heading Redmond's way. What it may potentially change is vendor relationships. Labels had already been working with the technology companies such as Macrovision for the full copy protection package. Now they could theoretically split their attention, buying the basic copy protection technology from companies like Macrovision, and the second session media technology from Microsoft.

Deciphering Microsoft's motives is not as easy as during the so-called browser wars, when the software giant used exclusive contracts and hard ties between Internet Explorer and the Windows operating system to crush rival Netscape Communications.

For one thing, there is nothing totally exclusive about the DRM toolkit giveaway. Music labels would use the technology to create a second session on a CD, containing DRM-protected music pre-ripped in Windows Media Audio format, lyrics, album art and other extras. The first session, conforming to the usual standard, would be unaltered by the process.

In fact, consumers would still be able to rip music from a CD's first session into an MP3, which wouldn't do much to curb file trading. But used in conjunction with first-session content protection from Macrovision or SunCom, Microsoft's second session would provide labels with a way of offering limited copying of the music. The technology also could resolve a common problem of first-session protection preventing CDs from playing on Windows PCs.

"One of the things Microsoft is really panicked about is Sony, among others, releasing these CDs that just can't be played in PCs," Rosoff said. "Microsoft, definitely, definitely doesn't want that to happen, so they have to present some kind of alternative."

Microsoft is betting the DRM and extras, like Windows Media Audio's support for 5.1 surround sound will appeal to record labels and consumers.

"Really cool liner notes"
"We've definitely seen a movement to taking CDs and trying to protect them," said Michael Aldridge, lead product manager of the Windows Media division. But there have been mixed results trying to do that. We wanted to come up with a mechanism to address this, hopefully, in a very compelling way."

Microsoft believes the second session will appeal to consumers because it "resurrects the kind of rich experience you used to get with albums, where when you opened up the album you had really cool liner notes, lyrics and photographs of the artists," Aldridge said. At the same time, labels can use the DRM to control how the songs are copied, whether to a CD, DVD or portable music player.

Record labels have applauded Microsoft's move for several reasons. While the entertainment companies have tried to avoid relying on the software giant as a sole technology vendor, they like the omnipresence of the Windows Media technology and the strength of its rights management system. And unlike the haphazard digital add-ons to CDs of the past, the Windows Media files are likely to be supported well into the future.

"That was one thing we needed, to make sure: that 10 years from now, you stick the CD in a machine and it plays," said Ted Cohen, vice president for new media at EMI Recorded Music.

Still, Microsoft's approach greatly favors Windows. Accessing the content "would require a PC and support for Windows Media on the PC itself," Aldridge said.

For now, Microsoft only provides a toolkit supporting Windows, although Aldridge says a Macintosh version is forthcoming. For now, record labels would have to distribute over the Web a downloadable license that would let Mac users play second-session content created using the toolkits. No option is available for other operating systems, such as Linux.

This kind of favoritism is likely to make record labels extremely cautious about using Microsoft's DRM, regardless of the technology's attractiveness or the free use, say analysts.

"On the PC, they're trying to lock in favoritism for the Windows platform," said The Yankee Group's Jones. "Their plan kind of shows through, and that will put the content owners on alert."

At the same time, labels are concerned that should Microsoft's file formats come to dominate digital media, what's free today could cost plenty in the future. In other markets, Microsoft significantly jacked up the costs once it dominated a technology or market segment. A good example is Microsoft's Licensing 6 program, which raised fees for obtaining Windows and Office licenses as much as 107 percent, according to Gartner.

"You have the possibility that all your digital content protection is on their platform and they start charging for it," Jones said. "There's this template of how Microsoft can spread its influence and then capitalize on it after being patient. It's really Microsoft's patience that's going to surprise content providers at the end of the day, as it has enterprises."

Consumer resistance
Even if Microsoft has no ulterior motives, content creators have other very good reasons to steer clear of Microsoft's DRM and Windows Media formats.

"Content is what drives digital media behaviors in the home, not a platform," Jones said. "You will never see content owners changing their architecture to fit a device's architecture in the home. It's always the other way around. The device architectures always fit how the content enters the home. There are MP3 players because the content source was MP3; it's not the other way around."

To date, Microsoft's strategy has worked to counter this behavior, with the company convincing device manufacturers to support Windows Media formats. But that strategy has failed to gain much traction for the format against MP3.

Still, the DRM is a big carrot that could convince labels to use Windows Media formats, which could greatly advance adoption. The timing is right, say analysts.

"The labels are feeling a lot of pressure, especially from the retail side, like this Echo thing that was launched," Jones said. "That's a sign the industry is thinking seriously about alternative distribution platforms."

On Jan. 27, a group of music retailers including Tower Records, Virgin Entertainment, Best Buy and Wherehouse Music formed a consortium to sell digital music--through an investment in Echo Networks, which formerly operated a streaming music community.

Even if record labels embrace the toolkit and create millions of discs with Microsoft DRM-protected content, there's no guarantee Windows Media formats would gain any traction with consumers. In fact, many analysts believe content protection simply cannot succeed in the market place.

"DRM solutions have not been popular with consumers," Jupiter's Gartenberg said. "It's not likely consumers will flock to this technology or replace either existing consumer-electronics equipment or PC equipment to help labels fight piracy or help Microsoft drive Windows Media adoption forward."

In fact, the most serious indictment of DRM technology may come from Microsoft employees. A research paper published last fall, reportedly by four Microsoft employees, concluded that DRM technology would likely fail because of consumer resistance to content protection and acceptance of file trading. The researchers concluded "that a vendor will probably make more money by selling unprotected objects than protected objects."

Gartenberg isn't surprised. "Consumers have shown adversity to anything that inhibits their use of the music that they purchase," he said. About 40 percent of 15- to 17-year-olds buying a CD in the last 12 months said downloading influenced their purchase, according to Jupiter; 28 percent had copied music from a friend.

"The figures were 11 percent and 10 percent, respectively, for adults," Gartenberg said. "That seems to indicate consumers want flexibility with their music."

News.com's John Borland contributed to this report.