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The week in review: The specter of Microsoft

Leading online companies confront the specter of Microsoft's moving in on their turf.

Online leaders confronted the specter of Microsoft's moving in on their turf.

RealNetworks surprisingly licensed streaming audio technology from the company often considered to be its principal challenger, while America Online watched as Microsoft invested in a Web directory that utilizes "keywords" rather than URLs, much like AOL's proprietary service. The software giant has a history of overhauling well-established market leaders, notably in toppling IBM in PC operating systems and Netscape in Web browsers.

Battle lines drawn
RealNetworks said it would support Windows Media in its Jukebox product, which plays music files stored on a personal computer. The company would not discuss other plans for the technology. Under its agreement with Microsoft, Real could incorporate the technology into its RealPlayer and eliminate the need for Web content companies to format material for two different software programs. But such a move could also undermine its status as the leading streaming company.

The Seattle, Wash., company already has begun to remake itself into an Internet media outfit, while Microsoft has signaled its intention for Windows Media to become the online streaming standard. RealPlayer was used by 12.1 percent of Web surfers in November, according to one study, while Apple's QuickTime claimed 7.4 percent and Media Player 3.2 percent.

Microsoft's taking a 20 percent stake in software maker RealNames (unrelated to RealNetworks) directly challenges its principal online foe. RealNames' service is the Net's equivalent to AOL's signature keyword system, and Microsoft said it will begin working with the influential Internet Engineering Task Force to develop an Internet keywords standard.

The strategy follows Microsoft's established pattern of identifying the leader in a market it values, creating (or acquiring rights to) a similar technology, and bringing its Windows-based marketing might to bear. Yusuf Mehdi, the mastermind of Microsoft's browser campaign against Netscape and a key figure in its battle against AOL's dominant instant messaging product, is leading the charge.

Ironically, AOL subsidiary Nullsoft may be using similar tactics in creating software for swapping MP3 files over the Internet, moving in on Napster's popular network for sharing digital music. Nullsoft hopes to reduce the traffic jams caused when thousands of large, compressed music files are traded online--a feature that makes Napster unpopular on university campuses--but may encounter the same copyright problems Napster has run into with the music industry.

Iridium said it failed to find a qualified prospective buyer by a Friday deadline and intends to shut down after less than two years in service. The demise of the world's first satellite phone service operator is being attributed to poor marketing and high service costs.

Shares of online grocer Peapod plummeted after the resignation of its CEO and the cancellation of a potential $120 million investment. Bill Malloy said he is resigning because of health reasons; Peapod, which warned it has only $3 million in cash, will explore selling the company. Separately, Time Warner and Sony scrapped a planned merger of their jointly owned Columbia House music club with online CD retailer CDNow.

Sony Electronics of America is reshuffling its management to focus on the convergence of entertainment and technology and better compete against AOL Time Warner. The company?s goal is to deliver digital devices, as well as interactive services and new forms of entertainment to animate those devices, into consumers' hands more quickly. Sony last reorganized two years ago.

3Com plans to restructure its business following the spin-off of Palm Computing. That move helped propel the network equipment maker?s lagging stock price to record highs, but shares have since lost about 25 percent of their value. The company's woes are indicative of an industry facing slowing sales of equipment for corporate networks. Faster-growing rivals have targeted at Internet service providers (ISPs) and telecommunications companies.

New markets
Nortel Networks will acquire Xros for $3.25 billion in stock. Like Qtera, which Nortel purchased for about the same price in December, the networking start-up specializes in optical-based equipment systems for the Internet's "core," or "backbone." Nortel, once seen as a stodgy provider of equipment to slow-footed phone companies, has been trying to change its image.

Touch America, the communications subsidiary of Montana Power, will buy a portion of Qwest Communications International's long-distance voice business for about $200 million. Qwest is required by federal law to divest itself of long-distance voice assets within merger partner US West's 14-state region as part of its acquisition of the highly regulated local phone company. Facing slow growth, power utilities have been trying to break into the fast-growing communications industry.

Sema Group and LHS Group agreed to a $4.7 billion merger, creating one of the largest providers of customer care, billing and messaging software and services in wireless telecommunications. U.K.-based Sema Group is the second-largest computer services firm in Europe. Atlanta-based LHS Group provides billing and support software to the communications industry.

As the trend to outsource corporate computing tasks gains steam, start-up businesses that offer a selection of online business applications are finding that giant telephone companies also have been drawn to the new "ASP aggregator" market. AT&T, Sprint and Bell Atlantic boast sprawling networks and time-tested relationships with customers and are actively searching for small applications companies. Analysts estimate there will be more than 200 ASPs vying for customers by the end of the year, creating the need for a kind of one-stop shopping.

Xerox formed an alliance with Sharp and Fuji Xerox in an effort to unseat printer market leader Hewlett-Packard. The three companies expect to spend approximately $2 billion over the next five years on research, manufacturing and marketing products in what remains a relatively unglamorous--but profitable--corner of computing. HP garners a large portion of its profits from printing and imaging products.

In a sign of demand, Apple added Tech Data to its roster of wholesale distributors, its first expansion since the dark days of the mid 1990s. Wider distribution typically means a manufacturer can more easily reach a larger number of retailers and customers.

Micron Electronics will install custom-ordering kiosks in Best Buy stores, wading into a fiercely competitive segment of PC sales. Compaq, Gateway and IBM have already staked out retail arrangements. The "direct sales" manufacturer has previously moved toward a "subscription" strategy, in which hardware sales garner customers who go on to pay monthly fees for various Internet services, a model used in the cellular phone industry.

Over the line?
Critics berated a Fogdog Sports marketing campaign that provides incentives for customers to supply their friends' email addresses to the company. ?Viral marketing? programs are becoming standard practice for online retailers looking to lengthen their mailing lists. But promotions that hinge on sending unsolicited commercial email run the risk of being classified as hated spam. Separately, IKEA pulled the plug on a similar promotion. said it will partner with a national retail chain to establish a network of brick-and-mortar outlets for fulfilling online liquor orders in 30 states by 2001. The company expects to be able to ship spirits without crossing state lines, surmounting legal hurdles. Almost 40 states have banned direct shipments of alcohol under laws going back to the end of Prohibition.

Online readers snapped up a Stephen King novella, with more than 200,000 customers requesting free copies of the story in one promotion. The interest is seen as a sign online publishing may be nearing fruition.

Also of note
The stock markets recorded breathtaking gains Thursday after suffering heavy reverses earlier in the week ... AOL will buy German media company Bertelsmann's 50 percent stake in AOL Europe and AOL Australia in a deal worth between $6.5 billion and $8.25 billion ... Strong database software sales fueled market leader Oracle?s solid third-quarter profit ... The leader of the Linux movement is rushing to get the next version of the operating system?s ?core? ready for commercial use ... IBM signed agreements with Cisco, Intel, Palm, Motorola, Nokia and Symbian to deliver Web software, content and services to wireless devices ... Newly public Palm Computing created a Japanese subsidiary, while Palm licensee Handspring opened a European office.