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Windows faces new competition: Itself

A year ago, Bill Gates told a court that too many versions of Windows would hurt competition. So why is Microsoft churning out so many different editions of the operating system?

7 min read
In the past year, Microsoft appears to have done just what it asked a court not to make it do: fragment Windows.

In April 2002, the software maker's chairman, Bill Gates, testified that too many versions of Windows would be bad for consumers and for competition. But since then, Microsoft has essentially doubled--to about two dozen--the number of "current" versions of the operating system software.

The goal behind the proliferation, analysts say, is in fact to create competition of sorts, within Microsoft's own monopoly market. They say the variations indicate the company understands that consumers and businesses crave choice. More versions could also boost sales and fill niches left vacant by the lack of external alternatives.

"Vanilla just doesn't work for everybody anymore," said Technology Business Research analyst Lindy Lesperance. "Microsoft is looking for ways to drive new demand, in new form factors and segments of the market where their OS may be applicable. They have to fragment to get into these new markets."

Since November, for example, Microsoft has released three new versions of Windows XP alone.

"The fragmentation of Windows suggests that a single operating system is not the right approach for everything in the market," said Glenn Manishin, an antitrust lawyer with Kelley Drye & Warren in Vienna, Va. "So Microsoft is essentially competing against itself, because it has different things priced at different price points for the differently situated segments."

At the same time, the multiplying versions of Windows have led to some confusion. Earlier this month, the company announced a new "shared source" program that would give more manufacturers and developers access to the Windows CE source code, or software blueprint. But the program does not extend to other Windows CE products such as Pocket PC.

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In the court case a year ago, nine states and the District of Columbia had asked a federal judge to compel Microsoft to release another version of Windows XP without so-called middleware, such as browser and digital media software. The states argued that this second option would encourage competition in desktop operating systems and in the middleware technologies that Microsoft had "bolted" onto Windows.

But during three days of testimony, Gates argued that such action would "fragment" Windows, leading to confusion among customers and economic chaos in the PC software market. Differentiation of Windows would hurt many companies dependent on the stability of the code base, Gates asserted. He disagreed with the contention of one of the states' attorneys that Windows already was fragmented because older versions and new versions were available from Microsoft.

Legal experts described Gates' argument as the classic defense of monopoly. In antitrust or economic parlance, differentiation and fragmentation are synonymous with competition.

In November, a federal judge rejected the states' request for the additional, modular version of Windows.

Regarding the newer versions of Windows, Manishin said that "the only one that can sell the same product at different prices is a monopolist."

Microsoft argues that what it does with Windows is qualitatively distinct from the potential effects of other companies tinkering with the operating system.

"There's a big difference between a company defining several different versions of its own products to meet specific customer needs, versus allowing hundreds of other companies to just delete portions of a product that Microsoft has designed and tested," said Microsoft spokesman Mark Murray.

Microsoft, he said, believes it "critical that customers and developers be able to rely on our products, that the features and functions will be there when they call upon them."

Fragmenting Windows
When Microsoft released Windows 95 eight years ago, the company offered just one other version of its operating system--Windows NT, which saw little adoption until the release of version 4 in late 1996.

By 2000, Microsoft had expanded the number of Windows versions significantly. Consumers could buy Windows ME, although many retailers and PC makers still offered Windows 95 or 98. Initially, businesses could choose from two versions of Windows 2000, but Microsoft in 2001 added two additional higher-end versions. At the same time, Windows NT continued to outsell version 2000. The company also offered Windows CE, which Microsoft developed for devices such as personal digital assistants (PDAs).

Too many versions of Windows?

In the last year, Microsoft has doubled the number of versions of its core Windows software. Here's the current lineup--not counting the more venerable Windows 98 and 2000--in three main groups.

Windows XP
• Windows XP Home
• Windows XP Professional
• Windows XP Embedded
• Windows XP Media Center Edition
• Windows XP Tablet PC Edition
• Windows XP 64-Bit

Windows Server 2003
• Windows Server 2003 Standard
• Windows Server 2003 Enterprise
• Windows Server 2003 Datacenter
• Windows Server 2003 Web
• Windows Server 2003 Enterprise 64-Bit
• Windows Server 2003 Datacenter 64-Bit
• Windows Small Business Server 2003*

Windows CE
• Windows CE .Net
• Pocket PC
• Pocket PC Phone Edition
• Smartphone
• Windows CE for Smart Displays
• Media2Go**

* Due in the third quarter
** Unreleased but in late stages of development.

During 2002, Microsoft rapidly accelerated a strategy of creating more versions of Windows--even though Gates argued in court that differentiation would confuse consumers.

When Gates testified, Microsoft offered three main versions of Windows XP: Home for consumers, Professional for businesses and Embedded for devices like ATMs and cash registers. By the end of 2002, Microsoft had added two new versions: Windows XP Media Center Edition and Windows XP Tablet PC Edition. Last month, Microsoft added a sixth version, Windows XP 64-bit Edition.

On Thursday, Microsoft will officially launch Windows Server 2003, which also will come in a multitude of versions. Three of them, Standard, Enterprise and Datacenter, also were available for Windows 2000. A fourth version, Windows Server 2003 Web Edition, is new. The Enterprise and Datacenter products also come in 64-bit versions.

Windows CE .Net, like Windows XP Embedded, is designed for non-PC products that use embedded processors. Microsoft offers the software for use in a variety of devices, including set-top boxes and handhelds.

But Microsoft differentiates Windows CE into many versions. One is the base code around which other companies create products. The company also distributes what it calls "Windows Powered" versions of CE, which splinter into more versions of the operating system: Pocket PC, Pocket PC Phone Edition and Smartphone. Another version, Windows CE for Smart Displays, powers flat-panel monitors that can be removed from a PC and used with a stylus. Microsoft is working on yet another Windows CE version, code-named Media2Go, which will be used in portable video and music players.

By current count, Microsoft offers about a half-dozen different versions each of Windows XP, Windows Server 2003 and Windows CE .Net. Microsoft also considers Windows 2000 still to be a "current" product. Including the 64-bit editions, Microsoft also offers about six different Windows 2000 versions, bringing the total to about 24. These two dozen versions do not account for older products, such as Windows 98, which is still sold by retailers and some PC makers.

"It appears that fragmentation is in the eye of the beholder," said Manishin.

Confusing customers
Analysts described Microsoft's fragmentation of Windows as expansive and deliberate, particularly as the company begins to differentiate operating systems based on function. For example, Windows XP Home and Professional are targeted at consumers or businesses. Media Center Edition serves up entertainment features such as digital video recording, and the Tablet PC software lays the groundwork for a separate, laptop version.

The three main Windows XP versions essentially contain the same basic components, said Michael Cherry, an analyst with market researcher Directions on Microsoft.

"Media Center and Tablet PC are different," he said. "These are a superset of Windows--that is, they have more components than the other versions, or they have components that the other versions do not seem to have."

IDC analyst Roger Kay speculated that Microsoft might eventually carry the differentiation further. One of Tablet PC's major differences from Windows XP is its support for digitized displays that let people write on the portable device's screen with a stylus. As more PC manufacturers incorporate digitized displays into laptop designs, Microsoft could develop Tablet PC into the notebook version of Windows XP.

Windows Media Center could evolve in a similar way, potentially emerging as the version of XP for consumer computers, Kay said.

From a product perspective, the key element of a competitive market is features, user interfaces or components tailored to a particular set of buyers, as in today's cell phone market.

"Consumers know which features they want, and that's what they're interested in," Lesperance said. "Do they know or care what OS is running on their phone?"

Typically, the differentiation would be provided by a variety of hardware manufacturers, adding or subtracting features as they saw fit, or by other software makers, delivering different operating systems such as Symbian's phone software. In Microsoft's version of fragmentation, competitive products are built around the Windows code base, say analysts.

"You have this philosophical issue where it's not acceptable to have multiple operating system editions--unless Microsoft does it. Then it's extremely OK," Kay said.

Cherry agreed with that assessment, but emphasized Microsoft's technological justification for the approach. "It would appear that the advantage to this differentiation is that Microsoft can tailor Windows to the application," he explained.

Analysts agreed with Gates' testimony on the matter of customer confusion. Too many versions of Windows can cause head-scratching about product choices or fixes for technical glitches. The latter point stems from variations in the flavors of a given family of Windows, particularly on the desktop.

"Say I am an administrator in a company and we have PCs, laptops and tablets," Cherry said. "Now I have to track two versions--Professional and Tablet. Or (say I'm) a home user with a desktop and a media center PC. Again, I have to track two versions."

For those trying to figure out which bug or security patch to apply to different Windows versions, Cherry said, "it just gets messy."

"If you have a proliferation of Windows operating systems, you have the potential for problems to occur," Kay said. He cited his experience testing a Windows Media PC, when the operating system consistently downloaded updates meant for the main XP version.

"That can ruin the OS build," he said. "Not only is there potential for confusion, but there are technical issues as well."