Tech Industry

Microsoft: Conspiracy theory vs. reality

Yankee Group analyst Neal Goldman says that theories about Microsoft's competitive practices abound, but they miss the mark. The reality involves much more complicated internal dynamics.

In the past few months, three announcements have aroused cries from Microsoft critics that the company is attempting to undermine competitors by leaving specific functionality out of Windows XP.

In July, Microsoft announced that it would not include a Java Virtual Machine (JVM) as part of XP. In August, the focus moved to the lack of support for Netscape-style plug-ins in Internet Explorer 6.0 and to features in Windows Media Player 8 that would not be available on operating systems other than Windows XP.

In an analysis that would make Oliver Stone envious, the critics' conclusions were that these decisions were calculated tactics in Microsoft's grand plans for the demise of Java, QuickTime and RealNetworks. However, a deeper analysis of how Microsoft and other large companies make decisions brings a different perspective.

Hello, comrade?
To draw a historical parallel to Microsoft's decision-making processes, for 12 days in October 1962, the world wondered what Nikita Khrushchev's strategy was when he secretly shipped nuclear missiles, missile silo parts and silo engineers to Cuba, and then proceeded to openly erect those silos in full view of U.S. spy planes. Did he not know we had these planes? Did he really want a show of strength without the full ability to bring the world to nuclear war? Did he want to use this as a threat to start negotiations?

Organizational historians believe that none of these was his true intent and that Khrushchev truly did want to establish a nuclear arsenal in Cuba for a possible threat to the United States. However, individual decision-makers in the complex Soviet government made choices based on their own views of the world that resulted in the actual sequence of events.

In a shortened analysis, Khrushchev communicated specific tasks to different groups without a project overview or project-specific instructions. The KGB was told to move the parts and people to Cuba, and the Soviet Air Force engineers were told to build the silos. The KGB, being defined by secrecy, pulled out its procedure books and shipped everything secretly. The silo engineers similarly pulled out their procedure manuals to build silos. Since all of their prior experience had been on Russian soil, no part of their assembly steps ever considered secrecy. Thus, they built in the open.

In Microsoft's case, one should look at its decisions not solely on the basis of its corporate competitive strategy, but also from the perspective of both the Windows XP and Windows Media product-management teams. From those vantage points, one sees decisions that make rational business sense within the XP and WMA microcosms. While Microsoft is certainly working hard to erase Java and RealNetworks from the market landscape, it is likely that these individual decisions were not generated by those grand plans.

With respect to Java, the XP product manager's choice, given the nature of the Sun Microsystems settlement agreement, was to ship old software, no software, or a Microsoft implementation that may or may not have been fully compatible with other JVMs. By choosing to ship no JVM, the team independently made the decision that is least likely to have customers blaming Microsoft, and specifically XP, for Java incompatibility. The grand effect, positive or negative, on the Java market is not part of that equation. While the result may help Microsoft battle Sun's encroachment and make CEO Steve Ballmer happy, the primary motivations are more about product and customer support than about leveraging a market position.

Likewise with Internet Explorer, the decision to remove plug-in support was likely fueled by issues of making IE 6.0 smaller and reducing its ongoing maintenance and development costs.

The number of major plug-ins beyond QuickTime that are affected is small, so the IE team's cost-benefit analysis seems pretty clear. By implementing Windows Media 8 only on Windows XP, Microsoft is apparently hoping that the features of Windows Media will spur consumers to upgrade to Windows XP. This might have seemed a good idea to the XP management team, but current consumer opinion indicates this is not likely to occur. I think this decision will eventually be overruled by the Windows Media team for their own goals of ensuring that Windows Media becomes dominant everywhere.

A sum of its parts
Microsoft, like all companies, has its share of corporate politics, internal competition and disagreements about strategy.

With almost 50,000 employees and a slew of divisions, it's impossible for a senior management team, no matter how smart and focused, to direct every day-to-day product feature decision. To fully understand how certain decisions have been made in any company, one must look at all the internal organizational factors as well as those of the outside world. It's infinitely easier to fit a conspiracy onto a large organization from the outside than it is to run a coordinated conspiracy from the inside.

Microsoft is not invulnerable to market forces. Intuit has done a great job of keeping Microsoft Money at bay. Today, Internet-based applications and the increasing concentration on building browser-centric user interfaces represent a dramatic threat to Microsoft's desktop business. The more companies build applications based on a hosted model, the more opportunities exist for other data-center infrastructure players.

Microsoft has angered businesses over its pricing and licensing practices for Windows XP. Consumers are wary of the company owning too much information about them, and privacy concerns with XP and Passport may limit adoption. Without its software-as-a-service model in place, Microsoft is still dependent on an upgrade business model that is getting harder to continue.

Competitors also have opportunities. AOL has unique Time Warner content it can leverage over MSN. Sun can learn a lesson from Intel and start a "Java-compatible" program. By cutting individual JVM bundling deals with PC manufacturers, Sun can take advantage of a branded presence on the desktop as opposed to being buried in someone else's browser.

While Microsoft has certainly leveraged positions where it could, and has been guilty of anti-competitive practices, those who look for legal remedies must understand the more complicated internal dynamics of the company to determine where it is capable of cross-application leverage. This makes creating oversight exceedingly complex and difficult. Solutions based on conspiracy beliefs alone will be insufficient. Encouraging other market forces would seem a more appropriate approach.