Silicon Valley Part 2
Carly Fiorina made news twice last week. First, while announcing at a press conference that she and Craig Barrett of Intel were heading a delegation of Silicon Valley executives to Washington DC to lobby Congress for $30 billion in subsidies and --quite surprisingly and to the chagrin of a lot of their struggling Silicon Valley neighbors-- to urge Congress not to move to put barriers up against the export of decent-wage IT and R&D jobs to India and the rest of Asia.
At almost the same time, HP, Carly's company, was announcing a deal with Apple in which HP would private label the Apple Ipod, the popular digital music hard disc storage and player device. This was a departure from HP's usual way of doing business in two significant ways: first, it broke a company taboo around OEMing products manufactured by other companies and more significantly, it signaled a break from Microsoft unquestioned domination at a major MS computer manufacturer. As part of the deal, HP will also bundle software on new computers that will allow PC purchasers to easily sign up for the complementary Apple iTunes service.
There was a time not too long ago when no MS partner, major or minor, would have dared take a step away from the Redmond giant. At the same Consumer Electronics show in Las Vegas, where the Apple HP announcement was made, to underline the importance to MS of the digital music delivery industry, Bill Gates had earlier given the keynote address in which he expounded on MS's vision for the PC as central for the "intelligent home". Key to that vision, not without coincidence, is the wireless home entertainment center, which Microsoft has tried to claim outright , in part, through the forced use of its own proprietary digital music format, WMA. The music industry generally supports the competing and technically superior AAC format, which just happens to be the format for songs sold on Apple's iTunes Service. Microsoft provides a free software based media player with Windows and that player plays WMA and not AAC.
iTunes is the first successful bid to sell songs through a download service and comes years after a number of companies tried and failed. It was the coupling of the iPod and iTunes service that sealed the deal for Apple with its customer base, so to speak, but it was also a matter of timing. The music industry has taken major heat from its own best consumers for its heavy handed approach to digital music sharing services that offered no copyright protection and in its eyes the outlook for negative revenue streams if something didn't happen quick.
Microsoft, through its .Net strategy and its DRM (digital rights management) capabilities that are integrated into the WMA format has been quietly positioning itself to become the sole intermediary between the entertainment (music and movie) industry and its customers thereby isolating the music companies from their customers much like it had done with computer applications companies like Netscape and Lotus.
Having seen how Microsoft had consistently crushed or at minimum subjugated nearly every industry it worked closely with, the major entertainment companies have resisted crawling into bed with Redmond.
A further bit of bad news for MS on the same front also came last week as IBM announced it was partnering with Real Networks, Microsoft's major desktop music player competitor.
Microsoft, of course, totally dominates the worldwide desktop application and operating system market for home and office PC's and has made a credible entry into the server marketplace. This business should continue to grow incrementally as larger and larger portions of the second and third world adopt the PC as a fundamental business and home tool.
But Microsoft's voracious appetite for revenues and business domination needs more than simple incremental growth and the prospect the entertainment industry offered with the promise of MS getting a piece of each transaction processed through its operating system and back end tools became the overweening goal that Redmond set for itself over three years ago when it laid out plans for .Net.
Of course, Microsoft's other great battle lies against Linux, an open source (freely licensed) competing Unix-based operating service that depends on the worldwide collaboration of programmers seeking to end Microsoft's domination. In this area MS also suffered a further blow last week. IBM, which has for a time now lent its full and highly credible support to Linux, first as an Intel-based Unix server solution competing directly with MS for domination in that area, announced that it would begin to convert its own internal corporate-wide desktop services and applications over to Linux as well, with a goal of being fully Linux-based on the desktop within two years. The company later backed off of that quite unrealistic goal. Nonetheless, the significance for MS is enormous.
As we noted, MS's major growth --particularly if they can't make it in show business-- must happen in countries like China and India where significant portions of their enormous populations are rather rapidly moving into an electronic reality that includes PC's and vast wireless networks. Should those countries decide to standardize on a feasible Linux desktop (something that doesn't exist today) the cost to future MS profit growth would be catastrophic. The stakes are great and Microsoft sits on an enormous cash war chest that dwarfs any other company's in the world. The question is whether that money being spread around by a company fighting for its life will overcome what could make enormous economic sense not only to developing countries building new businesses but to the major global interests that would like to see MS's ham handed strangle hold brought to bay.
We don't pretend to know that much about the future but we do have to think that investors betting that Microsoft will own home entertainment or even increase its dividend by distributing some of its cash reserves had better get another strategy.
rmb
Copyright 2003 Richard Mendel-Black All Rights Reserved
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