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Microsoft befriends some competitors

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Posted: Friday, October 14, 2005 6:43 pm | Updated: 8:32 am, Fri Oct 7, 2011.

SEATTLE - Here's a possible slogan for Microsoft Corp.: If you can't beat 'em, join the guys who are having the same problem. Microsoft struck two deals this week with sometime adversaries aimed in part at taking on mutual competitors.

Those partnerships with RealNetworks Inc. and Yahoo Inc. could signal a return to Microsoft's roots of successfully challenging IBM by finding the right allies, analysts say. And both show how seriously Microsoft takes competitors, including Google Inc. and Apple Computer Inc.

Microsoft "grew to a point where they thought they were big enough they could weather any storm," said analyst Rob Enderle. "I think they've been reminded recently that nobody's really big enough."

RealNetworks, the Seattle-based digital media company, on Tuesday announced a broad partnership with longtime nemesis Microsoft that also settles all the company's antitrust complaints. A series of agreements to share technology and promote each other's products could better position both companies to fight against Apple's market-leading iPod player and iTunes music service.

The need to compete better could not have been more clear when, the following day, Apple announced its newest iPod, which plays video, including some hit TV shows, that can be downloaded from iTunes.

As Apple CEO Steve Jobs strutted across a stage Wednesday touting his latest product, Microsoft and Yahoo were announcing that they had finally agreed to make their instant messengers work together.

That deal is designed in part to take on America Online Inc.'s more popular instant messenger. But analysts say the companies also probably have one eye on Google, which launched its own messenger last month.

The mostly free software for sending lightning-fast text over the Internet is popular with business users and teens alike because it electronically mimics regular conversation. Many also see lucrative potential in up-and-coming services like video chats, computer-to-computer calling and perhaps even efforts to sell music or other products.

The RealNetworks deal follows several years of efforts by Microsoft to carve a place in the living room - and in people's portable gadget collections - for Windows-based systems that can deliver music, TV shows and movies to consumers.

Various Windows Media technologies have been key to that effort, and companies including Creative Labs Inc. and Samsung Inc. have had portable Windows-based products on the market for the past year.

But analyst Phil Leigh with Inside Digital Media said the video iPod's attractive price, combined with the television content it has already snagged, including ABC's "Desperate Housewives" and "Lost," gives it an immediate edge over those fledgling efforts.

"Based upon the demand that they've got for the iPod per se, it's pretty clear that the video iPod is going to outsell all of the other devices that were introduced in the Microsoft ecosystem a year ago," Leigh said.

On the heels of the Yahoo-Microsoft announcement came news that AOL, a division of Time Warner Inc., has been talking with Google and Comcast Corp. about taking a joint stake in AOL. Those talks could perhaps edge out Microsoft, which has held its own talks with AOL over partnering in areas including search and instant messaging.

Analyst Charles Di Bona with Bernstein & Co. said Microsoft's recent partnership efforts could show that the company is refocusing on its roots as a platform company, providing the base software but leaving it to others to provide hardware and content.

That's the strategy Microsoft used in its early, extremely successful days, when it paired its operating system with computer makers' hardware to beat International Business Machines Corp.

In recent years, Microsoft has moved more into content with projects such as MSNBC and Slate, the online magazine it has since sold.

But going forward, Di Bona expects the company to focus less on content, such as its music download site, and more on partnerships that encourage others to use products such as its Windows Media software and copyright protection technology.

"They don't want to beat the iPod per se; they want to provide the software that allows other people to beat the iPod," he said.

Leigh said a disadvantage of that strategy is that Microsoft has to coordinate with multiple hardware and content providers, and can't always control how good the end result is.

"The Microsoft ecosystem has a lot of moving parts, and in the Apple ecosystem, Apple has complete control," Leigh said.

Also, although Microsoft has traditionally built itself on successful partnerships, some companies may be distrustful of working with the world's largest software company.

A big fear has been that to partner with Microsoft is to be owned by Microsoft, and the bullying tactics that came out during the company's U.S. government antitrust case are still fresh on the minds of some technology executives.

Brad Smith, Microsoft's top lawyer, has made it a priority to settle most of the company's outstanding private U.S. antitrust complaints, and a key part of some of those settlements has also been to forge business deals and increase goodwill.

Microsoft reached a massive antitrust settlement with Sun Microsystems Inc. last year that included a pledge to work together. Outside the courts, the company also has signed deals such as its cooperation agreement with phone maker Nokia Corp. in February.

Smith said the recent partnership push comes as the computer industry is evolving to be more focused on people using many different technologies over the Internet. That's forced Microsoft to change its philosophy, working to make its products more compatible and its relationships with others in the industry more harmonious.

"Consumers want to be able to use technology from multiple companies simultaneously, and so we have to work with each other in the industry, both to promote that kind of interoperability while we also continue to compete with each other," he said.

Companies such as Sun, Real and Nokia also have stressed that they continue to battle Microsoft one some fronts. And Di Bona said the partnerships shouldn't be taken as any indication that Microsoft, known for its brutally competitive streak, is getting soft.

"I don't think they view themselves as sort of the also-rans teaming up with the also-rans," he said. "They're definitely still in this to win. They're just deciding what stick they want to use."

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