Microsoft vs. EU: Expecting the unexpected

Posted by Rob Enderle, Principal Analyst, Enderle Group

Analyst Opinion - One thing you learn over time is if you get a government agency involved in a competitive dispute, the outcome may not be what you expect and the amount of time to get some sort of a result may exceed your companies’ lifetime.  

To come up with its recent ruling involving Microsoft, the EU has invested nearly a decade of time. When they started, Microsoft was just beginning to slip from the top of their game, neither the iPod nor Google were major influences in their respective industries (search was still in its infancy), and we were arguing whether Linux was appropriate for anyone but technologists and software specialists.  

The EU’s goal was to craft a weapon with impressive power in terms of a legal precedent that could be used against any company or organization that would gain excessive power and then to use that weapon effectively against that company.   Microsoft’s competitors, who had largely been unsuccessful in the markets concerned, were hoping the EU would step in where the US did not and cripple the company. They were not particularly worried about what the EU would do after they were finished with Microsoft.
 
Granted it remains interesting that these things take so long. By often when there is an outcome, much of the result seems kind of silly.   I mean, seriously, who believes Microsoft’s Media Player is a threat today?  
 
The market actually proved that Microsoft didn’t have an unfair monopoly with the media player but governments, as we all should know now, don’t really care that much about facts because facts just seem to get in the way of other things governments want to do.   

Now, both Google and Apple would seem attractive next targets for the EU, and Microsoft has already implemented sweeping changes to address core aspects of what the ruling calls out.  In addition, the ruling may create a stronger Microsoft code-based competitor for Linux at a time when the Linux supporters seem to be increasingly at odds with each other and appear to be vulnerable to a true competitive attack.
 
The lesson we may have once again learned is that weapons often have dual edges and can be wielded by anyone even the entity they were intended to be used against.
 
Let’s talk about an interesting alternative to the more common coverage you've likely seen elsewhere.

Winex Option One:  Linux/Windows Hybrid

When someone changes the rules of a game, a good tactic is to quickly become expert at the new rules and then play them to your advantage. What we have with the European ruling is a rule change and it applies to anyone who has a dominant position in any market.  
 
A side impact of this is it turns Microsoft’s code into a government backed source for a core interoperability technology that many others will take advantage of creating a powerful standard.  This is because it makes no sense to gain access to something and not rely on it. But once you rely on a technology, it becomes something you are tied to and if you can’t influence the future direction of this key component, you are subservient to it.   Microsoft still owns the roadmap.  

So, we now effectively have a set of interoperability tools, set by and owned by Microsoft, provided (if the EU gets their way) for free and provided to a large number of Microsoft competitors, who will become increasingly dependent on them.  Free pricing would typically be interpreted as being unfair as it could be seen as preventing competitive entry (typically this is called predatory pricing). But, in this case, it is part of a judgment and therefore ok.
 
This creates an interesting opportunity.  While it certainly doesn’t force Microsoft to continue an effort to make their products more compatible with Linux, it does suggest an alternative path in which Linux will voluntarily take increasing advantage of Windows technology to interoperate.  But Microsoft still controls the roadmap, which means anyone developing on the resulting platform will need a relationship with Microsoft, if they want to assure that what they have developed will work with future versions of the related technology.  Over time, because the Linux parts become increasingly dependent on the Microsoft parts for interoperability, Microsoft controls the direction of the platform and their related tools gain value.
 
The end of this evolution is a Linux/Windows Hybrid (or UNIX/Windows, or MacOS/Windows depending who goes down this path) with Microsoft largely in control of the result.  

Winex Option Two:  Windows/Linux Hybrid

Now, Microsoft could choose to drive this and fund a third party effort to create a Linux/Windows hybrid and have that third party bring it to market.  Let’s say they funded it with Novell, for instance.   Novell gets a product that is potentially (in terms of interoperating and running Windows applications) better than anything they currently have; Microsoft gains homes for Windows applications that probably wouldn’t run native under normal Suse Linux (virtualization aside).   A blended license, given we seem to be doing that a lot with Open Source products, is a solvable problem and revenues are tied back to services and applications that run on the new platform.  

As long as Microsoft retains control over the core code, which is likely since any unauthorized changes would either initially or eventually cause breakage, the end result is a low cost Linux/Windows hybrid that could be more attractive to a number of buyers than Linux currently is.
 
Microsoft clearly would take a revenue hit on Windows but, given that is heavily discounted to the OEMs anyway (and for Vista better than 95% has been going to the OEMS) and would likely drive an upgrade to secondary Microsoft offerings at full revenue it is at least possible that Microsoft gain revenue as a result of the transition if they played this right.   

It might also result in a product line either directly or indirectly from Microsoft which embodies the backwards compatibility of Windows and the Open Source benefits of Linux which could be very attractive to parts of the market that Microsoft currently doesn’t serve well.  

Apple/Google and US Impact

As I mentioned before, the goal of the EU was not to just create a weapon to use against Microsoft, but to create one to use against any vendor, who they believe is too powerful.   One clear way to reduce US influence is to reduce the power of the vendors who fund that influence.   Beating up on and fining US vendors is probably rather politically popular in the EU right now as well.  

In the technology market Google, Apple, IBM and Oracle all drift to the top of the list as potential targets for this new found EU weapon. The EU has for some time expressed concerns particularly with regard to Apple and Google.  For Apple, it is the lock-in between iTunes and the iPod and now iPhone, for Google it has been the increasing power the company has and the apparent inability for any country to curb it.   Given its scope and, through the use of its search tool, the potential to affect the outcome of elections Google likely has the higher long term concerns associated with it but Apple is the easier target.

Regardless of whether either one of these companies are next on the list the EU has put the world on notice that they plan to aggressively reduce the influence of any company, particularly those that are US based, that has too much power in their opinion.   This effectively bypasses the US congress in this regard and makes this body largely impotent and redundant.   If it weren’t for Iraq, I doubt this could have happened because the US would likely step in and contest the EU’s position. But the US Congress is clearly focused elsewhere and it may take awhile for it to wake up and realize that the EU is now where the US used to be with regard to commerce issues between US multi-national companies.  

Applied properly this precedent could open up both companies to competitors who otherwise may have been having difficulties entering or competing with either.  For Google, the attack would need to be a bit more convoluted because what needed to be shared might be the entire offering.   But for Apple it would be the iTunes/iPod software interface and hardware plug specifications which together would eliminate the barriers to entry Apple has so painstakingly created.
 
Microsoft could even potentially use this ruling against either party in what would be the ultimate form of irony but it isn’t often company attacked by a weapon like this feels, at least over the short term, willing to use it themselves.  In addition, Apple has been somewhat supportive in other areas and I doubt Microsoft will attack them.  Goggle not so much.  
 

Wrapping up

There is a saying:  “When the lord has given you lemons, make lemonade”.   While this ruling will likely take Microsoft down onto paths they otherwise wouldn’t have gone; the end result might actually be beneficial for the company long term forcing them down a path towards Open Source that the market has indicated for some time it wanted them to go.    The funny thing is, once Microsoft is dragged into an Open Source world, I actually think they could like the result if they play it right.

 I’m reminded that when Microsoft first started out, it had some massive problems to overcome.  Back then, the team laid the foundation for the powerhouse that exists today.  One of the problems with a mature company is it often can’t take those same kind of risks, gets stuck on the way things have always been done, and so drops into decline as a result of missing the related benefits.   This may actually create the kind of opportunity that built Microsoft, and it could actually revitalize the company by creating a closer connection between it and its true customers.  The only question is will the current management team step up to it?
   
This ruling is going to change a lot of things long term, many of them positive for consumers, because this is a government doing this; I imagine there will be a number of negative surprises as well.  (I’m kind of jaded when it comes to governments getting involved in business). The winners here will likely be those that figure out how to best use this new EU weapon, while avoiding the possible downsides.  

These are the folks that will best use the interoperability technology that Microsoft is providing and also get full access to Microsoft support so they can actually get it to work for them.   The folks that probably will have a head start will be Sun, HP, and Novell all of which can make the best use of this and are already engaged with Microsoft and have rich platforms that will further benefit from greater interoperability.    Apple’s play here isn’t as public but I understand they too are working with Microsoft to improve interoperability could also benefit from the result.  

There is an old Chinese curse: “May you be born into interesting times.” And hings just got really interesting.    


Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies. The editorial staff of TG Daily may not necessarily agree with his opinion stated in this article.