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Wednesday, November 15, 2006

Microsoft, Zune & Universal: The 1992 Game Plan

Microsoft is the guy who peaked in high school as the big man in the little pond but now in the real world, ill-equipped to function and compete when people are not impressed by the things they were in high school.

It was all so simple then for Microsoft. Like DOS, all they had to re-package what was out there and call it Microsoft - and everybody would bow before them. After all, they controlled the desktop. If your app competed directly with Microsoft - strange - it would run slower or not at all with the OS upgrade. Or if you built a company based on your flagship software selling for $300? Microsoft would simply create a look-alike and bundle it with 3 other apps also for $300 and of course, it would run faster, cleaner and without bugs - who would turn down such an offer? Or if you did ... Microsoft would cut a few % points off your Windows licensing package/maintenance contract - as an enterprise buyer, how could you argue against the most compatible software, the cheapest application bundle and a good deal on the OS & OS maintenance licensing?

You have to give Microsoft credit for leaving no stone unturned - they created lots of cheap and/or free tools for developers to create Windows apps. They also didn't forget retailers - of course, this was the introduction phase of the PC and it wasn't cheap (about $3-$4,000 in today's dollars) to buy a typical personal computer so retailers were more than happy to do whatever it took to stock and sell PC's. And to complete the circle, since Microsoft was freely licensing the OS, new PC companies were springing up everywhere.

At first, Microsoft was just smart & aggressive - but then of course, they started to veer into being overly aggressive and eventually to illegal methods. Some people think any monopoly is illegal. A monopoly is NOT illegal if it's achieved through natural consumer & buyer decisions and/or that position is not leveraged into other areas - which was the case with Microsoft as many courts and countries have ruled.

And when people tried to step out of line such as Netscape licensing to place their browser icon on Compaq machines, Microsoft threatened not to allow Compaq license to load Windows on their PC's (if carried out, you'd get a blank machine and the Windows discs to install yourself - a good time not promised).

This is the culture, company and ingrained attitudes of the people they've hired since the early 1990's as THE MICROSOFT WAY. We will surround you and start walking slowly towards you - you can join us, meld with us or perish.

Everybody knew eventually PC's would be linked with TV's, entertainment and or interactivity. No one was quite sure exactly what it might look like but everyone was sure it was going to happen. So, of course, Microsoft put their only game plan into place. I'm sure they scoffed at Apple's Quicktime. It's just a playback app for consumers - what moron starts there? No, we start at the other end no one ever thinks of. We design a DRM and codec’s. That way we get a % in royalties with every unit that sells. We also make and sell encoding and streaming machines. We show these to the studios and record labels. Okay with them? Great - sign here ... reluctant to? I see your corporate OS & maintenance contracts are up for renewal - sign today and I'm sure those boys will cut you a .5% discount - pals? So while sales of online video and online music were pretty slow, MS wasn't worried, they had the whole turnkey system in place. They had the suppliers locked up in the equipment and the final file format - who was their competition - Apple? bwahahaha. Unix? bwahahaha.

And then there was the internet.

Some of you might not remember but Microsoft actually thought they could bottle it up. They saw it as a CompuServe/AOL like service and they could beat it back with MSN, the portal - and while they easily defeated Netscape - kind of hard to compete with 'free,' but larger forces started that MS still doesn't quite grasp.

Even in the internet infancy, most people were just going to use the browser that came with the machine - not only did people not know how to download a browser, it was a flakey proposition to have to wait 20-60 minutes of downloading time over dialup and of course, since IE worked fine, why bother downloading another browser that actually ran slower or the most amazing thing - when IE reached www.netscape.com, it would literally take MINUTES to begin to draw the page - yea, must be Netscape's gray background page that's taking up all the bandwidth. It would be hilarious if it wasn't so obvious. And on the other end, MS offered corporations money or massive discounts on contracts if IE was selected as the corporate desktop browser - people seem to think that Netscape lost solely on merits. Netscape could not compete since IE was free (Netscape used to charge corporations) and how do you compete when Ms is willing to shave millions off a maintenance or licensing contract?

MS thought the war was over forever. They have 95% of the internet browsers - even Mac users got an IE. They had 95% of the desktop. Done & done.

But as the internet picked up users and cohesion, people were being connected all over the world and it was and is the dawn of a new age. It started in small ways - the people who had abandoned home PC's as dull letter writing & budget machines were starting up the computer again to connect to the internet & their friends. The things they were interested in were "universal," JPEG photos, text email, HTML web browser for viewing (mostly) text then - they weren't creating Painter files or Word docs or a Photo database only available on that machine - nobody really cared what kind of machine you used or if you had the same software because the most important files were 'universal' formats. And as connection speeds increased - collaborative efforts were now possible because people could contribute worldwide. Never mind a massive project like Mozilla/Firefox but look at all the amazing shareware apps out there. What was shareware distribution before? A user group could put it on a diskette and sell it - no real way to test it - you had to buy it to try it and what if you were really good at code writing but bad at UI? Your max audience is probably 1,000 users - now, a teenager in Norway can post a shareware app & source code, a guy in Ecuador can add a nice pull down menu and a bunch of other people in Arizona and India can trouble shoot and bug fix BEFORE the guy who started it all wakes up back up in Norway. How is this important?

Napster & Mp3. During the 10-month absolute heyday of Napster, everyday, there was probably more global communications going on everyday than in the history of mankind up to that point. Sure, it was illegal and copyright infringement but it was the power of the people. People were writing apps to convert audio CD's to Mp3's, people were downloading those, converting their CD's and then letting the reduced file be zapped all over the globe. And yes, MS tried to contain it with a new version of WMA - forgot which one - that was "way better" than Mp3 - sounded "better" and the file size was smaller. Clueless analysts and journalists said Mp3's reign was over, everyone would be switching to WMA.

Apple launched the iPod. A few people got it - and admittedly, it was overpriced due to component availability then at $399 but most people did not - least of all MS. They dismissed it as a portable hard drive - big whoop, they had 10-15 companies selling WMA tracks online and they had dozens of companies selling WMA DAP WORLDWIDE. Apple? What a joke.

But the world was different. Want to test out iTunes - just download it. For most people - particularly the early adopters, that's 2-3 minutes. Even included a free CD burning aspect that MS charged for - and later made theirs free. And in the internet age, locking up retailers is irrelevant. How many hits do you get if you type in "Buy iPod." Doesn't matter if you live in Tiny Junction, Wyoming or Santa Monica, CA - you are the exact same distance to your doorway to buy ANYTHING. In the internet age, there are no access points to lock up. While Wal-Mart might put a small retailer out of business in the real world, on the internet, walmart.com is no more or less easy to get to than Joe'sstuff.com. But MS is confused when 99% of online music stores sold WMA tracks, yet, nearly 90% of the business went to itunes. MS is confused that there are dozens of companies selling DAP's that play WMA yet nearly 80% choose Apple's iPod. MS lined up the record labels, they created encoding machines, servers, helped launched stores and provided guidance on making the hardware but yet, Apple & consumers just ignored all that - how could that be? So MS focuses on the one thing that they believe drives the success of the iPod because that's the ONLY ASPECT of its success they understand ... that it's "locked" but if anything, the evidence is CLEARLY THE OPPOSITE.

All evidence points to the fact that the bulk of music on iPods is NOT purchased at the iTunes store so clearly that is NOT the main reason people are buying iPods - clearly people know how to load "other" music on this thing.

Sure, the store is a must have component but clearly not the overwhelming factor - this is the reason the head of Universal Music calls anyone with an iPod a thief because we're not buying enough tracks online.

So, after careful analysis on Microsoft's part, the conclusion they draw is that "control/nuts-to-bolts" is the key to success so that’s how they arrived at Zune and why they're applying the ONLY game plan they know. And while they have a hidden agenda in trying to roil the waters for Apple's negotiations down the line with the labels - part of it is the only game plan they know. If we lock up the suppliers, we'll corral this thing - notice how they proudly proclaim the Zune is being sold in 30,000 stores versus 10,000 for the iPod - show of hands, who does not know how to find an iPod online or offline? How many online places sell iPods and really, you have to count every eBay auction as another seller - 2 million places to buy an ipod? Microsoft, it's 2006 NOT 1992 anymore.

What effect does the Universal Music deal mean for Apple? Very little.

Why? When the next negotiation rolls around, if Universal makes a noise, Apple will raise the following questions:

So, your response to "low" online sales is to try and raise prices and/or not sign a deal with our 80-million ipod users and us? That you'd rather withdraw potential sales to 80 million potential customers?

Who will win this PR battle? Apple, Steve Jobs and 80 million iPod users or a record label?

And if the fight escalates to consumers, Apple can also point out, do car manufacturers charge you every time you put gas in the car? Fridge makers when you load food?

Once again, in the consumer marketplace, MS is clearly in over their heads because they design everything backwards. Instead of trying to figure out what consumers want, they sit down and figure out how can they sign exclusive deals, try to make life more difficult for their competitors, sell more servers and how to extract micro payments from royalties or patent licensing - just look at their Zune "store." Who in this day and age makes buying MORE difficult and not easier. Songs are 79 credits but a penny is not a point ... songs are really $.99 so you have to buy in at a $5 minimum in which you get 395 credits that is NOT returnable or refundable but because they think consumers are morons who see 79 credits and think, man I'm saving way more than at iTunes where they believe in the wacky thing of you pay for only what you buy. Why would they price this way except to confuse us because they think we're morons and are easily fooled?

It should also be noted that consumers have clearly rejected every version of WMA - from plain WMA, the portable media center WMA and last year's plays4sure - but tech writers seem to have short memories.

This is yet another reason every consumer venture is a failure since 1995 (including the $12 billion spent on Xbox so far). What works for enterprise sales is one thing but clearly, they are ill equipped to function in a consumer world.

1 Comments:

Anonymous Anonymous said...

Great piece. A lot of good points in this article.

3:54 AM

 

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