Sun, Oct 16, 2005 - Page 11 News List

Microsoft using carrots instead of the stick

SHIFTING ALLIANCES Two new deals allow the firm to meet challenges from Apple and Google by relying on the success of partner companies, but there's a downside

AP , SEATTLE

Here's a slogan for Microsoft Corp: If you can't beat 'em, join the guys who have 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," analyst Rob Enderle said. "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.

While Apple CEO Steve Jobs strutted across a stage on 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 at Inside Digital Media said the video iPod's attractive price, combined with the TV content it has already snagged, such as 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.

Analyst Charles Di Bona at 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 IBM Corp.

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