July 16, 2002 8:00 AM PDT

Microsoft tries to steal Macworld thunder

Microsoft on Monday launched the first of several pre-emptive strikes against Apple Computer's Macworld trade show by making announcements about new technologies far ahead of their delivery to market.

The strategic attack comes as tensions mount between Apple and Microsoft. During Macworld five years ago, the two companies announced a five-year technology agreement, whereby Microsoft committed to continued development of Office and Internet Explorer for the Mac.

The two companies have said that they have no intention of extending the agreement, choosing instead to work together without a written contract.

In Microsoft's first salvo, the company revealed details about the next version of its digital media technology, code-named Corona, including that it officially will be known as Windows Media 9 Series. Microsoft Chairman Bill Gates is slated to launch the first public beta, or test, version of Windows Media at a Sept. 4 event.

Microsoft is expected to make other digital media and consumer announcements this week designed to steal thunder from Macworld, which starts Wednesday in New York. On Tuesday, Microsoft detailed its plans to release a digital media version of Windows XP in time for the holidays, in an apparent assault on Apple's digital lifestyle strategy.

Similarly, Microsoft said last week that it will release a new line of 802.11b wireless networking products later this year. Apple has been selling similar technology, called AirPort, for more than two years.

Technology Business Research analyst Bob Sutherland said Microsoft's marketing strategy isn't surprising.

"There's no doubt that Microsoft is going to try and play catch up with Apple," he said. "But Apple, when it comes to the real productive space---whether it's artists, architects or musicians--owns that market. Apple is going to continue to drive that down to typical day-to-day consumers."

Microsoft's Mac commitment appears to be wavering, spurred in part by recent actions on the part of Apple. Sources close to Microsoft's Macintosh Business Unit (MacBU) said, in fact, that executives are divided about how committed the company should remain to Apple.

"We're not seeing a lot of gratitude around here," said one source, who asked not to be identified.

And on Friday, MacBU general manager Kevin Browne started a three-month sabbatical, with a return date set for Oct. 7. Analysts looked askance at the timing, with Browne's absence starting on the eve of New York Macworld, where Microsoft the last two years made major product announcements.

In an e-mail Tuesday, Browne emphasized that Microsoft had "re-affirmed its commitment to continue making Mac products as long as the business case makes sense."

Still, the distancing between the two companies, which do compete in the operating system market, shouldn't be surprising, say analysts.

"Five years ago, Apple was all too happy to do whatever it took to make that deal happen," said Gartner analyst David Smith. "At this point in time, Apple is a little less dependent on Microsoft. They're acting more independent."

Referring to the investment Microsoft made in Apple at the time of the five-year deal, Smith said: "What does $150 million buy you? It doesn't buy you eternal gratitude."

Stealing thunder
Microsoft's pre-emptive strikes against Apple come as Apple CEO Steve Jobs prepares to announce a new flat-panel iMac with a larger 17-inch liquid-crystal display and Mac OS X 10.2's readiness ahead of schedule.

Microsoft's thunder-stealing activity also is, in part, a warning that Apple, which has less than 5 percent market share compared with Windows PC makers, needs to understand its place, said sources familiar with the strategy.

Microsoft apparently believes that it has delivered on the promises of the five-year agreement but that Apple has failed to do what is necessary to properly support its partners. Microsoft, for example, was instrumental in helping Apple resolve problems with Mac OS X, the next-generation version of the Macintosh operating system released in March 2001. That effort culminated in the September release of Mac OS X 10.1, soon followed by the release of Office v. X and many other important applications that run natively on the new operating system.

But after the turn of year, Microsoft began looking more closely at how Apple marketed OS X 10.1, complaining the Mac maker failed to put out enough marketing dollars to drive adoption of the new operating system. That adoption was crucial to Microsoft, which developed Office v. X to run only on OS X and not the older OS 9.

"OS X is doing very, very well," said Phil Schiller, Apple's senior vice president of worldwide marketing. "We were certainly more aggressive than Microsoft has ever been in making an operating system in making sure we built something we could move our whole market over to in a very short time."

Browne didn't necessarily agree with Schiller.

"We have announced that we're working on the next major releases of our Mac products but have concerns about the long term because Apple has not focused on moving the Mac installed base to Mac OS X," Browne said. "Since OS X was introduced, Apple has spent 20 times more on advertising iPods than on advertising OS X."

Schiller estimated that about 2.5 million of the 25 million Mac users have switched to OS X. "Our expectation--and this is right in line with where we thought we'd be--is that we will have 5 million by the end of the year. That's 20 percent. I don't know when Microsoft is saying XP is going to be 20 percent of the Windows PC install base, but I've never heard numbers even close to that."

Microsoft has been reluctant to release sales figures for Office v. X, but during a Tuesday briefing said sales were well below expectations. Microsoft has sold 300,000 copies vs. an expected 750,000. In fact, Office 2001, which runs on the older Mac OS 9, is outselling version v. X, the company said.

Again, Browne questioned whether Apple has done enough to promote the operating system.

"They have a great product in OS X, but changing operating systems is a big undertaking for customers," he said. "It involves directs costs for hardware and software upgrades, learning the new interface, etc. We would like to see Apple do a better job of explaining the benefits of OS X, so more people will feel the investment is worthwhile. We think this will benefit both Apple and our Mac business."

Still, Mac Office sales have declined steadily through the release of Office v. X. Between August 1997 and August 2001, the number of Mac Office users declined from 8 million to about 3.5 million, according to Microsoft.

While sales may be falling, analysts point out that not all the blame should fall on Apple. Microsoft, for example, cuts lucrative deals with Windows PC makers for carrying Office XP Small Business Edition, while Mac users must pay as much as $300 or more for Macintosh Office.

Schiller said that Apple and Microsoft "have had discussions" about an Office bundle on new Macs, but that they didn't turn into an agreement.

Microsoft's criticisms of how Apple markets OS X also fails to take into account how Microsoft sells Windows. The software titan typically pours out the most marketing money when a new operating system is released because that's when people are most likely to buy a copy at retail. Thereafter, sales trickle of boxed copies as the majority of people choose to get the OS with a new computer.

"Apple is always looking for people to replace older Apples, not to upgrade the OS," Sutherland said. "Apple is more typically interested in new sales than upgrades."

Questioning partnership
Redmond, Wash.-based Microsoft also has continued to develop other Mac products, releasing in the early summer new versions of MSN Messenger and Internet Explorer for OS X.

IE 5.2, in fact, takes advantage of unique Mac OS X features, such as the Quartz 2D rendering engine. The new version supports enhanced Quartz 2D font smoothing that greatly improves the look of Web pages. But rather than reciprocate, Apple has been cutting deals with one of Microsoft's chief rivals.

Apple's decision, for example, to include the iChat instant messenger program with Mac OS X 10.2 that connects to AOL's Instant Messenger network caught Microsoft executives by surprise, sources said. And it wasn't the first Apple deal with the Microsoft rival. Late last year, Apple cut a deal whereby Netscape took over the default homepage for Macs. Microsoft responded to this with the release of IE 5.2, which switches the default home page to MSN.

Another part of the problem lies in Apple's recent "switchers" marketing to woo PC users to the Mac. The Cupertino, Calif.-based company is running 10 commercials featuring former Windows PC users who have switched to the Mac. Some of those TV ads could be interpreted as direct attacks against Windows or Microsoft.

The unceremonious attacks on Microsoft have irked some high-level executives, sources said. As a policy, Microsoft rarely speaks out against partners. Even when bugs in Mac OS X hampered the release of Office v. X, MacBU took the heat for product delays rather than blaming Apple. Only after the release of Mac OS X 10.1, did MacBU general manager Kevin Browne discuss the 70 fixes Microsoft assisted Apple with.

Managers, apparently, don't see the same goodwill coming out of Cupertino.

Mac OS X 10.2, code-named Jaguar, has raised considerable concern in Redmond as well. Jaguar adds some new features "that have some people loosing sleep," said one source. "You don't know what kind of cultural paranoia we have here" about competitors.

"I can understand that Microsoft isn't 100 percent happy," Smith said. "But then again, I don't expect them to be 100 percent happy with the relationship with any company."

 

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