February 22, 2002 4:00 AM PST

Microsoft, Apple alliance at key juncture

Five years ago, Apple Computer announced an almost unthinkable pact with Microsoft: The software giant would continue to develop Office software for the Mac, and Apple would bundle Internet Explorer in all new machines.

In addition to the Office-Explorer trade-off, the pact called for Microsoft to purchase $150 million in Apple stock and for Apple to drop a long-standing patent lawsuit. Current Apple CEO Steve Jobs hailed the announcement at Macworld Expo in August 1997 as a much-needed boost for Apple, but many Mac fans were unconvinced.

The agreement, however, expires this summer, raising the question of whether the two companies--which have long had a love-hate relationship--will reaffirm their commitments or begin to drift apart.

"Apple needed this agreement more five years ago than they do today," said Technology Business Research analyst Tim Deal. "Microsoft and Apple were practically at war over the patent dispute and other issues."

Tensions seemed to have eased, but the companies remain occasionally at odds, making the expiration of the pact a potential issue. For example, in recent months, Apple has opposed a controversial civil lawsuit settlement. The deal, which would have showered schools with Microsoft software and as many as 1 million refurbished PCs running Windows, was later thrown out by a federal judge.

In addition, Apple in December decided to use Netscape to power the default home page on new machines bundled with Internet Explorer. Netscape is owned by Microsoft archrival AOL Time Warner.

Meanwhile, Apple needs Microsoft's continued support of the Mac OS, which has less than 5 percent market share and therefore offers limited revenue potential for Microsoft.

Apple and Microsoft representatives say that their relationship is stronger than it was five years ago and that there is no need for a written contract professing their mutual support.

"From our standpoint that agreement was necessary in 1997 because of all this bad history where the companies just weren't able to work together serving our customers very well," said Kevin Browne, general manager of the Macintosh Business Unit (MacBU) at Microsoft. "The agreement put this aside. As we look at the situation right now, there's no similar business issue between the companies that exists."

Because of the strength of the relationship, "Microsoft and Apple have not talked about doing any formal renewal of the agreement," Browne said.

Phil Schiller, Apple's vice president of worldwide marketing, agreed.

"It's not an issue today, a contracted commitment between Apple and the Macintosh Business Unit for the future of Office products," he said. "They have shown us in many ways their commitment to the Mac."

While Schiller said Apple and Microsoft have not discussed a new agreement, he emphasized that "those things normally would not be made public." He also stressed that such pacts are the exception, not the rule. "There aren't any other developers that have multiyear contracts to deliver products to the Mac. Adobe doesn't. Macromedia doesn't. Quark doesn't."

Browne emphasized that Microsoft remains committed to the Mac for a couple of reasons. "We have a great business," he said. "It's profitable. It makes a lot of strategic sense--in fact, it makes more strategic sense now than it did several years ago."

In November, for example, the company started selling Office v. X, which Apple has called the "poster child" for Mac OS X, the company's next-generation operating system released in March.

Microsoft sees big sales potential from Mac Office. It estimates there are between 15 million and 17 million Mac users worldwide, although Apple puts the number closer to 25 million. Only about 3.5 million of them use any version of Office, but that's a decline from 8 million users in August 1997. From Microsoft's perspective, that means there is enormous sales potential.

Apple views Office v. X as Microsoft's clear commitment to the Mac. "There's nothing in the contract that says you have to make this killer, great version of Office for OS X," Schiller said. "It is arguably the best version of Office on any platform."

Microsoft's other side
Nevertheless, analysts see strains of the old Macintosh-unfriendly Microsoft outside of the 160 employees in the Mac unit, which was formed about seven months before the announcement of the five-year pact.

"The MacBU guys have as their priority Mac products," said Gartner analyst Michael Silver. "For everybody else, those products are secondary. It's another question about the organization of Microsoft that they have some products from the MacBU but other products come from other divisions. Mac users can expect better priority from the MacBU than from other divisions."

Microsoft's Windows Digital Media Division, for example, is responsible for the Macintosh version of Windows Media Player and competing features bundled into Windows XP. Microsoft completed Windows Media Player for OS X in late October, around the same time Windows XP launched. But until a broad release earlier this year, the product was available only to those people willing to pay for Office v. X.

Microsoft's delay in putting the product on the Web for downloading is unusual, say some analysts, and could indicate that the company took such action for competitive reasons.

"It definitely seems a little bit strange to me that they would have delayed it two months," said Directions on Microsoft analyst Matt Rosoff. "There is no question in my mind they want to focus on digital media as a major selling point of Windows XP. They may have worried that this might have taken some attention away from XP."

David Caulton, product manager for Microsoft's Digital Media group, said there was nothing nefarious in the delay. The version of Windows Media Player for OS X shipping with Office focused on "intranet-focused media playback," he said.

"We continually improve Windows Media Player, and before we offered a release for broader distribution, we wanted to upgrade some features to provide the best Internet media performance," Caulton said.

But some analysts didn't buy that explanation.

Technology Business Research's Deal described as "shrewd" Microsoft's wide-distribution delay of the Mac media player, which is more widely used by Web sites than Apple's QuickTime format.

Another sign of trouble: MSN Messenger 2.1 has been shipping with Office v. X since November, but only version 2.0 is available for download.

Version 2.1 supports Microsoft's .Net Alerts feature, the first deliverable in the company's .Net software-as-a-service strategy. In fact, extending .Net support to the Mac could be "crucial to the platform's survival," considering Microsoft's aggressive expansion into Web services, Rosoff said. "This clearly is not a priority for Microsoft."

But MacBU's Browne argued that "the 2.0 and 2.1 versions are virtually identical," and "you basically get all the text and mobile messaging features you get with Windows Messenger. You just don't get the file transfer feature, the phone call, voice or videoconferencing feature. Those are all things we're taking a look at. Video and voice can be kind of tricky. It's not a lack of interest in providing those technologies."

Schiller remained optimistic about Microsoft's Mac support but noted that broader support for open standards would solve a lot of problems. "By supporting open standards these platform problems will demise over time," he said. "We believe in open standards, like supporting MP3 or JPG in Mac OS X."

Windows XP, by contrast, offers limited MP3 support. If consumers want to "rip" MP3s using Windows Media Player for XP, they have to pay extra for it.

With the expiration of the pact just six months away, Rosoff is taking a cynical view, considering that Microsoft's antitrust problems are winding down and that the company believes Windows XP will further marginalize Apple.

"I wouldn't be completely surprised if sometime after Microsoft's contract with Apple runs out that you see Mac Office suffering a similar kind of fate," he said. "Antitrust concerns aside, it wouldn't surprise me if they said they really don't feel like supporting the Mac anymore."

 

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