Microsoft Corp. bundling again despite critics

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Microsoft Corp. bundling again despite critics

Thursday, May 03, 2001

By David Radin

Way back in 1995, Microsoft Corp. signed a consent decree because its competition was accusing it of using its monopoly power in unsavory ways. Although Windows was just a few years old, the company had already leveraged the product to gain competitive advantage and leap over Lotus 1-2-3 with the Excel spreadsheet application and over WordPerfect with Microsoft Word, practically annihilating these market leaders.

Similarly, the company almost single-handedly destroyed the markets for companies selling fonts and system utilities by bundling applets and even full applications with new versions of Microsoft operating systems. If acceptable products could be "purchased" for free, then why pay money to anybody to buy slightly enhanced versions?

But the Internet's rise in the late '90s made the government step in big time. That's because Microsoft was now trying to step on a media darling -- Netscape, a company characterized at the time as a $300 million company with a $5 billion image.

This time, Microsoft used the power of Windows 98 to leverage into the browser market by bundling Internet Explorer with Windows. This created a similar situation to the earlier bundling of fonts and utilities by removing almost all the incentive for users to buy an external browser (Netscape), because they could get Internet Explorer for free. Of course, now Internet Explorer is the market leader with a huge market share. Netscape, now owned by AOL Time Warner, is an also-ran.

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So a federal judge decided to break Microsoft in two, a ruling that Microsoft is appealing and will likely win.

Even as the breakup order is still being fought, Microsoft is again bundling -- this time, Windows Media Player 8 with Windows XP (expected out this fall). Competition is again ruffled and fighting against the bundle. Uncompetitive, they say. Unacceptable use of monopoly power, they restate.

I see it differently. While bundling Internet Explorer with Windows 98 allowed Microsoft to leverage its browser into a market in which it had small share by using the Windows monopoly, it's the opposite here. Microsoft is using Windows Media 8 to protect its Windows operating system franchise and get more upgrades.

Consider this: Microsoft already has garnered substantial market share with Windows Media -- Version 7 and below. It's a great product, and anybody can get it for free if they have an Internet connection. But if somebody wants an even better Windows Media listening experience than version 7 can provide, he has to buy XP to get version 8. Sure it means incremental revenue for Microsoft in its high margin Windows product. But it leverages the market in the reverse cause-effect relationship than the company's prior bundling effort.

Will the bundling of Windows Media have an adverse effect on market share for Real Network's competing product? Undoubtedly. Will it decrease sales for Real's product? Not as likely. It may, in fact, expand the market segment as a whole. Most cars come with built-in radios, but there's substantial demand for after-market car audio devices, and there are a number of large competitors making money selling car stereos, CD players, tape players and the like -- even more who sell the content (songs) that play in your car.

Real Networks already sells subscription services to downloadable content -- songs, baseball broadcasts, and more. Plus they have a competing player that also is a fine product. It's up to Real Networks -- and to any company that wants to play in the computer audio space -- to differentiate its product to make the listener want to buy it.

In the meantime, Microsoft will do what it takes to continue its Windows revenue stream. It's becoming more challenging as each subsequent version of its operating system gets more stable and easier to use. There are fewer reasons to upgrade. Microsoft must create new reasons.

David Radin is host of the nationally syndicated radio show "Internet Insider," a local version of which is aired Saturdays at noon on KDKA AM 1020. You can ask him a computer or Internet question by following the instructions at www.post-gazette.com/interact, where you also can find an archive of his previous Q&A columns.