Schizophrenia

Incumbent versus innovator

Jun 2nd 2005
From The Economist print edition

The clash of the two Microsofts

DOES Microsoft suffer from a split personality? As one half of the giant corporation continues to slug things out with regulators, the other is stepping out as a sexy technology firm. Old Microsoft is an industry incumbent and convicted monopolist, defending to the death its legacy Windows operating system. New Microsoft is an innovative consumer-electronics firm with the leading online gaming service, and which uses trendy marketing techniques to generate buzz.

On May 31st, after much dithering and grandstanding, Microsoft submitted its plans to European Union (EU) antitrust regulators, detailing how it intends to comply with penalties imposed last year for its anti-competitive activities. Yet as Old Microsoft tests the patience of regulators, New Microsoft is leaving legal worries behind and emerging as a dynamic firm. In May, it unveiled the upcoming version of its Xbox gaming console directly to consumers via MTV rather than—in the traditional way—at an industry conference. It is even deploying a hip technique called “alternate reality marketing”—basically, a surreal treasure hunt both online and off—to popularise the product with consumers.

New Microsoft's gaming business—selling consoles and developing games—may be losing billions of dollars, but it represents much of the firm's future. “It's all about trying to get Microsoft—from the software to the brand—out of the office, off the PC screen, and into the living room,” explains Paul Jackson of Forrester, a research firm. For middle-aged techno fuddy-duddies, Microsoft may remain synonymous with Satan; but already, for a younger generation, it is a cool company. What do they know, or care, about the firm's legal history?

Old Microsoft is now fighting on two fronts. One is the price it can charge rivals to access portions of software code that are needed so that products can interoperate smoothly. The firm says that this is intellectual property that it should be allowed to decide how to license. Its rivals say its terms are expensive, they block open-source products, and that—as the code is simply a matter of translating technical parameters—the intellectual property is nil.

Meanwhile the EU is considering whether to accept Microsoft's latest plan for complying with the antitrust sanctions imposed in March 2004. A decision is expected this summer. It may choose to force Microsoft to cut the price of a Windows operating system that it ships without Media Player software (to play audio and video files) as part of the antitrust penalty.

Meanwhile New Microsoft has said it will start a network-security service, sold on an annual subscription basis. It has expanded its drive into software for personal digital assistants and mobile phones. And in May it created a new division to license intellectual property, sometimes accepting stakes in start-up firms in exchange.

Put simply, New Microsoft is preparing for a day when Old Microsoft's Windows operating system and PC software no longer provide most of the firm's revenues. But for now, the company is torn between being an incumbent and an innovator. Send for a corporate therapist!

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