The enemy of my enemy...

Microsoft

Oct 13th 2005
From The Economist print edition

By making up with old foes, Microsoft strengthens its hand against new ones

BOTH of Microsoft's deals with rival firms this week are classic cases of “the enemy of my enemy is my friend”. On October 11th, the world's biggest software company announced that it had settled its long-running dispute with RealNetworks, a maker of media-playback software. The following day it announced a deal with Yahoo!, a big internet portal, to link up the two firms' rival instant-messaging systems. Evidently Microsoft has concluded that co-operating with old foes will help it compete better against new ones.

Real launched an antitrust action against Microsoft in 2003, demanding $1 billion in compensation for Microsoft's use of its Windows monopoly to promote its own media-playback software at the expense of Real's rival product. It was also a strong supporter of legal action against Microsoft by trustbusters in Europe and Asia. Under the terms of this week's deal, Microsoft will pay Real $460m to drop its claims, plus a further $301m over the next 18 months.

The two firms will promote each other's products. Users who search for music-related terms on Microsoft's MSN portal will be directed to Real's Rhapsody music service; MSN search will be incorporated into Real's playback software (take that, Google); and users of Microsoft's instant-messaging service will be able to play music from Rhapsody while chatting. The two firms will also co-operate on security formats used to protect music downloads—for having been rivals in media-playback software, they are now on the same side of the digital-music battle against Apple, the market leader.

A similar logic underpins Microsoft's deal with Yahoo!, which will link up the second and third-largest instant-messaging networks. This will put pressure on AOL, the market leader, to open up its rival service. Just as importantly, it provides a riposte to Google, which recently launched its own service, making much of its openness—and which now holds the title of Microsoft's arch-rival.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.