ONE EARLY LESSON from Microsoft's ongoing antitrust trial is that the company's core Internet strategy no longer has anything to do with the Microsoft Network (introduced two years ago as the "next mass medium"), Sidewalk, or Michael Kinsley. While Microsoft attorneys have been slugging it out in Washington, DC, over the company's Web browser business, Microsoft system-development managers have been down in San Francisco hammering out details for a new high-speed Internet protocol, all in an effort to refocus the company on its enduring core strategy.
It's the operating system, stupid!
The nonpartisan committee (known as the Universal ADSL Working Group), which met two weeks ago in San Francisco, recently developed a standard Internet protocol that will provide Web connections up to 30 times faster than the modem technology currently available to home users. The ADSL protocol (Asymmetric Digital Subscriber Line) digitizes data signals sent between home computers, telephone company switches, and Internet service providers, dramatically expanding bandwidth, and can simultaneously carry normal voice calls. (In other words: Net surfers don't need a second phone line.) Microsoft expects that supplying high-speed Internet connections over ordinary phone lines will greatly increase interest in the Internet, which translates into more sales of personal computers loaded with Microsoft operating systems.
Over the past year, Microsoft and GTE have teamed up for the largest ADSL test in the country, with 1,000 Microsoft employees using the digital service in their homes. By agreeing on a single standard, members of the Working Group—including computer manufacturers, telecommunications companies, online service providers, and Microsoft—can begin developing their respective components of the network safe in the knowledge that each will be compatible with the others.
"We've been working together monthly since last January," Microsoft development manager Dan Steele explained during a break from the San Francisco planning meeting. "The analog modem technology has pretty much played itself out. Everyone sees some big growth oppor-tunities in the rapid technology of broadband. Clearly it's an opportunity to get more people on the Internet and sell more PCs. PC market penetration could go up much higher, and that's certainly good news for us."
Indeed, with every PC sold, so is sold another copy of Windows 98. But there's much more at stake for Microsoft in its cultivation of new relationships with the telecommunications community.
Just weeks prior the first ADSL Working Group meeting in January, Microsoft president Steve Ballmer took a weeklong trip around the country to visit with the CEOs and presidents of the seven leading telecommunications companies. According to minutes of those meetings acquired by Seattle Weekly, Ballmer was willing to sell Microsoft's entire online effort to date, including MSN, in order to partner with one or more of the telco giants. "The primary reason for the trip was to meet with the highest levels of the top telcos in the US to discuss our MSN portal strategy and sale of our access business," the internal memo begins. "It was an amazing trip with many very valuable meetings and insights."
First on the list of the memo's summarized "learnings" is the news that none of the telecommunications companies expects to make money by providing Internet access to consumers—"now, or even in the future with [A]DSL"—no matter how desirable the new digital features. According to Microsoft, fully loaded ADSL service in Seattle—already available in selected areas—costs roughly $240 per month, due to lack of competition from high-speed cable modems (unavailable in Seattle because of TCI's antiquated local cable infrastructure). On the East Coast, competition has already driven ADSL service down to one-fourth of the Seattle price—hence the smaller profits for the telcos.
IN ORDER TO SWEETEN a telco partnership, Ballmer's meeting notes show that Microsoft would sell its MSN business, which includes more than 1 million paying subscribers—a large enough customer base to cover many of the financial risks for telcos in the expensive customer migration to digital service. One scenario discussed on Ballmer's trip was a Microsoft partnership with a group of regional phone companies, including GTE, U S West, and Bell Atlantic, who are all members of the ADSL Working Group: "We could make this group the visible '[A]DSL-club' . . . to get meaningful scale and to draw subscribers for [A]DSL." According to the memo, there was one little problem (emphasis in original):
No one understands how (or perhaps they're simply skeptical of their ability) to have a mutually beneficial business relationship with us (will we share revenue, will we cap our greed, etc. . . . Likewise the "perception" (or at least fear) is that we are closed and will demand or technically force some form of exclusivity. We need to show how we can integrate and interoperate . . . how a Microsoft decision is not tantamount to throwing out Oracle [or] Sun. It is clear our competitors are positioning us this way. Thankfully this should be easy to correct.
Well, maybe not. In another internal document describing a follow-up visit to Redmond by one prospective "ADSL-club" member, Microsoft appears to require use of its NT network operating system in return for a partnership deal. After hosting a prospective ADSL partner, Microsoft's Dave Derwin, of the Internet Customer Unit, offers what sounds very much like the foisting of "some form of exclusivity": "I explained that our group's charter is to expand the use of NT in the public network fabric. In [his] overview of their ADSL system, I didn't see too many NT boxes. I said in order for [us] to do anything from a strategic marketing perspective, we'd like to see more NT in their solutions."
Certain Microsoft competitors, including Oracle, Sun Microsystems, and Netscape, are not even involved in the ADSL Working Group (although Microsoft says it's open to everyone). Where Microsoft's competitors see ADSL as a non-threatening application for the relatively small and unprofitable market of residential Internet connections, Microsoft sees an opportunity to partner with telecommunications companies and extend Microsoft's network operating system into the underlying telco architecture—also known, according to a former member of Microsoft's Internet Customer Unit, as "the last bastion of UNIX." "Plain and simple," this source says, "Microsoft wants to get NT installed, installed, installed."