What's wrong with Microsoft?

The software giant usually demolishes any opponent that dares to step in its path. But it can't beat streaming-media king RealNetworks.

Published February 16, 2001 8:27PM (EST)

If Microsoft had its way, which it usually does, it would be dominating the streaming-audio and streaming-video software market with typical ruthless efficiency. Over the past decade, Microsoft has littered its path to world domination with the corpses of countless competitors; a little company named Netscape comes to mind. But when the subject is streaming media -- seen by many observers as one of the big growth areas of the broadband Internet future -- Microsoft is stumbling far, far behind the market leader, RealNetworks.

Though not for lack of trying. Microsoft is up to its usual tricks, bundling its software as a free add-on to its operating systems and signing Windows-only deals with every company it can. Boston's WGBH, Manhattan's WNYC and dozens of other public broadcasters stream their audiovisual content only in the Windows Media Player format. Trance-heavy Spike Radio also forces listeners to use Microsoft's player, and when millions logged on to MSN last year to watch sold-out shows by Paul McCartney and Madonna, their Real and QuickTime players did them little good. Microsoft had already cordoned off the content, routing the streams exclusively through Windows Media servers.

RealNetworks CEO Rob Glaser first raised the specter of a Microsoft-monopolized streaming-media market two years ago when he testified before Congress about Microsoft's "anti-competitive practices." Since then, Microsoft has slowly begun to cut into RealNetworks' dominant position. Microsoft representatives are, as usual, serenely confident: They expect "to reach parity quite quickly," says one spokesperson. And when influential Merrill Lynch analyst Henry Blodget downgraded RealNetworks' stock on Jan. 24, he focused on the company's allegedly imminent fade, writing, "There's a significant risk that Microsoft will do to RealNetworks what it did to Netscape -- take over the market by bundling functionality in larger products and giving it away for free."

But even with Microsoft's recent gains, twice as many users tuned into Real Player's streams last year, according to Nielsen/Net ratings. Meanwhile, more than 85 percent of the streams on the Web are RealNetworks-encoded, and the Net's most popular streams still arrive through RealNetworks' servers, not Microsoft's or QuickTime's. And that's after four years of effort by Microsoft -- in a competitive environment in which RealNetworks charges users of its server software for every stream that gets broadcast, while Microsoft lets people stream for free.

So is the Colossus of Redmond crumbling? Not exactly. It is worth remembering that Microsoft doesn't always win, despite its reputation. Microsoft Money's failure to displace Intuit's Quicken as the most popular personal financial management program is exhibit No. 1 of Microsoftian fallibility. There is also the widely noted dominance enjoyed by the Apache Web server over Microsoft's IIS, although Microsoft has made significant gains lately in some high-performance e-commerce niches.

More to the point is the fact that the fight over streaming video is taking place on a different battleground than the fight over the Web browser or other popular applications, like word processing or spreadsheets. It's not desktops that are at issue but Internet servers, those Net-connected computers that host the audio and visual content streamed out to users. Microsoft, as the Apache example indicates, doesn't control the server market -- and because of that fact, many Net citizens can breathe a sigh of relief. For whoever controls the servers controls a massive portion of the Net's core infrastructure. And if Microsoft gained that power, then the company really could do anything it wanted.

Right now, no one controls the server market -- Sun Solaris, IBM, Windows NT, Linux, FreeBSD and even Apple are all major players. The key to RealNetworks' success, in large part, is understanding this heterogeneity and adapting to it, rather than attempting, à la Microsoft, to do the opposite and make the Net conform to Gates and Co.'s wishes.

Is RealNetworks a hero, then, a child of the cross-platform, open-standards Net? Not quite. RealNetworks also plays its own proprietary game, ensuring that no one else can play Real-encoded streams. But maybe that's the answer: Perhaps the only way to beat Microsoft is to be both proprietary and open.

Glaser worked for Microsoft from 1983 to 1993, so it should come as no surprise to discover that he and his company have an affinity for good old-fashioned closed standards. "Rob grew up in the Microsoft world, so he understood the role of proprietary software in maintaining an advantage," says David Yoffie, a professor at Harvard Business School and co-author of "Competing on Internet Time: Lessons From Netscape and Its Battle with Microsoft." "He knew that having some proprietary standard would help him in the long run."

From the start, Glaser recognized that creating the best streaming-media software would not be enough. "He also had to control it," Yoffie says -- which is why in November 1994, a year before RealPlayer debuted, Glaser filed a patent application for "audio on demand."

The patent, awarded in 1998, has yet to be the basis for any RealNetworks-initiated lawsuits, but it lays out the basic system of streaming: encoding and compressing multimedia, and sending the file through the Net to a user's computer, which receives, decompresses and plays the file in real time. It also points to the future of streaming: balancing loads to minimize congestion and combining images, tables of contents and other pieces of data into a single stream.

But while it makes the process of streaming public, the patent does not reveal the protocol; the actual code remains under wraps. "We've created a closed loop," says Len Jordan, RealNetworks' senior vice president in charge of consumer appliances. "Only our players play our content."

On the Net, where so much current media and programmer attention focuses on the battle between closed and open, between Windows and Linux, between the recording industry and Napster, the idea that a company could go head-to-head against Microsoft with its own closed content seems, in 2001, almost revolutionary.

But soon after RealNetworks started to grow, executives realized that their closed loop brought with it a huge advantage. It achieved one of the golden goals of commercial software marketing -- it made it hard to switch to a competitor. Abandoning Netscape was easy. Users lost nothing; Web pages rarely rendered differently. Many people never even knew what made Netscape's Navigator browser different from Microsoft's Internet Explorer.

But those who are tempted to use Microsoft's streaming format have a tough decision to make. They have to weigh the fact that all the Web's earliest streams are archived in RealPlayer format. They must also consider that 60 percent of the Web's presently available streams flow only through RealNetworks, according to DFC Intelligence, a webcast tracking firm. In contrast to the case with browsers, "there are real switching costs," says Harvard's Yoffie. "Even if all new content goes into Microsoft-protected formats, there will still be a lot of historical content that can only run on RealPlayer. Content providers and consumers have an incentive to stick with Real, regardless of price."

Most of the streaming-media users who use both formats prefer to stay agnostic; iBeam, Launch.com, SonicNet, Yahoo Broadcast and half a dozen other companies either refused to comment for this article or failed to return multiple phone calls. And those who have used RealNetworks exclusively for years exhibit a strong sense of inertia. An NBA.com spokesman, for example, says he hasn't bothered with Microsoft because of RealNetworks' "positive track record" and "established name." Others stressed that switching doesn't seem necessary. "It's not a question of why," says Renata Luczak, a spokeswoman for Comedy Central, which streams its television shows only in RealNetworks' format. "When we first started streaming [in 1997], we worked with RealPlayer and we still do because we're happy with them. If there's enough of a demand for Windows Media Player, maybe we'd consider switching. But for now, we're comfortable."

To get RealPlayer, you must download it or AOL 6, which includes RealPlayer. But the 100 million or so PCs sold each year with Windows come complete with the ability to stream audio and video through Media Player, while all Windows NT servers contain media production and hosting software.

How do you compete against that? Isn't this precisely what got Microsoft in trouble with the Justice Department? Bundling software with the operating system? Giving away the product for free?

Microsoft executives are justifiably wary of the term "bundling." They insist that the media software is not an added application but, rather, "a core feature of Windows."

"Our focus on digital media didn't just happen," says Michael Aldridge, lead product manager in the Windows digital media division. "We saw that multimedia was a core function of the OS back in 1991. If you look on our media software you'll see that there's a copyright dated 1992 to 2000."

Actually, Microsoft didn't seriously enter the media player business until 1997. When the Web started moving beyond text and graphics to "a level that's now Internet and digital-media focused," Aldridge says, Microsoft recognized that digital media would be the next hot spot. Spurred by RealNetworks' success, Microsoft moved quickly. It bought 10 percent of Glaser's 2-year-old company in exchange for a license to its technology, then consolidated developers and marketing forces into what is now a team of more than 500 people. (Microsoft subsequently sold all of its RealNetworks shares.)

Aldridge echoes Bill Gates' stance on browser bundling: He doesn't apologize for Microsoft's giving away the Media Player as part of the OS. He argues that Microsoft's ultimate goal is to satisfy users by constructing an end-to-end, Windows-centric media solution, one that comes complete with strong copyright protection that will induce major content providers to buy computers with a platform they know and trust -- Windows.

"We're not ashamed of that," he says. "That's where we make our money."

Or, as Gates was quoted as saying in a 1997 Fortune article: "We are a very predictable company. What we did with Windows, we're doing with Windows NT on the server."

And therein lies the key. Microsoft's real interest, say industry analysts, is not so much in domination of the streaming-media software market, but in gaining market share for Windows NT in the server market. By bundling in streaming software and media hosting and serving capabilities, Microsoft hopes to make Windows NT more popular.

"Microsoft is not a streaming-media company; they're using it to sell servers," says Heath Terry, an analyst at Credit Suisse First Boston. So Microsoft actually has a reason for not making versions of its streaming software that would run on any other operating system. It would hurt Windows NT.

"The bundling only works if they have something dominant to bundle it into," says William Kovacic, an antitrust expert and law professor at George Washington University. "If there are strong alternatives, then the bundling is not likely to be legally or financially significant."

In sharp contrast to its near-total domination of the desktop OS market, Microsoft does not dominate the server market. And that's where RealNetworks is thriving.

Even now, NT servers make up only about 20 percent of the publicly accessible Net, according to Netcraft, which means that many Web hosting companies or ISPs looking to expand into the streaming-media business would have to buy and familiarize themselves with new server software if they want to use Windows Media Player.

Or they could choose to go with RealNetworks. The software isn't free, but it runs on 11 operating systems, including Solaris, Mac OS, IBM AIX and Linux. And while the Windows Media and QuickTime players can't run RealNetworks content, streamers can use RealNetworks to offer not just its content but also QuickTime's.

In addition, says RealNetworks' Jordan, "the Net is not a Windows-centric environment going forward. Non-PC devices -- cellphones, Internet appliances, PDAs -- are not standardizing to Windows. If you have a strategy that only embraces one option, you're in trouble."

In such an environment, "it doesn't matter how much Microsoft wants to give their media software away," Terry says. "It's still not worth it." Some corporate clients -- companies that aren't specifically in the streaming business but would like their employees to have access to training videos, for example -- have started migrating to the Windows Media format. But, Terry says, "until Microsoft changes the mind of the entire company, and stops trying to sell servers with applications, they're not going to be able to take Real out of the market share lead."

Favor, it seems, falls to the versatile, says Virginia Prescott, director of interactive media at WNYC. And she ought to know: Streaming only for those using Windows Media has already inspired hundreds of listeners to write protest letters. "They're very disappointed with us, not so much because of the quality but, rather, because we're working only with Microsoft," she says. Indeed, Eben Moglen, a Columbia law professor and counsel to the Free Software Foundation, has even threatened to sue.

Still, neither public support nor RealNetworks' multiplatform, closed-source approach guarantees that Microsoft will remain the Net's Plan B. Microsoft has at least one distinct advantage -- deep pockets -- and has shown no lack of interest in throwing money around. The public radio and television deal, for instance, came about because Microsoft awarded the stations free bandwidth service, Prescott says. Meanwhile, the exclusive Madonna show reportedly cost Microsoft $45 million.

What's more, as computer book publisher Tim O'Reilly points out, Microsoft could ditch its Windows-only approach. If streaming becomes as important as Web browsing, and if Microsoft realizes that its present tactics aren't working, the company could change direction on a dime.

"I wouldn't put it past them to abandon their strategy," says O'Reilly. "When you look at .Net, you can see that they're looking toward a strategy that's not wedded to the OS." The prevalence of Napster's download-and-play model could also throw a wrench into both Microsoft's and RealNetworks' plans, as could competition from QuickTime, which is making an aggressive move toward cameras and other devices.

But for now, the streaming market looks a lot like it did back in 1995. RealPlayer still dominates; RealNetworks' format remains closed but spread over several OS platforms. And Microsoft sits in second place. Microsoft may have to look elsewhere to find the next Netscape to crush. When you look at the numbers, says Paul Palumbo, an analyst with DFC Intelligence, Microsoft domination just doesn't add up.

"Is Real going away?" he asks. "No, they're not. They have too many adherents. They're too clearly in the lead."

By Damien Cave

Damien Cave is an associate editor at Rolling Stone and a contributing writer at Salon.

MORE FROM Damien Cave

Related Topics ------------------------------------------