12 October 2005

Real Networks and Microsoft - Winners and Losers

Yesterday we learned that Microsoft and Real Networks have buried their differences and joined forces (perhaps to take on Apple in the music area). Cost to Microsoft, approximately $460m with other soft dollar considerations taking the figure up to $761m. According to my calculations, Microsoft has now agreed to pay approximately $5.5bn to 8 companies (Sun, AOL, IBM, Novell, Real Networks, Intertrust, Gateway, Be) over the last few years in settling anti-competitive lawsuits. Many of the other cases have also been settled not just with money but with new alliances, most notably in the resolution with previous arch-enemy Sun Microsystems.

Now just think about that figure for a minute. $5.5bn is a truly huge amount of money. Assuming 1bn computers out there, it is $5.50 for every single computer user. That Microsoft has accepted to pay this figure is indicative that their profits from such anti-competitive behaviour have in fact been considerably more than this figure (I have read of detailed studies indicating the actual cost of the MS virtual monopoly to be in the region of $10bn EVERY YEAR).

Now anti-competitive behaviour is very bad for the firms competing against Microsoft. It is bad for their employees and it is bad for their shareholders. They should indeed be compensated. Financial compensation of this magnitude is perhaps reasonable given the opportunity that has been lost by those companies. But is it? Not if it takes years and years to happen. The shareholders affected by such behaviour have probably long since departed. They will never get to see any of this compensation, though it was they who took the risks at that time. No doubt long-term employees may feel the wait has been worth it perhaps with more security in their jobs or a one-off bonus to make up for those lean years. But what about the employees around when this all took place? I'm not talking about just their missed compensation. But their career prospects - delayed or even destroyed by this behaviour. They will never get this back.

Then let's look at the real losers of all this - the users - whether consumers, small, medium or large businesses. They were denied a choice when they should have had one. They were forced to endure a worse solution than they could have had.
And, they were forced to pay more than they should have. In fact, this very compensation has come from THEIR pockets after all.

And there is the rub. Not only have they paid dearly for the anticompetitive behaviour of MS, they will not see any benefit from the resolution, and indeed, such resolutions have more often than not led to even less choice, less competition and further barriers to new entrants trying to provide consumer value in innovative ways.

It has been said that this deal will not affect the EU stance against MS (which has cost them another $500m or so of course in fines). But of course it will. It already has. Evidence may have been collected and documented but the unwillingness of previous complainants to pursue their cause can only lead to a reduction in overall noise levels. Solutions proposed are usually too little too late to affect that market, which has moved on. The next set of battles are already being fought (somewhat one-sidedly), but what should have been permanent, effective and general remedies have become specific, lottery-style payments, akin to paying off witnesses in a criminal case. And no more honourable.

Was it coincidence that the announcement was timed for the day of Apple's FY financials which continue to show dominance in the music area, and the day prior to Apple announcing another (possible) leap forward in it's offerings? Maybe it was, but I can't help feeling the headlines have been a lot more sympathetic to this resolution, than if Apple wasn't in the news reminding everyone that it is on the road to becoming the Microsoft of personal music players.

I think Apple is possibly a big loser in this announcement (strange that the share price didn't immediately react to that news, but then did react significantly when they didn't quite overhit the higher targets predicted by analysts?). But then Apple may need some competition if it is not to get too complacent and too greedy (eg reports this week of levying a 10% "tax" on 3rd parties). But I don't think competition between 2 organisations, one of which is Microsoft is what I want to see on the world stage. And that is perhaps what this may come down to.

And that leads me to who I think are also losers in this. It's the companies that have tried to compete with Apple by adopting Microsoft's "more open" WMA technology. Plays-for-sure may be the term used, but I think now the consumer may perceive "plays-slightly-more-sure" for the Real solution. Napster, Yahoo, HMV and others are the biggest corporate losers in this. But then perhaps they'll be the ones winning big lottery payouts in a few years. And then once again, we'll look round and we'll see that the true losers, time and again are the end users. After all these shenanigans, you still have just one music player on your computer out of the box (windows users that is), and you have even less choice about alternatives, about where you can get the content and will be forced to accept the restrictions imposed on that content.

FInally, in wrapping up, I'd like to congratulate the only other winners I can see in this. Microsoft's and Real Network's lawyers/law firms must be very pleased to have come up with such a settlement and with their respective cuts of it. I'm sure they can look back with pride on their work and how they have once again served the public with a resolution that serves to make a mockery of the laws that were used to bring about the dispute.

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