Weird Week in the News
In any given week, I’ll read fifty to a hundred news stories, and my general reaction usually elicits either a yawn or a few moments of cogitation about how the event in question is likely to reverberate through the industry. This last week, though, my reaction kept ranging from "Yeah, right!" to "There must be something in the drinking water." The convergence of such odd news clearly indicated the need for a combined look. It all started out with…
Netscape Sues Microsoft — Whoa, who could have seen this coming? AOL/Time Warner, which owns Netscape Communications, has filed suit against Microsoft based on antitrust violations. If your long-term memory is still working, the answer to the question of whether or not Microsoft had violated antitrust laws seemed pretty clear after the 1999 "findings of fact" from Judge Thomas Penfield Jackson. Judge Jackson then concluded in April of 2000 that Microsoft was a monopoly that used anti-competitive measures to maintain its operating system dominance. (Read our "Playing Monopoly!" series of articles on the whole sordid case for details). The only question is what could possibly have taken Netscape’s lawyers this long to fill out the paperwork. Netscape wants a jury trial and treble unspecified damages, and that’s only if they can’t get Microsoft executives’ heads on a platter.
Microsoft Makes More Money, Says "Trust Us" — Microsoft in turn will use some of its record $7.74 billion quarterly revenues ($2.84 billion in profits) either to make the entire Netscape lawsuit go away or to drag it out in the most annoying way possible. That wasn’t the only big Microsoft news, with Bill Gates telling Microsoft employees that they now need to concentrate on making software more secure in favor of adding features. Columnist Robert X. Cringely has suggested that this is actually a new strategy to sell more software, since most people don’t need more features, they just need software to work better (and security experts Bruce Schneier and Adam Shostack have offered some suggestions about how Microsoft can actually improve the security of their products). That’s an interesting explanation, because surely Microsoft can’t have just realized that their Windows software has major security problems. What’s really going on is that Microsoft wants everyone to trust their .NET Web services, but with the Microsoft network continually being cracked and their Windows Outlook email client and IIS Web server being literal cans of worms, it’s clear that Microsoft’s reputation for secure Windows software is on par with the company’s reputation for humility. It’s probably too late, but humility might have been the best defense, since their software wouldn’t have attracted such attention if the company hadn’t managed to tweak off so many people, something that Microsoft excels at. (Sorry.)
Amazon Records Profit, Hell Freezes Over — Microsoft wasn’t the only Pacific Northwest company recording a profit. Amazon.com, the dot-com poster child for losing money, has at last done what founder and CEO Jeff Bezos said in June the company would do, turn a profit by the end of 2001. For the last quarter, Amazon reported a $5 million profit on $1.12 billion in sales, and, more impressive, it’s what’s called a GAAP (Generally Accepted Accounting Principles) profit. GAAP is more stringent than the pro forma accounting method Amazon has previously used in that it includes costs generally excluded from pro forma numbers, such as interest on Amazon’s $2 billion in debt, charges for stock compensation, restructuring, goodwill, and time stuck in Seattle traffic. (Amazon’s pro forma profits last quarter were $35 million.) Amazon attributed the profit to gains in its international units (yes, Virginia, there is a global economy) and to cutting of costs in a variety of ways, including switching its servers over to Linux. (That move prompted a wonderful quote from a Microsoft spokesperson in a News.com article: "With Linux, customers end up being in the operating systems business, managing software updates and security patches while making sure the multitude of software packages don’t conflict with each other." And just how would that be different from Windows?) Nonetheless, kudos to Amazon for turning a quarterly profit; a few billion dollar more and the company could break even overall.
Aimster Gets Mad — AOL/Time Warner’s lawyers haven’t just been sitting around while waiting to sue Microsoft. They’ve been going after peer-to-peer file sharing service Aimster over the company’s name, which came from the fact that Aimster piggybacks on top of AOL Instant Messenger (AIM) in a way AOL can’t stop. A three-member, independent panel of the National Arbitration Forum (NAF) ruled that the name (and a couple of variants) violate the AOL Instant Messenger trademark. Aimster’s CEO has always claimed the name actually came from his daughter’s nickname, Aimee, and the company responded to the defeat by renaming itself Madster, since it turns out Aimee’s real name is Madeline. Or they’re just mad. Their Web site now says "formerly called A__ster" and "This page is not affiliated with America Online, Inc. in any way."
Kazaa Bought, Reopened — The legal woes of peer-to-peer file sharing networks have been increasing. In late November of 2001, a Dutch court ordered the Netherlands-based Kazaa service to stop carrying copyrighted music files, but unlike Napster, Kazaa doesn’t run any sort of centralized server, so there’s nothing to shut down. Kazaa’s response was essentially, "And how would we do that?" The company did stop allowing downloads of its software, but last week a private Australian company called Sharman Networks bought the assets of Kazaa (presumably avoiding the Dutch lawsuit and another one brought by the Recording Industry Association of America (RIAA)). I’m sure the RIAA, not one to let legal moss grow under its feet, will have refiled the case against Sharman Networks, but there’s no way the RIAA can possibly win at this modern-day game of Whack-A-Mole. All the developers of file sharing software have to do is start releasing updates anonymously via the peer-to-peer networks themselves. Authorities can’t even find authors of truly unpleasant viruses and worms that cause tremendous amounts of damage around the world; how are they going to track down people who write and distribute file sharing software that has arguably legitimate uses?
Palm Goes Where Apple Feared to Tread — When Steve Jobs rejoined Apple, one of his first moves was to slash the Macintosh clone market off at the knees. The move was widely reviled, but it probably helped Apple stay afloat until the release of the iMac, given that the clone manufacturers were cannibalizing Apple’s hardware sales and paying relatively little for the privilege. (Do the math – if Apple’s hardware margins were 20 percent on a $2,000 system, that’s $400, whereas Apple was making at most half of that licensing both the Mac OS and motherboard designs.)
Now Palm has decided to repeat the experiment in the interests of science, forming a corporate subsidiary – the Platform Solutions Group – that will license the Palm OS to companies like Handspring, HandEra, Kyocera, Samsung, and Sony. (Interestingly, the press release claims future Palm OS products from AlphaSmart, makers of the simple AlphaSmart keyboard, and Garmin, makers of GPS devices.) Palm’s gross margins are about 20 percent on an average selling price of about $165, so the company makes about $33 per Palm sold; Palm OS licenses would have to cost close to that to avoid cannibalizing hardware sales. Licensing is currently a drop in the bucket for Palm, making up only $5.5 million of last quarter’s $290.6 million in revenues ($274.1 million came from hardware and accessory sales), although the fact that Palm’s new software subsidiary will be charging the hardware arm of the company for the Palm OS should improve licensing revenues at the expense of hardware revenues. Palm gets points for guts; let’s hope they’ve done their history homework.
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The Palm Platforms Solutions Group will have someone in charge who was at least in the general vicinity of Apple’s abortive cloning effort. David Nagel, who was a senior vice president at Apple and the head of the R&D group, led the ill-fated Copland next-generation operating system project before leaving Apple for AT&T in April of 1996. Just months before that, though, Apple under Gil Amelio licensed System 7.5.x and Copland to Motorola to jump-start the clone licensing program.
Taking Bets — My money’s on the Netscape/Microsoft case being long and annoying, Microsoft making lots more money every quarter, security holes continuing to be found, Amazon slipping back into unprofitability without a holiday sales spike, peer-to-peer file sharing networks continuing to grow in defiance of clueless court orders, and Palm taking it on the chin with licensing. But, hey, I could be wrong.