Journal of Information, Law and Technology

Are You XPerienced?

John Hogan

This is a commentary published on: 7 November 2001 

Citation: Hogan J, ‘Are You XPerienced?’, Commentary, 2001 (3) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/01-3/hogan.html>

1. Introduction
Windows XP, the latest version of Microsoft’s ubiquitous operating system, was formally launched on October 25. By all accounts, Windows XP is an excellent product. It has been described as ‘the best Windows yet’, ‘stable and reliable…simpler to use and compatible with more software and hardware’ than earlier versions of Windows. Yet even before its official launch, XP had proved massively controversial: 

‘[Microsoft] has also turned Windows XP into a sort of Trojan Horse. It has built in a bunch of features including instant messaging, online photo-printing, and a so-called passport to the Web, that appear to be blatant efforts to lure consumers into using a set of new Web-based services Microsoft is launching, while ignoring alternative services that may be better. The goal seems to be to trap users in a sort of Microsoft company store. It as if you finally had a chance to buy a sleek, reliable new car after owning a series of lemons. But then you found the new car was rigged so the manufacturer could track in which garage you parked the car, blare its ads at will through the radio, and steer you towards toll roads it owned’.

This commentary analyses Windows XP and its part within Microsoft’s broader ‘.Net’ initiative. Some discussion of the ongoing antitrust case is inevitable, but the primary aim here is to explain Microsoft’s plan for moving computing to the Internet, and to put it in context. While the arguments advanced by Microsoft’s critics are not without merit, it should also be recognised that the company is currently creating and presenting a vision of the future of computing. Bill Gates is gambling the company on the success of .Net.

2. Windows XP
Windows XP integrates instant messaging, streaming media and digital photography capabilities into the operating system (OS). To the extent that computer manufacturers and consumers are reluctant to install additional, competing applications, Microsoft’s practice of embedding its applications in the operating system presents a clear threat to firms operating in the application markets downstream. 

In July, Senator Charles Schumer (New York) asked the US Department of Justice to include XP in settlement negotiations, arguing that it was ‘hard wired to prefer Microsoft applications’ over those of Eastman Kodak, a firm based in New York State. Kodak accused Microsoft of designing XP so as to steer consumers towards Microsoft’s imaging applications and to its preferred online photo-printers.The Senator argued for ‘open access for competitors to offer their software application products on an equal basis with Microsoft applications’. Kodak’s concerns have since been addressed – its software now appears on XP, and the companies are working on an online photo-printing deal – but the complaint brought unwanted political pressure on the development and launch of XP. The Senate Judiciary Committee has since decided to hold hearings on Internet competition, and these will include an examination of whether Windows XP shuts competitors out of markets. 

Senator Schumer had also argued that the integration of instant messaging and streaming media capabilities would unfairly hurt media giant AOL Time Warner, which is also based in New York. Interestingly, Kodak is partnered with AOL. At the end of July, the two companies launched a new version of their ‘You’ve Got Pictures’ service for viewing, sharing and storing photos online: Kodak’s attack on Windows XP coincided with its AOL announcement. 

3. Microsoft .Net 
Far more significant than any single feature of Windows XP is the broader technology it introduces – ‘.Net MyServices’, formerly known as HailStorm. .Net MyServices will organize a variety of personal information, from online calendars and contact lists to credit card details, facilitating online transactions such as banking and shopping. These services will be accessible from any digital device, anywhere. 

‘The pitch goes thus: a user’s personal information and other data are now scattered across the technological landscape – among numerous devices, different pieces of software, and countless websites. If people move, they need to update their addresses separately in many electronic places. [.Net MyServices] is supposed to make all of this far simpler. The user’s information will be stored in huge data centres run by Microsoft and reached via the Internet when needed…. 

Microsoft’s idea is that [.Net] will allow websites and groups of people to co-operate far more easily than is possible today. Imagine that you want to go on a vacation trip with your friends. A travel site could take that information, plus data from MyProfile, to put together a tailored package for flights, hotel and entertainment. And it could arrange for payment through MyWallet. Later, if the plane is late, MyNotifications would send out an alert to a mobile phone specified in MyDevices’.

Windows XP will also feature an integrated browser called MSN Explorer. This will sit on the desktop with the latest version of Microsoft’s standard browser, IE6. Importantly, MSN Explorer is tightly tied to Microsoft’s Internet properties: links with labels such as ‘Money’, ‘Shopping’ and ‘Music’ lead to Microsoft-owned or Microsoft-partnered sites. MSN Explorer seems set to be the user interface for .Net My Services: links lead to offerings from .Net MyServices such as ‘MyCalendar’, ‘MyStocks’ and ‘MyPhotos’. Windows Messenger may offer an additional user interface. It will support ‘.Net Alerts’, instant messaging subscriptions that can track dynamically changing online information such as share prices and auctions. .Net Alerts will allow companies such as McAfee to send out virus warnings to its customers.

Central to .Net MyServices is Passport, an online identification and authentication utility. It allows people to sign in to multiple sites with the same password, and to store personal information such as credit card numbers for online purchases at partnered stores. Approximately 160 million people already have some kind of electronic ID from Microsoft, having being assigned one when they signed up for Microsoft services such as Hotmail. Microsoft claims that more than 200 companies have signed on to the Passport ‘e-wallet’ service, as well as all of Microsoft’s MSN properties and travel site Expedia, and that Passport facilitates 2 billion authentications a month. Somewhat predictably, XP users will not be able to use features such as Windows Messenger without signing up with Passport. 

In September, Microsoft announced plans to open up its Passport service. It will allow third parties to register Passport members and will seek to establish relationships with independent networks, so that the standards from one service will be accepted within the Passport network and vice versa – much like the global network of ATM machines. Ideally, this will allow virtually everyone to maintain a single identity anywhere on the Internet. 

.Net MyServices is the first offering under ‘.Net’, Microsoft’s broader strategy for moving computing from desktops and networks to the Internet.So, in addition to the free and subscription-based Web services available to consumers, Microsoft will develop a range of business-oriented services, selling software tools that will serve as a platform on which businesses can build Web services. Effectively, .Net is being marketed as a set of ‘platform assets’ that drive business for developers and Web sites.

Microsoft’s plan is that .Net will be the operating system for the Internet, or a platform on top of which web services can be built, just as Windows is a platform for PC applications. Rivals such as AOL Time Warner and Yahoo will offer similar services; importantly, they have equally large customer bases. Indeed, AOL is the only firm with an existing subscription-based paying relationship with its installed base. It is working on a set of Web services, code-named Magic Carpet, which build on its ‘Screen Name’ service that lets users sign on to multiple websites. Like PC operating systems, the platform for Web services will be subject to network effects: 

‘The more users who sign up for, and the more services that are built on top of, a directory [such as Passport], the more attractive that directory becomes for extra users and services providers. Microsoft has certainly made sure that [.Net] can benefit from this happy circularity. Although the standards for accessing the services are open, their inner workings are proprietary. It will be all but impossible for .Net users to switch to another service and take their data with them. Details of AOL’s plans are not yet known, but it is unlikely that it will offer a completely open solution’.

4. Microsoft’s Antitrust Headaches
On June 28, the US Court of Appeals unanimously overturned Judge Jackson’s order to break up Microsoft. It sent the case back to the District Court for hearings on remedies and for re-examination of whether Microsoft illegally tied Internet Explorer (IE) to its Windows operating system (OS). In an effort to streamline the case, the Department of Justice (DOJ) has since announced that it will not seek a break-up order or a rehearing of the tying claim. Instead, the DOJ will focus on the appellate court’s affirmation of Jackson J’s finding that Microsoft employed anticompetitive means to maintain its OS monopoly .

4.1 Desktop Real Estate
The appellate court found that by not including IE in the ‘Add/Remove Programs’ utility, Microsoft deterred PC manufacturers (OEMs) from pre-installing a rival browser, thereby insulating its OS monopoly from the ‘middleware threat’ posed by the combination of Netscape’s browser and the Java programming language. In response, Microsoft announced on July 11 that it would relax its OEM licensing agreements, allowing them to remove some Microsoft icons from the Windows desktop. The exact scope of this policy shift is not clear, but it seems to be limited to icons for Microsoft’s browsers: IE and MSN Explorer. That is, any relaxation of the licensing arrangements is narrowly tailored to the specific violation of excluding IE from the Add/Remove utility. Microsoft will require OEMs to include a desktop icon and a ‘Start Menu’ link for its Internet-access service, MSN. 

It is unlikely that this about-turn is sufficient to remedy the underlying antitrust issue. Microsoft could be required to alter future versions of its OS to allow OEMs to replace integrated applications such as Windows Messenger or Windows Media Player with competitors’ offerings, instead of simply piling more icons onto the desktop. Despite this, the relaxation of OEM licensing agreements will certainly stimulate competition in the nascent Web services market. Since the July 11 announcement, AOL has been negotiating icon deals with at least nine OEMS, and it has confirmed a deal with Compaq whereby AOL will be the exclusive Internet-access service offered during the Windows XP start-up sequence. This goes some way to explaining Microsoft’s desire to ensure a degree of prominence for its MSN Internet service. And, on October 23, Yahoo launched ‘Yahoo Essentials’, a package of Web services that will piggyback off Microsoft’s OS and browser. Yahoo Essentials will offer instant messaging, e-mail, photo-facilities and document storage. It will also set Yahoo as the browser default home page and search engine. More importantly, many of the services will be set as default services on the Windows XP Start menu. Compaq will pre-install the package on its new Presario desktops and laptops.

4.2 ‘Commingling’
In the detail of the ruling on anticompetitive monopoly maintenance, there is a particular danger for Windows XP. The Court of Appeals found that, insofar as it deterred OEMs from pre-installing rival browser, the commingling of operating system and browser code (which meant that IE-specific code was an irremovable part of Windows) was anti-competitive. 

‘As a general rule, courts are properly very sceptical about claims that competition has been harmed by a dominant firm’s product design changes. In a competitive market, firms routinely innovate in the hope of appealing to their consumers, sometimes in the process making their products incompatible with those of rivals; the imposition of a liability when a monopolist does the same thing will inevitably deter a certain amount of innovation. This is all the more true in a market, such as this one, in which the product itself is rapidly changing. Judicial deference to product innovation, however, does not mean that a monopolist’s product design decisions are per se lawful’.

Microsoft unsuccessfully challenged as a factual matter the finding that it commingled browsing and non-browsing code. In the absence of a showing of any integrative benefits from the commingling, the DOJ’s prima facie case of anti-competitive effect was sufficient to ground a finding of illegal monopoly maintenance. This has particular implications for Windows XP, which features tightly integrated media and messaging applications. It is hardly surprising, therefore, that on July 18, Microsoft filed a brief with Court of Appeals, arguing that the court had ‘overlooked – or misinterpreted’ critical evidence in its ruling on the commingling issue. Its request for appellate re-consideration of the issue was rejected on August 2.  

Arguably, the concept of the operating system has to change with the concept of computing: the shift from the desktop or network to the Internet will necessarily involve a shift in the nature, scope and understanding of the operating system. However, it remains the case that where such applications are embedded in the operating system, Microsoft may be adjudicated to have illegally commingled code so as to deter the installation of competing products. 

4.3 Playing for Time
In the immediate aftermath of the Court of Appeals decision, there was a real likelihood that Windows XP would be included in a remedy. Further, Microsoft’s opponents were calling for an injunction preventing the release of XP. So, Microsoft dragged out court proceedings and settlement negotiations, while rushing to release XP. At the time of writing, the company seems to have succeeded on all points.

On August 7, Microsoft applied to the Supreme Court, asking it to overturn the District Court’s Findings of Fact, the foundations of the entire case, on the basis of Judge Jackson’s inappropriate conduct and apparent bias. It also applied to the Court of Appeals for a stay on the order remanding the case to the lower court. While the appellate court had criticised Judge Jackson and saw fit to remand the case to a new judge, Colleen Kollar-Kotelly, it had found no evidence of bias in his Findings of Fact.  On August 17, the Court of Appeals issued a terse order denying the bid to delay further proceedings while the Supreme Court considered whether to intervene. On October 9, the Supreme Court rejected Microsoft’s application. 

In August, in an attempt to push the parties towards a settlement, Judge Kollar-Kotelly directed Microsoft and the DOJ to complete a joint status report on how the case was to proceed. The parties failed to reach agreement. On September 28, Judge Kollar-Kotelly ordered the two sides into settlement talks, with a November 2 deadline. If no settlement has emerged by then, remedy hearings will begin on March 11, 2002. It seems that little progress is being made. Eric Green, a law professor from Boston University, was recently appointed as a mediator.

On September 6, the DOJ had confirmed that it would not seek an injunction delaying the release of Windows XP. While the reluctance to break up Microsoft or delay the release of Windows XP (which may give a much-needed boost to PC sales) in part reflects the pro-business stance of the Bush administration, it also works to preclude Microsoft from further delaying proceedings. Importantly, the DOJ also suggested that a remedy should involve Windows XP, saying that it wants the District Court ‘to investigate developments since the trial concluded’. Judge Kollar-Kotelly has since rejected an argument advanced by Microsoft that remedies should be limited to the specific misdeeds raised during the trial, noting that she has ‘large discretion’ in constructing a remedy – an incentive for Microsoft to settle the case. 

4.4 You Can Run, But You Can’t Hide
The European Commission recently expanded its investigation of Microsoft business practices to cover the integration into XP of Microsoft’s Windows Media Player. On October 10, The Wall Street Journal reported that the Commission has alleged that Microsoft deliberately engineered incompatibility into Windows XP in an effort to dominate the online market for media software. Under EU competition policy, a dominant firm’s design changes will not attract scrutiny if they are implemented for the purpose of objectively improving its own product. So, a dominant firm is not free to make design changes that primarily impose difficulties on its downstream competitors. Similarly, the proportionality principle suggests that a dominant firm is not free to cause substantial inconvenience to its competitors to achieve a minimal improvement in its own product.

The leaked Statement of Objections argues that ‘nondisclosure of specifications needed for interoperability’ is contrary to EU competition law. Quite simply, rivals need ‘the information that is necessary for effective communication with the PC operating system’. The Commission has relied on its Tetra-Pak decision. In that case, Tetra-Pak was found to have abused its dominant position in the market for packaging machinery and cartons by, among other things, withholding information about its machinery from competing carton makers. It was required to disclose the technical specifications for the cartons. The Commission has alleged that Microsoft’s failure to share the information necessary to allow programs to interact with Windows without glitches constitutes an abuse of its dominant position in the markets for PC and server operating systems. 

The Commission’s recent decision in IMS Health seems particularly relevant to the Microsoft investigations, although it is a considerably more controversial precedent than Tetra-Pak. IMS Health collects health-care information for pharmaceutical companies under a method of data collection known as the ‘brick’ system. Essentially, regions are broken down into bricks within which drug sales can be tracked and analysed: at issue was IMS Health’s brick structure for Germany. In theory, rivals can build their own structure simply by choosing where to set the boundaries, but IMS Health’s competitors in Germany found that most pharmaceutical companies wanted either IMS Health’s existing structure or something based directly on it. Under principles of intellectual property, a particular brick structure can attract copyright protection, and IMS refused to license its copyright to its competitors. Last July, on the same day that it blocked General Electric’s merger with Honeywell, the Commission imposed interim measures, ordering IMS Health to immediately license its copyright to competitors. The Commission argued that, as an industry standard, IMS Health’s proprietary data collection system was an ‘essential facility’: IMS Health’s refusal to licence its data collection system therefore constituted an abuse of a dominant position.  

5. Battling for E-hearts, E-minds and E-wallets
Microsoft’s .Net is a gamble on the future of Microsoft itself. The company is advancing into new markets – and, to an extent, it is also defining those markets.  Windows XP, the introduction to .Net, suggests a unified view of online computing:
 
‘Windows XP is important because it finally unites Microsoft’s venerable consumer software, which has been based on its original MS-DOS programming, with the more robust, non-DOS version known as NT and designed to run on servers. Completing the transition begun with Windows 2000, which was not originally intended for PCs, XP is designed to integrate the desktop operating system not just with a local network server but with the global network of the Internet’.

The implementation of the various elements of .Net will see Microsoft square off with its arch-rivals Sun Microsystems and AOL Time Warner. Essentially, Microsoft is competing with Sun for the de facto programming language of the Internet, and with AOL for the online consumer. This is not competition within markets, but competition across markets and for markets.

5.1 Sun Microsystems
The Java programming language was launched in 1995 by Sun Microsystems. Since then, it has become synonymous with creating Web applications, or ‘applets’. Whereas Java is based on data processing, or moving applets around the Internet, the focus of Microsoft’s competing language, C#, is much more about the transfer of information.

Programs written in Java are run in their byte code form by a ‘Java Virtual Machine’ (JVM), which in turn works on any computer that has software called the ‘run time environment’ installed. Effectively, this allows Java-based programs to run on a multitude of platforms, which is why it has been so popular on the Internet. So, the JVM can be thought of as the platform on which Java-based programs are run. 

In July 2001, Microsoft announced that while Windows XP would support Java, it would not incorporate Sun’s JVM. Although this decision appears to eliminate an important distribution channel for Sun, it should be noted that XP will work with a pre-existing JVM, and with downloads of current and future versions of the Sun JVM. Also, programs such as AOL’s Netscape Navigator 6.1 incorporate Sun’s JVM. More significant is the fact that Sun’s current JVM is not compatible with IE6: the browser can only use Microsoft’s JVM, which is built around C#. While Sun will make available for download an IE6-compatible version of its JVM, many users will be deterred by the size of the file (5MB).

In January, Microsoft launched a new set of software tools that translate Java software so it can support .Net, allowing developers to convert Java-based software into Microsoft-based software without having to rewrite code. Oracle and Sun responded with a set of tools that translates Microsoft Active Server Pages (ASPs) to Java Server Pages (JSPs). The companies also hope to migrate users of Microsoft’s server database to Oracle’s server database. Microsoft will embed elements of .Net’s programming framework into its server software, and IBM and Sun will shift elements of their Java-based development tools into their server operating systems.  (Server software runs Internet transactions, and so is an integral part of Microsoft’s .Net strategy, and Sun’s competing vision, ONE.) 

5.2 AOL Time Warner
Whereas Microsoft is a technology company, AOL Time Warner is primarily a content company, relying on partnerships with technology companies such as RealNetworks. However, despite their different appearances, Microsoft and AOL share the goal of ‘owning’ the Internet user.

Over time, AOL has bolted features such as instant messaging, calendaring and photo services onto its proprietary Internet access service. AOL Anywhere allows customers to access its services through decides such as mobile phones, BlackBerry pagers, and AOLTVs. AOL also has the second-largest cable system in America, with 2 million broadband Internet subscribers. The mass adoption of broadband Internet access will allow AOL to deliver its movies and music to subscribers. 

AOL has more than 30 million subscribers, almost 5 times as many as Microsoft’s MSN service. However, Microsoft’s Internet properties are among the world’s most visited, and its browser is the most popular.  Further, users accessing the Internet from Windows XP for the first time will be prompted to sign up for Passport, which will introduce them to .Net MyServices. 

The battle for the consumer Web services market will be determined by the success of the identification tools underlying the competing packages. Passport and .Net will compete head-to-head with AOL’s ‘Magic Carpet’ project, which builds on AOL’s Screen Name and Quick Checkout services. These services currently offer AOL users a single sign-on and password that can access about 40 AOL properties and about 100 third-party e-commerce sites. 

In July 2001, AOL made a $100 million investment in online retailer Amazon. In return, AOL will enjoy access to Amazon’s e-wallet or identification technology. Amazon owns crucial e-commerce patents, covering its 1-click ordering facility, its affiliates program and its recommendation tools. Apparently, the deal will require Amazon to use AOL’s Screen Name service instead of Microsoft’s Passport. By partnering with the Web’s largest retail company, AOL has gone some way to insulating itself against Microsoft’s advances. Microsoft soon responded with its own high-profile partnership. This month, it struck a deal with Disney’s ESPN.com that gives MSN exclusive rights to the sports site’s content. ESPN will eventually incorporate Microsoft’s streaming media technology and adopt Passport as an authentication option. 

5.3 Ganging Up on Bill
Sun and AOL have also entered into a joint venture that will compete with the e-business aspect of Microsoft’s .Net initiative. The joint venture, called iPlanet, seems to build on Sun’s Open Net Environment (ONE) strategy, which is based on the Java programming language. In August, iPlanet announced the introduction of a set of Web services software tools. Sun will release a free developer’s kit that will guide developers on building Web services to the ONE framework. It also plans to release industry-specific Web service developer’s kits in the future.

Whereas AOL and Yahoo have developed consumer-oriented messaging applications, Microsoft’s Windows Messenger is aimed at both consumers and corporate users. For example, it includes a document-collaboration feature, and will allow corporations to set up closed messaging groups that rely on a corporate server. Against this backdrop, it is hardly surprising that Sun and AOL’s iPlanet joint venture is developing corporate instant messaging software (which will presumably have the advantage of interoperability with AOL’s existing messaging network).

Finally, Sun recently launched Liberty Alliance, an alternative to Microsoft’s Passport, claiming that it will provide a neutral method for handling online identities. Founding members are Sun, General Motors, Bank of America, Nokia, RSA Security and RealNetworks. It seems that Sun has built a 33-company coalition in just two months, although AOL and Yahoo are notably absent. Sun has said that its ONE strategy and iPlanet e-commerce software products will incorporate the Liberty specifications. 

6. Conclusion
Microsoft’s tendency to integrate into its operating system features that are commonly understood as stand-alone applications merits antitrust scrutiny. However, Microsoft’s critics may ignore a crucial point: Windows XP is not a traditional PC operating system. Rather, it is more akin to the interface for a new system of online computing. Remember too, that in the emerging markets for online services, Microsoft is competing against two heavy-hitters: Sun Microsystems and AOL Time Warner. Barging into a nascent market and crushing a smaller firm is one thing, but creating new markets and leaving your rivals trailing in your slipstream is quite another.