Gate-crasher

Microsoft is determined to ignore partnership allegiances and is barging its way into a raft of new media sectors so as not miss out on the digital winner. Unswayed by a US anti-competitive practices investigation, its latest move is into the

Microsoft’s move into the computer games console market this week gives some indication, if it were needed, of the sheer diversity and power of Bill Gates’ empire.

This new area of business is one of many avenues Gates could go down. Allegiances to partners appear to be no obstacle to his expansion – the launch of the new console is in direct competition with alliance partners Sony’s PlayStation and Sega’s Dreamcast for which it supplied the Windows technology.

The sheer scale of Microsoft’s investments to date is mind boggling. During the first six months of this year Gates made no less than 24 acquisitions at a cost of nearly $10bn (£6.25bn). And in one two-week period alone, $6bn (£3.75bn) was invested on expansion.

But all is not perfect in Gates’ world. He is under fire from US attorney general Janet Reno for alleged anti-competitive practices. Reno is interested in whether Microsoft is forcing customers to use its portfolio of products by bundling them with the Windows system, used by 93 per cent of PCs.

And his image appears to have been transformed from plucky Harvard drop-out to a ubiquitous Big-Brother figure, a mood best summed up by the creators of the recent cult animated film, South Park. A cartoon-scene depicts Gates as a justified target for gunfire.

Some also argue that the company’s approach to investment in new technologies is proof it is as uncertain as anyone over the true direction that Web and data communications services will take.

James Waite, chief executive officer and creative director of Digital Partners, the digital arm of Leagas Delaney, says: “Perhaps one of the reasons why it is taking stakes in so many different companies is because the new media industry is developing so quickly it would be difficult to bet on any certainty.”

Waite points to Microsoft’s content provision on its Microsoft Network (MSN) Internet system as a particular weakness.

He says: “Microsoft had a problem with Slate (its Internet magazine) in that it was paying writers to run the magazine and they didn’t crack the subscription model. If there is a gap at Microsoft it is in terms of content delivery and creation of content.”

Waite says that Microsoft may attempt to get content through big deals with established providers, as it has done with broadcaster NBC.

Microsoft was unable to comment on its content provision strategy for this article. However, a spokesman for Microsoft in the UK suggests its diversity of investment in cable companies is indeed a reflection of a general lack of certainty about the way digital services will develop. He says: “We are looking at driving the company’s vision for broadband services. There are a number of ways it can be done and we would be wrong to back just one runner.”

Others believe that the company is playing the digital game just as cannily as it has the PC market, and in a way other companies have yet to understand.

A senior agency source says: “Microsoft’s understanding of the future doesn’t seem to be clear and it has had a somewhat shotgun approach to acquisitions. But there is a perception it is playing the digital market as a large jigsaw. It keeps buying bits of the jigsaw that it can see are part of the bigger picture, while others it is not so sure about.”

This piecemeal approach has included the acquisition of a number of image libraries, which own the rights to pictures and images which are now in greater demand as communications grow increasingly global. Such moves are arousing disquiet among others in the digital industry.

The agency source adds: “There’s no fear that Microsoft will dominate the digital market, there is an assumption that it will. It does a fantastic job educating consumers about new technology. But its power could mean the best applications don’t evolve.”

A problem for Microsoft and for Gates, who has reportedly taken Reno’s attack on his company’s competitive practices as a personal affront, is that Microsoft is now being cast as the bad guy. This may be one of the reasons why he set up the Bill and Melinda Gates Foundation, the world’s second largest philanthropic trust (behind the UK’s The Wellcome Trust), which is legally obliged to donate $855m (£535m) a year to charity. Nonetheless, Microsoft’s all-powerful image appears to be increasing rather than decreasing.

Digital Partners’ Waite says: “Microsoft is easily scrutinised. Because it is a ubiquitous global player, that image can easily be transformed into Big Brother.”

The outcome of the anti-trust investigation, though bound to be the subject of endless appeals, could drastically cripple Gates’ avowed strategy of expanding Microsoft’s reach into digital services.

His main priority appears to be cable. In the first half of 1999 Microsoft invested $5bn (£3bn) in US communications giant AT&T; $500m (£312m) in NTL, the UK’s third largest cable television group; and $300m (£187m) in United Pan-European Communications (UPC), Europe’s biggest cable TV provider. Each investment will help those companies develop their cable systems faster.

The strategy is to drive the expansion of broadband digital systems which will serve the new generation of “smart” mobile phones, and make access to the Internet infinitely faster. It is estimated broadband cables will speed up data transfer tenfold.

Microsoft stands to benefit from these higher bandwidth systems because they will require a greater array of software applications to serve them. The company has developed, and is continuing to develop, software to suit. Also, the growth of the Internet in Europe, which still lags behind the US, is dependent on improving the speed with which customers can get on to the Net.

A spokesman for Microsoft in the UK says: “If you are looking at barriers to the UK becoming a digital economy, the main one is the speed of access. We are investing to try to make it faster. Microsoft supports the Government’s vision that the best way to do business is electronically. Microsoft is a technological leader and has a vested interest in seeing the UK succeed.”

As Microsoft’s investment in UPC demonstrates, the strategy is mirrored throughout Europe.

But Microsoft has stakes in a far wider array of businesses than just cable companies. It has also poured money into strategic alliances with content providers including Sony, US TV network NBC, and Dreamworks, the media company founded by Steven Spielberg and music industry heavyweight David Geffen. Each allows the Seattle-based giant to offer high quality content over the Net through MSN.

Its portfolio also includes smaller fry such as Audible.com, a company which provides spoken audio over the Web, and Omnibrowse, a data services company that specialises in computer applications for cellular phones.

As Gates continues to expand his reach, Reno’s four-year crusade to break Microsoft’s hold on the computer software market through Windows is reaching a climax. Preliminary rulings over alleged anti-competitive practices by the world’s biggest company are due either at the end of this year or early in the new millennium.

But as judges deliberate, Bill Gates’ £315bn company is likely to grab as dominant a share of the digital market as it has the PC one.

Microsoft denies it is guilty of any of Reno’s charges and is confident it will emerge unscathed. The spokesman even refuses to comment on what the implications of a guilty verdict could be. “Microsoft believes the case it has presented to be strong enough to get the judges to rule in its favour,” he says.

However, it may be that by the time decisions are made, Microsoft will have moved far enough into the new digital market to be beyond reach.

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