Microsoft Gets into P2P Groove

In part of its effort to cull the best technologies and resources for its pending .NET Web services initiative, Microsoft Corp.
Wednesday agreed to pump $51 million into Beverly, Mass.-based peer-to-peer software firm Groove Networks Inc.

Microsoft’s desire to grasp Groove’s technology for .NET, a Web services stategy designed to allow application to application collaboration over the Internet, is plain — Groove is one of the leading makers of software that lets people share files stored on their personal computers and work together on projects. Part of what makes Groove attractive to the software
giant, is no doubt the talent behind it, which includes Chief Executive Officer Ray Ozzie. Ozzie is the creator of Lotus Notes, a
leading business collaboration application, that became IBM Corp.’s property some six years ago.

Groove’s software, which Ozzie admitted he intended to be an advanced sort of Lotus Notes in terms of what it will do for
corporate communications, has been available for a year. Basically, it allows business teams to collaborate on a number of
activities within shared virtual spaces, in real time or offline. When integrated with centralized business systems, Groove adds a
“person-to-person interaction layer” that can streamline company processes with customers.

That is why Microsoft sat up and took notice. For more than a year, the companies have been working together on XML-based Web and peer services, focusing on areas such as programming languages and a variety of .NET services to
Office, Windows XP and real-time communications initiatives. The glue that binds the software makers is what they call “an
appropriate mix of centralized and decentralized infrastructure,” which they said is important to enterprises seeking true
collaboration technologies. The firms believe .NET and Windows XP technologies, combined with Groove’s software Networks’ collaboration technologies,
will enable customers to work together within and across organizational boundaries.

“When Groove was first introduced about a year ago, we indicated how excited we were about the technology, not only because of its
advanced use of our .NET tools and infrastructure, but also because it represented a new breed of innovative software that takes
full advantage of the PC and the rich communication aspects of the Internet,” said Steve Ballmer, CEO of Microsoft. “As our
investment indicates, we are even more enthusiastic about Groove today than we were a year ago.”

Ballmer and Co. also probably figured there were ways to cut infrastructure costs using P2P technology. Recent research from Cambridge, Mass. research firm Webnoize bears this logic out as it applies to the sharing of music, which is where the P2P seed really took hold (Napster, Gnutella, et al).

The study concluded that Web ventures such as online music subscription services may reach proftability better using P2P applications by cutting 90 percent off of data delivery costs.

“P2P is controversial because most Internet media piracy is committed
using peer networks. However, P2P may be used to reduce bandwidth costs
for media distribution in a system just as secure as one using a
centralized network server,” said Webnoize Senior Analyst Matthew
Bailey, who authored the report.

Although the Webnoize report solely addressed P2P’s effect on online music delivery, the underlying principle of P2P applications, and by extension, Groove’s software, cannot be ignored. The bottom line is that it cleaves costs from Web services delivery. In Groove’s case, because the product is not dependent on centralized Web servers, it has an extremely low vulnerability to single points of failure. This means it is suited for secure cross-business workflow.

As for working with Microsoft, Groove’s Ozzie, whose software has attracted such customers as GlaxoSmithKline, Andersen, and the Defense Advanced Research Projects Agency,
said customers have actually asked for tighter integration with Microsoft’s Office applications, as well as interoperability with
the company’s IM product, Windows Messenger.

He also said many people have been extremely curious to see how Groove software would dovetail with .NET.

“We’ve made significant progress on these and other initiatives, and now look forward to working even more closely with Microsoft to
ensure that we capitalize on the strengths of our respective technologies to deliver cross-enterprise collaboration solutions for
our customers,” Ozzie said.

The deal, good for a minority stake for Redmond, Wash.’s Microsoft, rounds out a $54 million investment round for Groove Nwetworks that included Accel
Partners. It also comes out a time when investments into the teens of millions are scarce compared to the myriad, multi-million-dollar plays made in the venture capital heyday of 1999.

The companies will also accelerate the adoption of their respective technologies through product,
sales and marketing initiatives.

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