.NET: Is Microsoft Its Own Worst Enemy?

Some of the biggest firms in the technology sector have been increasingly staking their futures on Web services, a model which seeks
to go beyond the traditional client-server operating system to define a workable distributed computing framework for the Internet.
One of the firms with the most to gain (or lose) from this future is Microsoft Corp. , whose .NET initiative
holds significant advantages in the space but faces difficult challenges as well.

In a July report, “Deciphering Microsoft .NET,” Gary Hein, analyst with research firm The Burton Group, found that though Microsoft
is facing off with serious competitors like AOL Time Warner, IBM, Sun Microsystems, Hewlett-Packard, Bowstreet and BEA, Microsoft’s
biggest obstacle in the Web services arena may be itself.

“Microsoft is aggressively pursuing the Web services model with its .NET Framework and, with HailStorm, is building both a platform
for services and specific services that leverage the .NET Framework,” Hein said in the report. “The combination of these two efforts
represents nothing less than Microsoft’s attempt to ensure it will dominate the Internet market as thoroughly as it dominates the
desktop OS. Given the company’s current lock on developers and the desktop, Microsoft has some clear advantages. But its insistence
on running all Web services on Windows, along with privacy and security issues, presents significant challenges. Perhaps Microsoft’s
biggest challenge will be to balance efforts to protect its past while building the future. Considering the substantial changes that
Web services will wreak on Microsoft’s business model, that’s no small task.”

The Strategy
But given Microsoft’s near iron grip on the consumer market and within large swathes of the enterprise, it’s not impossible either.

“Indeed, we expect Microsoft to use its dominant position in other areas in an attempt to carve out a portion of the Internet where
it cannot be replaced or where replacement will be very difficult once Microsoft has established a foothold,” Hein said. “Microsoft
will accomplish this task by addressing multiple fronts simultaneously. The company will leverage existing developers, desktops, and
applications, while establishing new products and services, such as Windows XP and HailStorm, that tie all of these components into
an inseparable Internet experience, just as it tied enterprise software into an inseparable and irreplaceable client and server

The Web services model is based on the idea of a “cloud” that provides a set of core network services to users, applications and
other services. Incidentally, it also dramatically reduces the importance of the traditional operating system.

“In a nutshell, Microsoft’s .NET is a company-wide effort to move Microsoft’s developers, products, customers, and services from the
client-server computing model to Microsoft’s vision of the Web services model,” Hein said. “Traditional software delivers its value
as a complete, integrated product that is typically hosted on a single machine or operates across discrete clients and servers.
Alternatively, the Web services model divides and distributes functionally among multiple hosts throughout the Internet, thus
providing new methods for access and delivery of software value.”

But, as Hein indicates, much of Microsoft’s success can be attributed to a strategy of linking its operating systems and office
productivity applications in such ways that it is difficult to remove Microsoft from the enterprise environment. That domination
does not carry over to the Internet.

“While it’s difficult to deploy non-Microsoft desktops in the enterprise, it’s relatively easy to choose non-Microsoft operating
systems, Web servers, and middleware infrastructure for Internet-facing applications,” Hein said. “Indeed, many customers do just
that because products like Apache Web servers, the Solaris and Linux operating systems, Oracle databases and BEA application servers
dominate Web applications today.”

Hein said Microsoft’s answer is to tie its .NET services to the Windows platform, forcing enterprises that wish to utilize .NET to
go with .NET Enterprise Servers and .NET Developer Tools.

But Hein noted, “Simply put, the Internet is not a single vendor-operating environment. To be effective, Web services must operate
as easily across operating system platforms as they do across corporate boundaries. The emergence of network services as
general-purpose, discrete components, such as directory and security, was just a beginning. The Web services model is a logical
extension of the Network Services Model, and has already begun to make operating systems less and less important.”

Nevertheless, according to Hein, .NET is Microsoft’s attempt to change that. But to be successful it must do so without tearing the
heart out of its current business model.

“Since Microsoft has the most to lose in the transition to the Web services computing era, it has the difficult task of maintaining
and protecting its legacy while at the same time defining the future,” Hein said.

He added, “Microsoft is already showing the erratic signs of a vendor that’s caught in a conflict between its past and future. As it
moves to define .NET, for example, Microsoft is simultaneously tightening its grip on customers of its current client-server
products, driven by today’s depressed market to maximize revenue. As it adds onerous copy protection schemes and licensing terms to
its products, using these tactics to squeeze more blood out of the existing turnip, Microsoft is creating ill will in the market,
which could be an obstacle to a smooth transition to the future.”

Meanwhile, the public’s perception of Microsoft will become an increasingly important factor as Microsoft pushes .NET, Hein said.
Much of the success of .NET is predicated on the success of a core component of the initiative: HailStorm. Hein calls HailStorm an
Internet applications platform, next-generation distribution mechanism and business model rolled into one. Using Microsoft’s
existing Passport identity authentication system, HailStorm is .NET’s answer for provisioning services ranging from e-mail to
instant messaging, notifications and calendaring, across a range of devices from computers to phones and digital assistants. It
would allow applications to access users’ information and interact with their services. As Hein puts it, “HailStorm, in essence,
could become a digital entity for the user, representing the user and “thinking” in a very limited sense, based on predefined rules,
even when the user is disconnected.”

“For example, a user could register for concert tickets, specifying preferences such as seating and maximum payment,” Hein said. “If
tickets were available, the user’s HailStorm account would receive notification and (if authorized by the user) purchase tickets on
behalf of the user. All of this interaction could take place whether or not the user was currently online.”

But here’s where the public’s perception of Microsoft becomes involved. For HailStorm to work, consumers and businesses must be
willing to store sensitive information on Microsoft-managed servers within the HailStorm .NET service.

“Businesses, consumers, and governments must trust Microsoft with private information; yet, given Microsoft’s history, this may
prove difficult,” Hein said. “Security, privacy, and stability are critical, but these are not perceived Microsoft strengths. In
essence, Microsoft must earn the public’s trust in these areas for .NET to succeed. Complicating matters is the fact that Microsoft
will use its dominant position in other areas to establish its position in the Internet, a tactic that is already causing
Microsoft’s competitors to cry foul to government regulatory agencies. Microsoft may find that these non-technical issues pose some
of the greatest threats to .NET.”

Indeed, a group of privacy and consumer organizations filed a complaint with the Federal Trade Commission in
July, alleging Microsoft was engaging in unfair and deceptive trade practices through tightly bundling the Passport service — a
core component of HailStorm — with its new Windows XP operating system.

Microsoft also faces challenges from competitors. Hein points out that through HailStorm — by offering single sign-on, user
centric-features, a payment infrastructure and subscription-based access features — poses a significant threat to AOL’s business
model by co-opting many of the features AOL offers in its “walled garden” service.

“AOL is aware of the .NET threat and is considering both legal and technical solutions, from private discussions with State Attorney
Generals to building a competing desktop operating system,” Hein said. AOL has limited alternatives to counter .NET and HailStorm,
but the majority of these alternatives require substantial changes to AOL’s partnerships and business practices. And time is of the
essence. AOL must act quickly to expand the AOL identity and services before HailStorm and .NET can gain a foothold in the

Hein said AOL needs a developer framework to successfully compete with .NET, and suggested its most beneficial option would be a
pairing with IBM, which he said is in the best position to compete with Microsoft through its WebSphere Web services platform and
toolset. But he also said such a partnership was unlikely, given the strength of AOL’s partnership with Sun, which offers the Sun
ONE (Open Net Environment) Web services platform.

But .NET and HailStorm also offers something the competing services don’t.

“Web services solutions from IBM, Sun, HP and others emphasize developer tools and platforms,” Hein said. “However, one must look
past the developer and platform initiatives to the larger picture, one that incorporates paying consumers for Web services. “With
HailStorm, Microsoft is providing the missing link that, if successful, will accelerate adoption of .NET by appealing to the masses
with a set of beneficial services and by providing a platform on which developers not only can host their own services, but get paid
for doing so. In essence, .NET is more than just Web services development tools — it is a business model for developing,
delivering, interacting and receiving payment for Web services. While others are focusing on the first few steps, Microsoft has its
sights on the end game — creating revenue by positioning itself at the very heart of the Internet with HailStorm.”

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