Can a computer software firm really understand what regular folks want?

Earlier this month, Microsoft started making known its strategy for the emerging market in consumer electronics devices. As you might expect from the world’s most successful computer software company, the company’s approach to dominance of the New Digital World is long-term and cohesive.

Unlike Apple and various consumer electronics firms, which appear to pursue a number of disparate strategies in parallel (for example, Apple’s consumer division vs. its advanced products group, and much the same scenario in Sony’s many warring divisions), there are no apparent political battles within Microsoft.

The company appears to be in total alignment for delivering Bill Gates’s vision of computers in every home (whatever you want to call a computer) running Microsoft software (whatever you want to call software).

The flying-wedge strategy has stood Microsoft in good stead in the PC software business, which it knows better than any other company in the world. The question is whether such an approach is useful in the consumer market, which weds hardware and software in a fundamentally different and much less forgiving union than does the PC.

A ‘DIGITAL INFORMATION DISTRIBUTION STRATEGY’

At the CD-ROM Conference in San Francisco earlier this month, Microsoft chairman Bill Gates spoke broadly about the kinds of computing devices that the company believes will become available to consumers.

But, in fact, Gates and his lieutenants have been meeting and dealing with many companies, including Sony and longtime Microsoft partner and chip maker Intel, about specific kinds of devices for which Microsoft would like to supply system software.

The first shoe drops. The technology announcement of Sony’s “Bookman” electronic reader at the CD-ROM Conference (see story, p. 16), powered by MS-DOS and using Microsoft’s own Viewer technology as an authoring system, is only the first of many shoes to drop in the consumer arena for Microsoft. The company is both pursuing and being pursued by companies ranging from hardware vendors to traditional print publishers, all looking to exploit Microsoft’s formidable industry clout.

Though Microsoft has its eye on market niches such as personal digital assistants and interactive entertainment devices (details to follow), its approach is far different from that of the traditional consumer electronics firm.

Unclear on the concept. Unlike Microsoft, consumer vendors are still unclear on the concept of digital information. They have only just started to deal in the digital domain, although their products have been powered by microprocessors for some time now.

To date, the raison d’être for consumer electronics has been to hold the consumer captive to a product, usually via some kind of delivery form factor such as video or audio cassette, 8-track tape, cd platter or video game cartridge. This tactic was for many years used to great effect in the computer business, too, via incompatible operating systems, data formats and physical media. However, it (mostly) outlived its usefulness when customers began demanding the easy interchange of these components.

It’s even started to become less effective in the consumer world — most notably in the case of Nintendo, where software providers demanded and won access to a market that Nintendo was trying to control via the form factor of its game cartridges.

Building on the present. That’s the critical difference between the old and new worlds. All things being equal, digital technology embraces, it does not exclude. The point is not to create new and interesting enclosures or boundaries for data, but instead to knock down the walls between devices or players and the information — music, video, text, whatever — that exists in whatever format.

In contrast to the traditional model, Microsoft intends to build on its present software base as it enters the consumer market — i.e., the Windows graphical environment — to build what Nathan Myhrvold, Microsoft’s vice president of advanced technology and business development, calls a “digital information distribution strategy.”

THE FLYING WEDGE: RESEARCH SETS THE FOUNDATION

The foundation for Microsoft’s future is the company’s belief that people today mainly write and analyze with their computers; finding a way to expand how people think of and use computing technology for reading, information distribution and comprehension will greatly increase the market for new computing devices and software.

It is Myhrvold’s group that is clearly setting the pace for the company’s voyage into these largely uncharted waters, via a comprehensive applied research program that focuses on three main genres.

Very personal computers. One of Myhrvold’s favorite tricks is to empty out his pockets during a meeting and assert that everything on the table could, and will, be computerized. (You may have heard this concept before: Xerox PARC calls it “ubiquitous computing,” and is also working on the hardware and software to make it happen.)

“Today, you can’t use a computer for something as simple as lists to take to the store,” Myhrvold says. “The things you use even a $10,000 computer for are limited — you’re still doing the same things you did with an 8088. We have to change the form factor.”

Communications. Most communication today is created for an audience of one, according to Myhrvold’s model. In addition to facilitating a whole new model of electronic publishing, digital communication enhances one-to-one connections by making it possible to focus on the message with less emphasis on how it gets to its destination.

“Communication will be pervasive across a wide variety of devices from desktop to handheld,” he says. “It is a fundamental technology area for us — local networking, certainly, as well as wide-area access to digital information.”

Happily for those of us who worry about things like privacy and data integrity in a world where all data is digitized and flying around on public networks, Myhrvold claims to be a “moral supporter” of the Electronic Frontier Foundation (see Vol. 1, No. 5, p. 8), which is concerned with such matters. In addition, he says, Microsoft has licensed RSI Data Security’s public key encryption technology for inclusion in upcoming products.

Public key encryption is an extremely powerful method of protecting and validating data. It, or something like public key encryption, will become a cornerstone of the digital world as information owners and buyers require secure ways to send, receive and pay for digital media.

HDTV/land-based machines. Myhrvold also says Microsoft will conduct basic research into high-definition imaging systems and what he calls “land-based machines” that deal with much higher bandwidth than can presently be transmitted.

Though Myhrvold didn’t say so, it’s likely Microsoft is also interested in enabling fast, accurate and compatible transmission of data-intensive digital images from computers to these “land-based machines” because of Interactive Home Systems, Gates’s startup company that is working with the problem of creating high-quality digital images (see Vol. 1, No. 4, p. 18). Both companies’ major stockholder — Gates — obviously believes there is a major market opportunity in such images.

Though Microsoft isn’t averse to building hardware — “when the need arises, we’ll build hardware of the enabling variety,” Myhrvold says — by and large the company isn’t interested in hardware research.

Within each of these genres, Myhrvold says he has four missions:

• To set technology strategy for the company and consult with product groups on the strategic level. In the past, people who started out with projects in the research divisions followed those projects as they were spun into product development. Myhrvold says the company is trying to build more permanence into the staff by bringing in product groups to work with the researchers as they develop products.

• To support the industry’s first and only all-software research lab. Called Microsoft Research, the lab’s director is Rick Rashid, formerly a professor of computer science at Carnegie-Mellon University, who oversaw the development of the Mach extensions to the Unix operating system while at CMU.

It’s important to note that Rashid’s charter at Microsoft is similar to what he did at CMU: find a way to take the old code base of Windows and implement interfaces to match the old applications while completely rebuilding everything else around it.

“It’s possible to carry the older world forward while rebuilding the insides,” Rashid believes. “If you’re careful, you can at least preserve your investment in what you’ve done before.”

Rashid says the lab will hire 50-60 people in the next two years. “Most research we shouldn’t do,” he says. “Our goal isn’t to have ‘one from Column A and one from Column B,’ with token researchers in each area. We want to fund research that’s not being done, like video compression algorithms.”

• Advanced product development. Myhrvold says this is where products like PenWindows, Windows NT and the new consumer products are being developed. As you might suspect, the fundamental difference between advanced development and research is that advanced development “probably can be done,” he says. However, in research, “you don’t know if it’s possible, but wouldn’t it be cool if you could.”

Advanced product development, he says, either cuts across traditional company divisions or is fundamental new technology. He says some work is being done in this group, for example, in making Microsoft’s consumer electronics strategy “happen.”

• Business development and strategy. Though Myhrvold didn’t say so, obviously this is where Microsoft figures out how to dominate the industry: choosing the areas where it can best implement new technologies, either from internal development, licensing key pieces of technology or forming strategic relationships with companies such as Silicon Graphics/MIPS, Apple for TrueType and RSI Data Security.

If Myhrvold and his team succeed in these areas, he believes Microsoft will have a notable effect on the fundamental technologies for production, reproduction and distribution of all kinds of digital data (see graph, above).

RAISING THE CURVE

Myhrvold sketches a graph to illustrate the possibilities. The distribution curve for video and other types of media today looks a lot like the pre-Gutenberg/Xerox curve for documents on his graph — as with documents, the number of videos that are actually seen by millions of people is relatively small. And despite the growing ubiquity of video data, very few homegrown videos are seen by more than one or two people.

“The tools we’re making now give us the opportunity to raise the curve, to make simpler not only the act of creating, but also reproducing and distributing, all kinds of information,” he says.

Myhrvold is convinced that the approach of consumer electronics vendors, such as Philips with CD-I, is “dead wrong” because they haven’t simplified the distribution or the creation of products.

“It’s not just authoring, but creating an information business at all levels, with bottom-up grassroots and third-party support,” he says. “This [new industry] won’t happen because a bunch of big companies sign a contract. Look at Minitel in France — its strength is that it allows people to create information businesses very cheaply. All you need is a [communications card] and a PC. It’s cheap and very clean.”

APPLE’S KARMIC DEBT: EVER FIRST, EVER CO-OPTED

These concepts — the democratization of information creation and distribution — are not new. They’ve been the foundation of most of the excitement around the digital media business for a few years now and Apple was the company first to bring them to public attention.

Apple was also the first company to promote and popularize the graphical user interface for personal computers, via the Macintosh. Microsoft has now co-opted that position with the enormous success of Windows 3.0.

In addition, Apple was first to create a powerful system software extension — QuickTime — for the kind of time-based information that Apple, and now Microsoft, says is critical to the development of this information market.

Microsoft, Tandy and Intel (with IBM support) announced their own digital video alliance at the CD-ROM Conference. Called DV MCI, it is a digital video command set and architecture for Microsoft’s Media Control Interface under Windows.

Now, in a move that surely must convince Apple executives that they must have done something terribly sinful in a past life, Microsoft is starting to push hardware manufacturers to build computing devices for the consumer market. Apple chairman John Sculley announced essentially the same strategy at the Consumer Electronics Show in January. Gates even used Apple’s term — PDA, for personal digital assistant — during his keynote at the CD-ROM Expo in March.

AN IMPRESSIVE SCENARIO

Shortly after Sculley’s keynote speech at CES, Gates and Rob Glaser, head of Microsoft’s multimedia systems group, paid a visit to Andy Grove, chairman of chip maker Intel, Microsoft’s biggest partner in the computer business. (Grove, by the way, is delivering the keynote address at Digital World this June.)

Gates and Glaser made a detailed presentation to Grove about what they consider to be “new high-volume opportunities” for Intel based on the home/consumer market and the growing market for new mobile devices.

Betting on Intel? Considering the enormous success that Microsoft has had in the past with Intel’s chip technology, it’s likely that Microsoft is placing its biggest bets for the future on Intel — especially in the consumer market, with its potential for high volume sales of powerful 16- and 32-bit microprocessors.

If you’ve been reading this newsletter for any length of time at all, the categories and the players listed below will sound familiar to you. But think of them in a new light: think about the world’s largest software company and perhaps the world’s largest microprocessor supplier entering these markets. It’s an impressive scenario.

Of course, one can only speculate on how Intel feels about Microsoft’s relationship with Sony on the Bookman, which is powered by a NEC V-series microprocessor, an Intel 8088 clone that was the focus of a protracted legal battle with Intel which NEC won.

Video support. NEC or no, Intel is continuing to support digital video in general, DVI specifically, and Microsoft and Tandy vis-à-vis the aforementioned digital video alliance. Clearly, the company is viewing the convergence of computing and consumer electronics as a huge potential market for chips. Clearly, this is what Gates has proposed to Grove. The only surprise would be if Intel did not accept the challenge.

According to Gates and Glaser, here are the five devices presented to Grove. (In his speech at CD-ROM, Gates combined personal appliances and communicators into “PDAs.”)

• Interactive Entertainment System Connected to TV, to “enhance recreational or educational experience in the home.” Price point would be $200-500, or provided as part of a subscription business. So far, they see the players as Nintendo, Sega, TV Answer, Philips (CD-I), SkyPix and Frox. Microsoft estimates that unit volume for such devices will be “tens of millions of systems per year” in 1992, and “at least tens of millions of systems per year” by 1995.

• Advanced Telephony, to “enhance home-based interpersonal communication transaction services.” Microsoft figures smart phones will cost $200-500. Though there are few announced players in this market today — AT&T is the only truly visible player here — and the unit volume expected to sell by the end of 1992 is low, many such products are under development today. By 1995, Microsoft believes such devices will probably sell in the “millions of systems per year” category.

• Personal Information Appliances, known in Apple lingo as “personal digital assistants” or PDAs, designed to provide a “ubiquitous, highly portable way to store, transmit and receive all forms of personal information (e.g., calendar, to-do list, address book).” Target cost is $200-600, and players already gearing up for this market are Sharp, Apple and Hewlett-Packard, though as in the case of smart phones, many more companies have similar products on the drawing board. Microsoft believes “millions of systems” in this category will be sold in 1992, and “at least” millions per year will be sold by 1995.

• Personal Communicators, for “ubiquitous, highly portable, integrated voice and data connection for individuals.” Target system cost is $200-1,000, and the announced players — General Magic, Apple, Sony, Motorola, GE Ericsson and Ardis (the cellular data network run by IBM and Motorola) — have received enormous attention. Though sales volumes in 1992 are expected to be low, Microsoft believes in 1995 the unit volume for such systems is “probably millions of systems per year.”

• Electronic Books, one of the most evocative consumer devices, will according to Microsoft provide a ubiquitous, highly portable playback mechanism for all forms of digital data, and will cost $200-700. So far, the announced players are Sony, with the DataDiscman and Bookman, and Philips, whoever builds a portable CD-I player. Unit volumes sold in 1992 are likely to be in the hundreds of thousands, but by 1995 Microsoft expects to see reader devices sell “probably millions of systems per year.”

Some of the unit volume estimates can only be gratuitous, since no one really knows what will happen. But it’s clear that Microsoft believes strongly that the market is not exactly blue-sky.

SPEAKING OF ‘HAIKU’: ARE WE ALL DEAD NOW?

Though Rob Glaser says Microsoft is “not prepared to make any product announcements,” he says the company has already created a pared-down, scalable version of the Windows operating system to power these devices as they come to market.

More a technology category than a product, the project’s code name is Haiku. Its slogan within Microsoft: “I would tell you what I was working on, but then I would have to kill you,” which is, you’ll note, an actual haiku. Team sweatshirts have been duly created (see photo, p. 3).

Sanjay Parthasarathy, product manager for Multimedia Systems Group, says the goal is a “sleek, fast” operating system, and he is finding the task not as difficult as he expected. “It’s interesting to go in and see how much of Windows is simply printer drivers,” he says.

It’s heartening to hear such statements, since the biggest complaint about Windows and its Multimedia Extensions centers around speed. Any moves Microsoft can make to eliminate system overhead from Haiku will be extraordinarily helpful.

“The idea of minimalized Windows is potent for these systems,” says Glaser. “Scalability and interoperability is crucial.” Glaser is also aware that the vagaries of consumer productizing might mean a vast number of slightly different operating systems for different applications. Since Microsoft doesn’t design hardware, he says, Haiku will make it possible for the company to work with hardware designers “on whatever level they want.”

WHAT ABOUT THE MPC?

Good question. What about the MPC — the Multimedia PC, the Real Big Deal that was going to insert digital multimedia into the hearts and minds of PC users from sea to shining sea?

The response has been underwhelming since the MPC launch last year. But Microsoft refuses to give up on the specification, despite the groundswell of support for consumer devices which is likely to co-opt the market for MPCs in the future.

Darby Williams, group product manager for the multimedia systems group, is convinced that multimedia-assisted computers will be popular in the home for as long as there are home computers. Though it’s having a hard time finding a niche in the home — the benefits of multimedia don’t yet match the extra cost, which is in the multiple hundreds of dollars today — he believes that clone companies will use the MPC moniker to differentiate themselves in a massively competitive commodity market in the next few years.

Though it doesn’t seem likely that the MPC will gain widespread acceptance in the near term, Williams does have a point that increasingly powerful PC clones are becoming incredibly cheap. “Cheap” is at the very least what is needed to crowbar MPC technology past the nice-idea stage and into the home.

As this happens, Williams is convinced producers will segue more development dollars into MPC titles.

WHEREIN LIES THE RUB?

Bill Gates can look at nearly any task and believe in his bones that it can be done better in software, preferably software sold by Microsoft. So far, he’s been right. But the move into digital information devices for consumers is a vastly different one from the world in which he lives and breathes.

Why? With consumers, the “just make a black box and they will come” theory of product design and marketing will not cut it. A consumer information device has to be something people want to buy. All the mass marketing hype in the world isn’t going to make them dig deep if it doesn’t do something for them, something which provides immediate and understandable benefit, with a pain factor that’s less than (or at least equal to) that benefit. It also must work with similar devices or form factors on the market.

Frosting on the cake. That is why Sony did so well with the Walkman and Discman. Both those products, in all their many versions — with radio, without radio, record and play, play only, professional quality, waterproof, etc. — provided immediate, recognizable benefit to someone who wanted to move around and listen to music at the same time. The frosting was that the music itself sounded even better than listening to it in the traditional way of through a speaker system.

The same can certainly not be said for any multimedia system in the world today. In the same vein, that’s also why Sony’s done so poorly with the DataDiscman (see Vol. 1, No. 8, p. 7). To reiterate: A brand name only buys you a sale in the consumer market if it’s already something people want to buy.

A simple sentiment, perhaps. But as they say, simple doesn’t mean easy. Despite the power of its flying wedge, Microsoft needs to remember that it has no cachet in the consumer market. Microsoft software may well power the vast majority of personal computers in the world, but this is nearly without meaning in the consumer world. In fact, it may have the negative psychological effect in the consumer world, forcing a mental connection to a computer — the dreaded “C” word — a connection which could well prove to be death in the market.

‘ELEPHANT BRAND’ SOFTWARE

Though it is deeply woven into the computer landscape, Microsoft’s name doesn’t have the consumer recognition of either Apple or Sony. Microsoft’s name means “serious computer” to most consumers who know it; ironically, it’s become the new IBM. Microsoft will have to prove itself solely on merit, something it hasn’t had to do in the computer world for a long time by virtue of its elephant-in-the-living-room status.

If the shoe fits … As the biggest elephant in the software business, Microsoft can sit anywhere it wants. It talks a good line about openness and standards-setting and not reinventing the wheel in its research labs, but one of Microsoft’s rote lines these days is “a standard is what everyone uses.” Obviously Microsoft is the only shoe that fits in that category.

That attitude doesn’t contribute much to the greater good of a budding industry, or to creating better technology for users or consumers. Microsoft consistently sneers at Apple’s offerings (one executive calls QuickTime “cute”) because Apple is not the market leader, but Apple is clearly the technology leader that Microsoft has followed for almost a decade. Does anyone really believe, after all these years of IBM’s dominance, that whoever sells more products has the best technology?

Microsoft’s Glaser says this statement is “grossly unfair,” citing Microsoft’s pioneering the CD-ROM Conference in 1986 and its delivery of content applications on cd including Multimedia Works and “lots of non-multimedia examples of innovation,” such as Object Linking and Embedding, or ole, and the earliest graphical user interface applications for the Macintosh.

“Both companies innovate in different areas,” he says. “That’s a fairer way to tell that piece of history. When you don’t actually ship hardware, you have a mediated role. Somebody else has to ‘excel,’ if you’ll excuse the pun, or blow it.”

True enough. And while Microsoft’s greatest innovations, as Glaser says, have come from the applications group, Apple’s greatest contributions are in system software. Clearly, as Glaser points out, the PC is an excellent content delivery mechanism. Just as clearly, Apple’s mapped out its turf as a vehicle for delivery of time-based information such as video and speech. It’s another example of where the two companies diverge.

Whatever the differences between Apple and Microsoft, however, there is obvious appeal — and great potential for success — in Microsoft’s version of the future, with a consistent hardware and software architecture ranging from simple consumer products up through sophisticated networks of business computers.

But the success of consumer electronics companies has been in their ability to cooperate with the other big players. Sony, Philips and Matsushita have very different beliefs and approaches to their markets, but when they joined together, they changed the face of the entertainment industry. The big question for all concerned is not whether the PC industry model will map to the consumer market, but whether we really want it to.

Denise Caruso