Microsoft to Compete Directly with Apple

The rumors that Microsoft is working on its own portable media player and online service have now crossed the line into fact, as the New York Times and Reuters report on the companys (still not officially announced) plans to release them by this years holiday season.

Of course, Microsoft is going up against Apple.  Microsoft has been accused of using unfair tactics against independent software vendors, such as hidden system calls that other vendors cannot access.  But from the standpoint of DRM, we see little advantage.  There are already many Windows Media-compliant devices out on the market already, and none of them have put much of a dent in Apples dominance, at least in the music market (the video market is inconclusive).  Windows Media DRM was designed to be a lot more flexible than Apples FairPlay and to work with a wide variety of devices.

Microsoft intends to create a seamless experience that integrates the portable device with an online service.  This is part of iTunes appeal.  One question is whether other Windows Media-compliant devices will be able to use the Microsoft service, or whether it will work exclusively with the Microsoft device.  It is too late for Microsoft to make its new service exclusive to its own devices; besides, a vertically integrated strategy does not guarantee success, as Sony now knows. 

We suspect that other Windows Media devices will work with the service, but Microsoft may build premium features in that will only work with Microsoft devices.  This will involve, among other things, establishing rights to content that are turned on for Microsoft devices and turned off for others.  For example, the Microsoft device might have video quality that is better than, say, the Creative Zen; the company may subsidize the incremental cost of a better video display in order to grab market share. Microsofts service could offer video in the enhanced quality for Microsoft devices only. 

A more important example is wireless connectivity, which reports have confirmed will be built into the device and service so that users can obtain content over the air as well as through PCs.  This design decision must have touched off a significant philosophical battle within Microsoft, whose longtime strategy has been to funnel everything through PCs. 

Apples over-the-air strategy has been a notably rare failure for the company.  Over-the-air music services have proliferated in Europe and Asia, but have been slow to take off in the US.  We strongly suspect that Microsoft will use WiFi instead of (or in addition to) relying on wireless telephony services in order to leapfrog Apple and the rest of the competition.  The wireless telephony infrastructure in the US is barely capable of supporting over-the-air downloads of audio content and is hopelessly inadequate for video.  At the same time, many municipalities are building pervasive WiFi networks, and the longer-range WiMax is around the corner.  Finally, using WiFi would make Microsoft less beholden to individual wireless carriers, as Apple has been to Cingular.

The new device and service will become part of Microsofts gathering momentum in the wireless device arena for Windows Media DRM.  Just this week, Microsoft announced that Bouygues Telecom (Frances third-largest carrier) will launch a mobile music service in early 2007 with Microsoft Windows Media-compatible devices.  In contrast, the only announcement so far this year about OMA DRM 2.0 deployment came about a month ago from Viaccess, whose Purple-Safe client software (which supports both OMA DRM 1.0 and 2.0) will be incorporated into mobile phones from Sagem.  No carriers announced services for the latter devices.

We dont believe that whatever device Microsoft launches this year will have large, immediate impact on the market.  But we suspect that content owners will greet Microsofts initiative warmly.  More vigorous competition will result in better services for consumers as well as more leverage for content owners in this market.