Keeping a Safe Distance from Microsoft

ISVs need to stay close to Microsoft -- but not too close. Here's how to be an effective partner without giving away too much.

Some stories have been around for so long that they sound almost apocryphal, but they're real. References to them are scattered throughout public records and court documents. They are cautionary tales of companies that developed a close working relationship with Microsoft only to have the company glean knowledge from them and move into their markets with its own offerings. It's every good partner's nightmare.

These stories aren't just retreads or the aimless anti-Microsoft ramblings of grizzled industry veterans, either. In fact, they continue to appear today, most recently with Microsoft's creation of its own Digital Rights Management for its forthcoming Zune digital music player.

For its independent software vendor (ISV) partners, Microsoft is the mother ship: a creator of revenues, a powerful brand name that attracts customers and the producer of the operating system that lets them carry their applications to their user bases. It's critical, then, for ISVs to work closely with Microsoft, to tune their applications to the company's technologies and to have Microsoft's backing in marketing and, sometimes, development efforts. Working closely with Microsoft can produce huge benefits for ISVs, just as staying too far away can shut them out of critical opportunities for revenue and growth.

Yet those tales of past alliances persevere, reminding ISVs that they need to keep just the right distance from Microsoft-to work with Redmond as good partners without tempting the company to pull the rug out from under them in their own markets. And, ultimately, it's possible for ISVs to do just that, if they adhere to a few simple rules of engagement with the technology giant.

Redmond Channel Partner magazine repeatedly contacted Microsoft's public relations firm about this story in the weeks leading up to publication. Microsoft, through its PR firm, first declined, citing legal issues, an interview request to discuss how the company handles non-disclosure agreements with third-party software vendors. Microsoft subsequently failed to provide a spokesperson by our deadline in response to requests to discuss more generally how the company handles relationships with third-party ISVs and how it deals with sensitive information from those vendors.

Alliances Gone Awry

Plenty of stories exist to remind partners that it's wise to use caution when dealing with Microsoft. Two of the better-known tales from Redmond's history involve one former ally that survived -- and one that
didn't. The company that didn't make it was San Diego-based Stac Electronics, which, in the 1990s, successfully sued Microsoft for patent infringement. In a February 1994 article, The Los Angeles Times noted that the company negotiated with Microsoft to license Stac's Stacker technology for the MS-DOS 6.0 operating system.

By the end of 1992, however, the two companies had severed their relationship, according to a 1999 article in the San Diego Metropolitan, Uptown Examiner & Daily Business Report. When MS-DOS 6.0 appeared in 1993, it included DoubleSpace, a data-compression technology that Microsoft claimed it had developed itself. In addition, the 1999 article continues, the price of the whole operating system was half the price of Stacker, Stac's data-compression utility. Stac's sales slumped.

Stac claimed, among other things, that Microsoft had stolen its patented technology during the companies' brief courtship and used it to develop DoubleSpace, according to the San Diego publication. In 1994, a federal jury agreed with Stac and awarded the company $120 million in damages, according to the Times. Ultimately, after some wrangling, the two companies released a June 21, 1994 statement announcing that they had reached an agreement through which Microsoft would pay royalties to Stac and purchase a stake in the company; Redmond's ultimate outlay came to about $83 million. In that statement, Gary Clow, then-chairman and CEO of Stac Electronics, said, "Today's agreement immediately ends our conflict with Microsoft and ushers in a new era of cooperation between the two companies."

After experimenting with other business models, Stac went out of business in 2002.

Autobytel Inc. still exists and remains one of the Internet's leading auto-sales sites. The Irvine, Calif.-based company, though, had its own run-in with Microsoft in the mid-1990s. According to BusinessWeek, the companies partnered in the 1996 launch of what was then called CarPoint, Microsoft's online car-buying service.

The companies ended their partnership in May 1997 over differences in strategy -- but not before Microsoft had used the relationship to pump Autobytel for information on its business model, according to public statements by former Autobytel president Peter Ellis.

Ellis told BusinessWeek that Microsoft "picked our brains" during the companies' collaboration. He offered a more damning analysis -- and a warning for current and future partners-with this comment about Microsoft: "When they call you up, you think it's great, but in reality, the dance will soon turn into a nightmare." -- L.P.

Microsoft Isn't Always a Predator ...
Despite some famous incidents in the company's past, partners and analysts say that Microsoft doesn't tend to join forces with ISVs just to steal their ideas and incorporate them into its own products. Instead, they say, Redmond usually hopes to achieve mutual benefit with its partnerships.

"I don't lose any sleep worrying that Microsoft is going to take intellectual property from us," says Steve Morton, vice president of product management and product marketing for Altiris Inc., a Lindon, Utah-based maker of service-oriented management applications and Gold Certified Partner. "That's never been a concern. I don't think that from a code-level perspective that would be part of their game plan or be considered appropriate by anybody at Microsoft."

In fact, Microsoft is one of the less predatory companies in the technology industry in terms of dealing with partners, says Paul Neel, president and CEO of Espero Inc., an Edmonds, Wash.-based consulting firm that counsels ISVs on partnering with Microsoft. "Frankly, I know a lot of other ISVs that scare the heck out of you more than Microsoft," Neel says.

... But Don't Tempt the Beast
If Microsoft isn't necessarily out to get them, why do ISVs need to use caution when dealing with Redmond? Because every big company looks for ways to break into lucrative new markets, and partners that do too good a job of lighting those revenue paths without demonstrating their own value might be compromising their futures.

One CTO at a West Coast Microsoft ISV partner company, who's well-acquainted with Microsoft's dealings with third-party vendors, explains that product groups at Microsoft, such as the Exchange or Office divisions, are always on the lookout for opportunities from any source.

"There's a set of clearly defined categories of functionality [within Microsoft]," says the executive, who maintains that he has a good relationship with Microsoft but spoke to Redmond Channel Partner only on the condition that neither he nor his company be identified. "They have program managers who are responsible for finding out what the different approaches are to satisfying customer requirements in these categories in whichever way they can. They read analyst content; they read information from the press. They have face-to-face conversations with ISVs."

It's those conversations that can get eager ISVs into trouble, and Microsoft is just as likely to start them as ISVs are. In fact, the first sign of caution for an ISV should be an approach from a product group at Microsoft.

Working very closely with the sales and marketing arms from the start is a better move, despite the fact that Microsoft sometimes tells partners that the first thing they should do is to engage directly with the product group, the CTO says. In fact, he continues: "That is the last thing."

"Screwed for Sure"

So read a headline on Wired News online in August, reminding Microsoft partners of all stripes that the company is not afraid to launch its own initiatives, sometimes at their expense.

Pundits and analysts agreed that -- despite Microsoft's pledge of support for its music partners -- the forthcoming launch of Microsoft's Zune digital music player and proprietary Digital Rights Management is likely to hit the partners in the company's current PlaysForSure DRM harder than it will Microsoft's chief competitor, Apple Computer Inc., which owns the iTunes and iPod franchises. Eliot Van Buskirk's Wired news article surmises:

"This will come as a huge disappointment to Microsoft's hardware and software partners ... Microsoft's own Zune player will not support their stores despite this longstanding partnership. These partners have also been giving their internal

numbers to Microsoft as part of the PlaysForSure licensing deal, giving (Microsoft Chairman Bill) Gates' crew insights into how their businesses work. Zune must feel like a serious betrayal of trust to PlaysForSure partners."

And Michael Gartenberg, analyst at New York-based JupiterResearch, noted in his blog that "the real losers in the short term are likely to be ... former partners that

have failed to deliver market share from Apple and will now find themselves not only competing with Apple but with their former partners from Redmond." -- L.P.

Offer the "Press-Kit View"
Furthermore, the CTO says, while Microsoft won't usually pressure third parties to give away sensitive information, partners often cause problems for themselves by voluntarily divulging their strategies and putting ideas for new products in Redmond's head.

"My recommendation is not to talk about strategy at all. Talk about your existing technologies; talk about your existing products, and let Microsoft extrapolate where you're going," the CTO says. "Give the person the press-kit view of the company" -- in other words, emphasize information that's already publicly available.

It's important to remember, too, that absent protection from patents, Microsoft can use just about any information an ISV turns over to it. Even non-disclosure agreements signed with Microsoft can't protect an ISV from having Microsoft pass critical information on to product teams who might be working -- or start working -- on a competitive product.

The Problem with Patents

Patent lawsuits have made news in recent years, and Microsoft has lost its share throughout the history of the company. As such, ISVs might be under the impression that patents can protect them from having Redmond usurp their technologies.

That might be true, but patenting technology isn't as simple as it might seem. The U.S. Patent and Trademark Office Web site says that the average waiting period for a decision on a patent application is 24.6 months, meaning it takes, on average, two years for the government to process and ratify or deny a patent request.

In the software industry, three to five years can pass between the time a company files for a patent and the time the government grants it, says the CTO of one Microsoft ISV partner company. That doesn't help upstart ISVs with innovative ideas that might interest Redmond, or any other large vendor.

"Patents protect a company that has become successful," says the CTO, who spoke to RCP on condition that neither he nor his company be identified in this story. "You can't sue people based on a patent that's not been granted. There's value in acquiring patents. I strongly recommend that all ISVs acquire patents. But don't expect a patent that has not been granted to offer you much defense." -- L.P.

"Any meetings, conversations that you have with Microsoft, if there's a product feature idea that comes up in conversation, they have a right to take it," Neel says. "I don't know anyone that's been able to strike that clause from the agreements."

To that end, Neel recommends keeping a fairly tight rein on CTOs, as they often talk proudly-and far too openly -- with Microsoft product groups about their companies' technologies. Some communication is healthy, he says, but too much can open an ISV up to risk.

"I've seen companies where the CTO is so clammed up you can't get them to set foot on [the Microsoft] campus," Neel says. "That can be unhealthy." But, he adds, "One CTO went unchecked into Microsoft a week at a time. Thanks to that attitude, Microsoft's next version of Office has a lot of things in it that come from this company."

Relating a story about one of his clients, Neel adds that trade shows are a particularly dangerous place to unleash CTOs. "I watched the chief architect of this [Microsoft product] group walk up to the CTO and pick his brain right there in the booth," he says. "Don't go to a meeting with product groups for more than an hour and a half."

Keep Tabs on Microsoft
If ISVs need to be careful about how much Microsoft knows about them, they should also be diligent about knowing everything they can about Microsoft. Having a feel for Microsoft's product roadmap and what features will or won't be included in key releases of future applications is critical for ISVs that want to avoid competition with the giant, compete effectively or put themselves in a position to be acquired.

Acquisition by Microsoft, of course, is the happy alternative to unexpected competition from Redmond. But ISVs shouldn't make it obvious to Microsoft that they've set acquisition as a goal -- even if they have, according to the West Coast CTO.

"If an ISV is trying to set itself up for acquisition, it's very likely to come across to Microsoft as a company in trouble," he says. "Align with Microsoft's roadmap and figure out those areas where three years from now Microsoft won't have a solution in the same space. That's more about understanding what Microsoft is going to ship three years from now than it is saying, 'I've got this cool new whiz-bang feature.' When Microsoft wants to acquire technology, they will find you."

On top of that, talking acquisition with Microsoft can be a risky proposition, says another partner-company executive, Mike Levin of LaGarde Inc. Caution is in order even when Redmond broaches the subject.

"There's more than a few stories about Microsoft dangling acquisition, getting companies to open up and then walking away," says Levin, who is executive vice president for strategic business development at LaGarde, a Gold Certified ISV Partner and maker of StoreFront shopping-cart software based in Olathe, Kan.

Innovate and Diversify
Knowing Microsoft's product roadmap is only useful if an ISV can read it and work on applications that Microsoft can't or won't develop itself. It's important to know where Microsoft is going with its newest products and features in order to avoid those categories-or to stay significantly ahead of Redmond in them -- and develop for Microsoft's weaknesses. Microsoft is more likely to buy a company than compete with it if it wants the company's technology but can't readily develop it in Redmond, the CTO says.

"ISVs who are continuing to innovate automatically have a three-year lead on Microsoft," he says. "It's going to take Microsoft two-and-a-half to three years to release a product that's directly competitive. When Microsoft fails to implement [a technology idea] or sees that the timeframe for implementation is too long, that's when a company gets acquired."

Smaller ISVs should also use their size as an advantage in developing around Microsoft, Altiris's Morton says. ISVs focused on one or a few categories of technology can stay ahead of Redmond by releasing products faster than Microsoft can.

"It's a lot easier to turn a 1,000-person company than it is a company like Microsoft," Morton says.

ISV's don't have to be married to Microsoft, either. Neel counsels ISVs to expand their own ecosystems when appropriate, seeking to partner with other large vendors as well. His own former company, KVault Software Ltd., worked with Microsoft but also maintained partnerships with other large firms, such as storage giant EMC Corp. Ultimately, it was Veritas Software Corp. (since acquired by Symantec Corp.) that bought KVault Software for about $225 million in 2004.

KVault was acquired "a little under two years ago in a hostile market, with revenues of $24 million, for a quarter of a billion dollars with less than 200 employees," Neel says. "Realize that you have the power of setting up your own ecosystem. Realize it and fulfill it."

Be Careful, but Not Paranoid
Caution, while necessary in dealing with Microsoft, shouldn't preclude a close relationship with the company, which can be an important and lucrative partner for ISVs.

"Microsoft is not the evil empire," the CTO says. "They're out to try to make value for the company."

And partners who know how to deal with Microsoft can use their relationships with the company to make value for themselves -- without compromising their own businesses.

About the Author

Lee Pender is Redmond Channel Partner magazine's senior editor. You can reach him at [email protected].


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