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.
- By Lee Pender
- October 01, 2006
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.
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."
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
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
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." --
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.
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
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.
Lee Pender is Redmond Channel Partner magazine's senior editor. You can reach him at [email protected].