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A modern-day Gerstner is needed to cure all of Microsoft’s ills

Time for Ballmer to move on...

Recently the MPEG LA patent pool issued terms for licensing the Microsoft VC-1 codec, which is the standard based on the Microsoft codec bundled in its Media Player. Out of 125 patents that are licensed by going to this pool, Microsoft only has two essential patents.

Financially it has to pay back-payments, perhaps as high as $80 million, to the patent pool, and a further $8 million a year to license technology which it allegedly invented. Instead of market dominance, what Microsoft achieved was a tax on being Microsoft imposed by intellectual property of rivals. Again it was a problem of management.

But during the 3 to 4 years that it has taken this technology to become standard, it has lost ground both in the market and in performance terms against the H.264 codec which is now standard throughout much of digital media.

The VC-1 effort has cost Microsoft both credibility and time, and today, within Flash video, the proprietary codec of On2 Technologies resides. This means that Microsoft is being beaten out of internet video by a small company with just 37 employees, despite over 200 patents that it claims in this area.

Which brings us to AT&T in its IPTV roll-out. All the major tier 1 telcos need help redefining their services, in a manner that doesn’t force them to spend too much money re-building their networks but which staves of fixed voice price erosion. If the same telephone line can be used not for one service, but for three or more services, the huge losses of fixed phone lines, due mostly to mobile fixed line replacement and VoIP, can be averted. So everything that can help is worth buying into, and IPTV and the triple play are vital.

But this hasn’t progressed as Microsoft had expected. Despite signing up 15 or so tier one accounts around the world there are three major issues, firstly that the AT&T requirements are over and above any other in IPTV, and Microsoft is reported having trouble scaling its systems to these requirements. Even if this is not the case, AT&T has major problems targeting a system that has at least two concurrent HD screens at once, a requirement that Europe, where Microsoft has the rest of its IPTV customers, won’t reach for years to come.

Hey, where did that roll-out go?

The second issue is that the US is the only place where cable operators are dynamic and well funded enough to have built out digital cable, and this has created a particularly tough environment for companies like AT&T, and Microsoft has got the brunt of this. But at the same time, the original contract with Microsoft was only for $400 million from AT&T and while this may have been renegotiated to take in Bellsouth and other acquisitions, precious few homes have yet been switched on. This means that Microsoft is almost in the position of having to force the pace on software development purely for a single customer. A Microsoft IPTV division which did NOT have AT&T as a customer, would be a very different, and rather better, proposition from the one that does.

But the third reason in that in Europe where Microsoft can argue that it has done a better job, the prospect of DVB-T terrestrial TV, well in advance of US broadcast digital TV transition, has limited the requirement for pay TV services. Add to this the fact that the European Union legal position on unbundling the local loop means that all of the Microsoft customers in those territories enjoy rivals that also have access to the incumbent telco’s lines and we have a scenario which inhibits IPTV take up at incumbents, because there is wide choice, which in turn delays any real success that Microsoft might enjoy in IPTV in dollar terms.

Of course once tier 1 telecommunications operators engage with any company, that engagement becomes an exercise in strategic account control, and that never was the Microsoft way of conducting business, it’s far more an IBM style approach. Microsoft needs the IPTV account at Deutsche Telekom so that it can launch other services with DT, not just for the revenue it can get from IPTV. So if IPTV is paying it nothing, Microsoft is forced to remain attendant and helpful for the sake of the rest of the business. This pulls Microsoft towards the IBM way of doing things, with sales and project led account control.

This in turn lowers margins and make for a far less exciting income statement. Perhaps it’s worth all that trouble, but then Microsoft becomes tied to the operator and cannot offer services which take a free ride over operator networks.

So any way you look at it IPTV is going to remain an on-going cost for Microsoft for years to come, and internal pressure to make it profitable would be far more palatable if this IPTV team was working at say Alcatel-Lucent or Cisco, where it could help shift more and more router equipment. With the arrival of someone in the Microsoft leadership ranks with views like those of Gerstner of old, MSTV would find itself on the block and sold off to one of the major telecommunications equipment suppliers, probably Alcatel-Lucent.

In gaming we see much the same thing. The Xbox loses money and only a big increase in the attach rate of games and an outright win in this generation of gaming devices would change that. Being in first place, where Microsoft is still in a price sandwich with the Nintendo Wii below it and the Sony PlayStation above it, is still an uncomfortable place to be. This is made worse by having virtually no Japanese gaming penetration, and by backing the wrong horse on High Definition DVD players.

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