Charles Arthur On Technology

A licence to print money
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The Independent Online

Microsoft has just reported its quarterly financial results, and they're the size to make any normal company weep. Its revenues grew by 17 per cent to $9.18bn (£5.2bn), though its profits fell by 38 per cent to $1.32bn. Surprisingly, that's only a 14 per cent profit ratio, but clearly Microsoft was just having an off day.

Microsoft has just reported its quarterly financial results, and they're the size to make any normal company weep. Its revenues grew by 17 per cent to $9.18bn (£5.2bn), though its profits fell by 38 per cent to $1.32bn. Surprisingly, that's only a 14 per cent profit ratio, but clearly Microsoft was just having an off day.

You can guess where the overwhelming majority of that money came from: selling licences for the Windows operating system for PCs and servers, and the Office software suite. Microsoft has an effective monopoly on the desktop for both operating systems and that productivity software. Which isn't illegal, by the way; it's only using that monopoly to squeeze out players in new markets that is, as the US courts ruled in 2000.

But there are signs, if you look closely enough, that the Windows licensing engine is starting to make Microsoft a bit, well, sclerotic. Recently the magazine BusinessWeek asked how well the company is going to handle moving into its corporate middle age. Bill Gates and Steve Ballmer were in no doubt that innovation would carry it forward. Not necessarily innovation that they'd come up with inside Microsoft, but also the sort where you make an idea workable. (It's an interesting definition, which shows that Microsoft definitely works off a different dictionary from everyone else.)

So take a couple of recent examples of "innovation" that have come from inside Microsoft, and see what it's done to itself. First there was "Smart Displays", which also went under the codename "Mira". This seemed at first rather a neat idea: a detachable flat screen that you could take anywhere in the house, which would be linked back to your main computer and able to display and query content on that system. Now, lots of people might have had that idea at some stage, but only Microsoft has the muscle to develop an operating system interaction that will work for it.

Trouble is that Smart Displays were hobbled almost from the start because they had terrible implications for the number of Windows licences Microsoft could sell. A Smart Display doesn't need a whole Windows XP licence, because it's just a little screen with a wireless connection, and no hard disk. It needs only a cheap Windows CE (the "embedded" version of Windows) licence. You could imagine a rather neat setup where a family could buy a high-powered machine and get a few Smart Displays that would all connect, and you could all access your data remotely all over the house. After all, Windows XP is multi-user, right?

Unfortunately such ideas brought the Windows licensing people at Microsoft out in hives. What! Sell four or five lousy CE licences instead of the same number of Windows ones? That's financially insane, even if technologically neat.

So Smart Displays were hobbled: only one person at a time could use a PC with a Smart Display attached. If you stuck a monitor to the main box, you'd just see a black screen. Mad, quite mad, and the idea quietly died late last year.

Next there's the Tablet PC, which is a step up from Smart Displays because it really is a self-contained PC. Gates has said loudly that it'll be the most popular form of PC sold in the US by 2007 or so. However, he's hardly helping it along by pricing the Tablet version of XP higher than the standard version of the operating system - meaning that manufacturers, who are already struggling with the higher costs of upgrading factories and persuading customers to try an entirely new computer shape, have to pay more for their licences. Jim Wong, the head of the products group at the PC (and Tablet) maker Acer, called the situation "a mess": the result is that Tablets cost about $500 more than standard laptops, because people have been making laptops for absolutely ages. Tablets, though, are a new game. Standard marketing methods would suggest it's wise, if you're trying to draw people towards a new market, to lower the price. No such luck; Microsoft's implacable Windows licensing managers hold sway, because they aren't interested in growth or new markets; they want to protect the company's revenues. Don't forget - 17 per cent revenue growth.

And then we come to the Media Centre PC (or Center, depending which country you're buying it in). This is intended to embody the "digital hub" concept that Microsoft has "innovated" from Apple's Steve Jobs, who first enunciated it in January 2001. The Media Center connects to your TV and/or hi-fi and can record TV shows that you can pause and play back, rather like a TiVo or Sky+ box. (You'll need to keep plenty of disk space free, of course.) The better ones have DVD burners, though the DVDs you burn from TV shows will play back only on the machine that made them because of piracy fears. (Imagine how things would have been if you could pirate videotapes. Oh wait, pirates already have done. And they pirate DVDs like it was going out of fashion.)

The biggest problems with the Media Center concept are twofold: it's a PC, which means that in most homes it's going to look ugly stuck in the front room, yet that's where it needs to be to do its work; but being a Windows-licensed PC, you won't be able to use it to record TV as one user and do e-mail as another. That might seem trivial, but if you wanted to record a program at a particular time and your spouse or child is on the Net, you don't want the two to interfere. I'd suspect that the logic behind this is down to Windows licensing again, because Windows XP is based on Windows NT, which in turn is a server technology able to deal with multiple users at once. Interestingly, there's a product for the Apple market - EyeTV from Elgato - which does allow precisely this multi-user functionality. (I'll review it in a forthcoming week.) As for letting lots of people use a single machine - well, it's innovation, but not as they know it in Redmond. Still, look at those revenues!