Microsoft Makes Nice in D.C.

The software giant tackles TV issues—gently

Microsoft Corp. tore through Washington's lobbying scene like a tiger
seven years ago, with the same bluster it used to conquer the computer

Today, company Chairman Bill Gates is more like a pussycat, taking a
softer approach in the nation's capital by brokering deals with rivals and
settling scores in digital-age industries. The new approach is especially
apparent in television, where policymakers are fighting over two issues
critical to Microsoft's future in the business: copy-protection for video
content and standards for cable Internet telephone service.

Microsoft has a big incentive to make sure the growth of the broadband
market isn't bogged down by internecine warfare between competing industries
seeking even the slightest regulatory advantage over rivals. Annual revenues in
the U.S. broadband market are expected to climb more than 80% over the next
four years, to $29 billion, according to IDC Worldwide. Capturing a chunk of
that growing market would help the company maintain double-digit growth despite
the maturing of Microsoft's core PC market.

In the same way Gates grew an enormous business by selling Microsoft's
ubiquitous operating system to every PC maker, he aims to be a critical
supplier, if not the critical supplier, for video and
voice software to every broadband service provider.

“Their large presence in Washington has certainly won them lots of
friends on the Hill,” says Kerry Knott, Comcast's chief lobbyist. “They
are also in a mode to win friends within the industry.” Knott is a former
Microsoft lobbyist who worked there during the company's more combative

The hard truth is that Microsoft needs allies in Washington and can't
afford enemies anymore. Already, angry competitors have exposed Microsoft to
billions in antitrust damages. Further antagonism from rivals could lead key
Microsoft products to be delayed in the future if vindictive competitors ask
regulators not to provide necessary approvals for critical components.

There was a time when Microsoft didn't need to worry about this kind
of risk from Washington; PCs and their software didn't require regulators'
sign-offs. Now, however, FCC approvals are required for many of the new
products Microsoft is counting on for growth. For instance, Microsoft can't
alter its TV copy-protection software without FCC approval. It also needs the
agency's approval to update Internet-voice applications used for Xbox online

Microsoft's deals to provide program-guide software for Comcast and
SBC are two recent examples of its determination to win friends—and make
money—in the television business.

In Washington, Microsoft is just as likely to back away from a lobbying
or legal battle. Rather than join TiVo in a fight with Hollywood and the NFL at
the FCC last summer, Microsoft accepted demands that PC video software block
movies and sporting events from being streamed over the Internet beyond a
user's home, even to vacation cottages and other properties they might

Also, Microsoft settled another legal battle last month by rejoining the
Computer & Communications Industry Association after the trade
group—which also includes rivals Oracle, Sun Microsystems and Red
Hat—dropped its antitrust claims against Microsoft in the U.S. Supreme Court
and the European Union.


Going forward, Microsoft is trying to persuade warring industries to
strike deals over digital copy-protection and Internet-telephone standards.
Microsoft also is cozying up to regulators to help them create new high-speed
Internet services that will compete with cable and telephone.

Another factor driving Microsoft's quest for allies is the
less-than-stellar performance of MSNBC and its online magazine,
Slate. Gates now realizes that Microsoft's future lies
not in competing with content providers but in providing them software for
delivering digital programming.

Legg Mason analyst Blair Levin likens Microsoft to a sports agent who
wants to maximize his own revenue by promoting his clients without hurting the
profits of the teams they play for.

A Stark Contrast

Such willingness to strike deals contrasts starkly with the combative
stance Microsoft took in the mid '90s. Gates rocked the National Association
of Broadcasters' convention in 1997 when he announced a $425 million deal to
buy WebTV. Two months later, he acquired a $1 billion stake in cable giant
Comcast. His subordinates even promised to deliver 40 million
“broadcast-enabled” PCs by 2000.

He also fought a bitter battle with broadcasters and TV-set
manufacturers to make DTV pictures more compatible with PC screens. But
Microsoft gained little from the battle. Although Microsoft persuaded
regulators to permit the “progressive” format as an option for DTV sets,
the lobbying victory won Microsoft few practical gains. Today, broadcasters
continue to prefer pictures based on “interlaced” scans.

“Microsoft needs to optimize the size of market instead of winning
clear-cut victories over rivals for any specific product,” says Legg
Mason's Levin. “I don't know if Microsoft has any natural enemies