Sunday, January 18, 2004

Give away the software, sell the hardware

New Economy: Can Hardware Rise Above Software?
... For Microsoft, the issue transcends online music. The foundation of Microsoft's power and leverage in the computing industry is based almost entirely on a set of software sockets known as application programmers' interfaces, or A.P.I.'s. It is those A.P.I.'s that other software publishers must adapt to in writing programs for use on Windows machines. By controlling the shape of the sockets, and what can fit into them, Microsoft has a powerful advantage against its competitors.

The Justice Department's antitrust lawsuit in the 1990's was about Silicon Valley's quarrel with Microsoft over control of the A.P.I.'s. During the trial in 1998, Apple's lead software designer, Avi Tevanian, described his company's efforts to persuade PC makers to bundle Apple's QuickTime media software with their machines and how Microsoft demanded that Apple 'knife the baby' - in other words, drop the QuickTime bundling effort.

Now, with the new Apple-Hewlett alliance, Mr. Jobs finally has a QuickTime bundling arrangement. The program, which allows for the playing of video clips on a PC, will be a standard feature of every Hewlett-Packard computer. So will another Apple software technology, Rendezvous, which is an A.P.I. designed to let the computer identify and create links to any printer, camera, music player or other digital device without complicated configuration procedures on the user's part.

Simply put, Mr. Jobs has managed to inject Apple's DNA into the PC world, meaning that it will be increasingly easy for his company to offer PC users any kind of iPod-style device - whether for music or other media - the company may create in the future.

Don't be surprised, in other words, if Mr. Jobs and Apple have many razors in the works.

Markoff knows, though he didn't say so, that Apple has always made money off hardware. Apple has long given away software (bundled with machines) while controlling what hardware would work with the software. So the iPod is only the continuation of an old business model. What's more novel is Apple's move towards software leasing (.Mac) -- something Microsoft longs to do.

IBM is bundling Linux with its non-PC hardware, so it's been giving away the (free) software and selling hardware for a while.

He's partially right about Quicktime. Yes, HP is bundling. But just as important is that iTunes, freely downloaded by millions, is a trojan horse for QuickTime. That's the bigger bundling. The Rendezvous observation is very important.

Microsoft completely controls the software industry -- with the exception of Linux which has a much smaller revenue stream. The analogy is an organism that totally occupies and ecological niche. Eventually organisms that can't compete move into another niche. Given Microsoft's power the mutations required are considerable -- software costs plummet by a rock. Eventually Microsoft is competing against "free" (not free of course, just that the costs are concealed.)

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