WATPA: FW: NYTimes - Microsoft Is Ready to Supply a Phone in Every Computer

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From: Norman J. Jacknis (norm@jacknis.com)
Date: Wed Jun 13 2001 - 21:22:46 EDT

In case you didn't see the front page of yesterday's NY Times. I don't know if it will be Microsoft or Cisco or someone else, but quality voice over the Internet is beginning to happen.


-----Original Message-----

Microsoft Is Ready to Supply a Phone in Every Computer


Microsoft's new Windows XP operating system for PC's goes further
than ever before in commandeering the capabilities of the most
widely used desktop tool in America: the telephone.

The ability to use the personal computer as an "intelligent" phone
has been viewed largely as a curiosity by the computer and
telecommunications industries, not to mention by consumers.
Internet telephony has mostly not been high quality, and
conversations are frequently plagued with static and delays. It has
also been difficult for computer telephone callers to find each
other without inconvenient and sometimes costly third-party
directory services.

That is likely to change rapidly as Microsoft's new software
prepares to exploit the next generation of the Internet, offering
computer-based telephony with better-quality voice than before and
with more powerful features than the traditional phone.

And that has some high-technology executives wondering whether the
telephone companies are going to be the next target in Microsoft's

Microsoft is preparing to include both high-quality telephone and
directory features in Windows XP, which is scheduled to be
commercially available on Oct. 25.

Weaving improved versions of features Microsoft already offers,
like online video meeting software and Internet voice chat, and
integrating them with a more sophisticated version of the company's
identity system, known as Passport, Microsoft asserts that it will
transform the very nature of the telephone.

In the future, not only will Internet telephone calls be higher
quality than on today's telephone network, but the personal
computer will offer new features like the ability to tell whether
the person being called is at her desktop computer before the call
is made and "follow-me" capabilities that let the network track a
person's location whether she is at the desk, at home or reachable
by cellular phone.

One favorite voice and computer capability described by
Microsoft's chairman, William H. Gates, is the ability to call a
restaurant and have its menu pop up on a computer screen during the

Moreover, Internet telephony may offer Microsoft powerful new
revenue potential from subscription services, like Caller ID and
voice mail, in which it will begin to compete with traditional
telecommunications companies. The company has said that it is
trying to generate new subscription revenue from all of its
software products as part of its new Internet strategy, known as

That new power has some of the company's competitors worrying that
Microsoft is planning to steal revenue from the telecommunications
industry in the same way it undermined competitors like Netscape in
the software business - by adding free features to its operating

If telephone calling becomes a standard free feature of the
Microsoft operating system, they say, it could bring huge changes
to the telecommunications landscape.

"Microsoft is going to suck the value out of the
telecommunications companies," said David Isenberg, a former Bell
Laboratories researcher who has written about the impact of the
Internet on traditional communications networks. "Microsoft is
going to do end-to-end Internet telephony, and they're going to do
it right."

For longtime experts on the communications and computer
industries, Microsoft's move is not a surprise.

"I don't think it's shocking at all," said Reed E. Hundt, a former
Federal Communications Commission chairman who is now an adviser on
information technology at McKinsey & Company and a member of the
board of the Intel Corporation. "It's like predictions of
earthquakes: you know it's statistically certain to occur, but it's
still kind of rattling when it happens."

Microsoft executives said that the company was discussing the
relationship of Windows XP with telecommunications and Internet
companies and that it might announce new alliances before it begins
its operating system this fall.

"I think it's highly unlikely that we will become a network
carrier," said Craig Mundie, Microsoft's senior vice president for
advanced strategies. He acknowledged, however, that the company was
looking to produce revenue from new telephone-based services. "To
the extent that we can add a cool capability, maybe it's possible
that we can make it a subscription service."

That is likely to mean that the line between the telephone
industry and Microsoft's emerging .Net Internet strategy will be
increasingly blurred.

Even if Microsoft does not become a network carrier, it presents a
potentially formidable challenge to the regional phone companies.

It is clear that the regional phone companies "wonder the same
things the Netscapes have wondered: are they friend or foe?" said
Brad Garlinghouse, chief executive of Dialpad Communications, an
Internet telephony company in Santa Clara, Calif. "Any time you
have a competitor with $20 billion to $30 billion in cash that's a
scary proposition."

Currently, to make a call from a PC to a telephone it is necessary
to have a subscription with a third- party Internet telephony
service like Dialpad or Net2Phone.

But in the future, Microsoft competitors say, the software company
will move to rely less on third-party providers and more on
Microsoft's own emerging .Net software strategy, known as

Hailstorm is intended to aggregate a wide range of personal
information, including buying habits, calendar and contact
information as well as "presence" information. Whether a computer
user is in front of the computer and available for calls or
traveling in a foreign country is a piece of information that will
be held by the company's network, raising privacy and competitive

Industry executives say the telephone companies have until now
believed that voice over the Internet was a competitive threat that
was in the distance and they are only beginning to awaken to the

"The phone companies should be increasingly worried," said Andrew
J. Kessler, a partner at Velocity Capital Management, a Silicon
Valley investment firm.

The phone companies themselves argue that they are very much aware
of Microsoft's looming presence, but they argue that it will face
obstacles entering their markets.

"I think we've woken up to Microsoft," said David Nagel, AT&T's
chief technology officer. "There is an enormous difference between
putting a piece of software code in a box and having a working

Microsoft's major current competitor in this realm, America
Online, has voice features similar to those found in current
versions offered by Microsoft, but has yet to announce any plans
for an improved and integrated service of the type expected in
Windows XP. AOL declined to comment on Microsoft's plans or its

For Microsoft, the voice communications system is perhaps one of
the best examples of how its legendary persistence can lead to the
creation of a formidable capability that has long been dismissed by

Microsoft has already begun shifting its focus to the personal
computer as a hub of home services and entertainment. In recent
weeks, ads for Microsoft's MSN online service have focused on the
idea of shifting telephone conversations away from the home phone.

In one commercial, a teenager who has had her phone privileges
taken away by her mother jokes with a friend about her mother's not
being aware that it is possible to have a voice conversation on the

The company began putting voice features in its operating system
as long ago as 1996 with its Net Meeting program, with the idea of
making voice, video and data collaboration possible. Now it will
take that technology and integrate it with its Windows Messenger
software and the .Net Passport service, creating a single
consistent mechanism for using the computer as a telephone in
Windows XP.

"One of the things we were really committed to in Windows XP was
to provide an integrated customer support mechanism," Mr. Mundie
said. "Once we achieved that, it doesn't matter if you call
Microsoft because you have a problem with Office or you call a
friend" because all calling will be done in the same way.

Consumer advocates are concerned about the Microsoft voice
strategy. They say that both Microsoft and AOL are creating
proprietary platforms for new voice services that will limit
competition and hurt consumers.

"This is extremely troublesome from the point of view of market
competition," said Gene Kimmelman, co-director of Consumers Union's
Washington office. "Consumers are not well served by two enormous
fortresses. There needs to be more openness rather than less."


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