Wednesday, February 08, 2006


Pressuring Microsoft, PC Makers Team Up With Its Software Rivals

Pressuring Microsoft, PC MakersTeam Up With Its Software Rivals
Dell Is in Talks With Google To Use Search Services; Winning Loyalty at Set-Up
'A Magic Time for End Users'


February 7, 2006; Page A1

It takes only about five minutes to set up a new personal computer by clicking through a series of introductory screens. In that time, however, many consumers choose software and services they will often use for the life of their machine. Historically, Microsoft Corp. held great sway over this "first-boot sequence" as well as other software preinstalled in the factory.

Now PC makers including Hewlett-Packard Co. and Dell Inc. are beginning to take more control over this crucial real estate. They increasingly are trying to sell this space to service providers and software makers, such as Google Inc. After a year of sometimes tense negotiations with Google and PC makers, Microsoft has ceded ground on some key technical details.

In what would be the most significant example of this shift, Google is in serious negotiations to get its software installed on millions of Dell PCs before they are shipped to users, according to people familiar with the matter. Under the deal being discussed, Google, of Mountain View, Calif., could pay Dell fees approaching $1 billion over three years, these people estimate. The terms might change and the discussions could fail. Any agreement would be the latest in a series of similar deals with computer manufacturers the giant Internet search company has signed.

PC makers are turning their computers into the equivalent of a supermarket, capable of stocking products made by many companies -- for a price. The idea is similar to the way food companies pay grocers a fee to get space on store shelves and could help shift the balance of power in the software world.

Robert Guth discusses1 Google's negotiations with Dell to install its software applications.The company that stands to lose the most is Microsoft, which garners its largest source of revenue and profit from PC software. Microsoft for years has been able to exert significant control over what appears on the desktop because it produces the PC-industry's dominant operating system, the software brains behind a computer.

Microsoft managers warned Chairman Bill Gates a year ago that if Google started paying PC makers to carry software, Microsoft's PC-software business could become "increasingly defunct," according to a company report viewed by The Wall Street Journal. The managers worry that PC makers will demand lower prices as they package software from rivals that duplicate elements of its operating system.

Already, a consumer setting up a new H-P computer, for example, has the option to sign up for Earthlink's broadband access, AOL's online service, Symantec antivirus software and videogames from a start-up company named WildTangent. Those companies pay H-P a set fee or a share of revenue, say executives at the companies. H-P also auctions off its space: Google pays it $1 for every PC that ships with a Google toolbar -- a strip that sits atop a browser and enables users to easily operate Google's search engine -- and another 75 cents the first time a home-computer user taps the service, says a person familiar with the matter.

Under a scenario Google and Dell are discussing, Dell would set up PCs to run a few Google products straight out of the box, including software to search PC hard drives and its toolbar browser.

A Google spokesman says the company is "looking at testing various technologies with Dell" but wouldn't provide further details. A Dell spokesman says only that the PC maker is testing Google's software. H-P, Palo Alto, Calif., declines to comment on its relationship with Google.

Microsoft says it thinks the game will be won by who can deliver the best products, not those who best control users' preferences. "The desktop is readily available to anyone who wants to offer good software to customers," says Microsoft Senior Vice President Will Poole. "The customers are going to use it or not depending on how good it is."

The first few minutes after a consumer plugs in a new computer are critical for software makers. Alex St. John, chief executive of online-games company WildTangent Inc., says 70% of consumers who bought a computer preinstalled with his company's software played one of its games online within 30 days.

After setting up a new PC, consumers often don't switch to the competition or change any of the settings. The technical hurdles often are daunting, especially for home users who can't call on a corporate information-technology department for help.

Ten years ago, Microsoft used PC makers' reliance on its operating system to block competition from a browser offered by Netscape Communications. Its tactics led to a landmark antitrust suit against the software giant that eventually restrained Microsoft from using its hold on PC software to close out or limit rivals. The ruling granted PC makers greater freedom to pitch non-Microsoft software on the PC's earliest set-up screens.

Continuing Influence

Still, last summer, executives at Google, H-P, Yahoo and other companies started to worry about Microsoft's continuing influence. Early versions of Microsoft's newest web browser, which is due out this year, featured a built-in box for searching the Internet that automatically directed PCs to Microsoft's MSN search service. They feared Microsoft was using the feature to put rival search companies at a disadvantage. (A browser is the software that enables users to view Web pages; a search service trawls the Internet for requested information.)

At Microsoft's Redmond, Wash., headquarters, Chief Executive Steve Ballmer discussed a test version of the browser with executives from Internet giant Yahoo Inc., including co-founder Jerry Yang and Chief Executive Terry Semel. The Yahoo executives left concerned that Microsoft's plans could hamper their search business, according to people familiar with the meeting.

A Microsoft spokesman and spokeswoman for Yahoo, Sunnyvale, Calif., declined to comment.

Similar concerns surfaced at a Google board meeting in July: "Microsoft will limit access to Google, try to gain default settings," read a slide presented at the meeting that was made public in connection with a recently settled lawsuit between Google and Microsoft over an unrelated matter.

Google representatives voiced their concerns at a July meeting at Google's offices, arguing that Microsoft should make it easier for consumers to choose other search services, say people familiar with the meeting. Microsoft representatives pushed back and later said Google's requests raised privacy problems for users, among other issues.

Dean Hachamovitch, general manager of Microsoft's browser team, wasn't at the meeting but received a series of text messages from his colleagues who were. "Not sure they're hearing us," read one message describing the Google group, he recalls.

After months of back and forth, Microsoft backed down on some, but not all of the debates. Mr. Hachamovitch recently demonstrated the latest test version of Explorer. The built-in search box features options such as "Get Search Providers" and "Change Search Defaults" that enable users to select search engines from AOL, Ask Jeeves, Google, MSN and Yahoo. "Our overriding principle from the get-go is 'respect user choice,'" he says. "There's no desire to do anything other than that."

Microsoft was a stickler on one matter that irked Google. Anyone who upgrades to Microsoft's new browser out this year will automatically inherit their old browser's default search options. In the old browser, that barely mattered, because it didn't include an easy-to-find, built-in box linking to a search engine. The new version does, and that is a problem for Google, which is set as the default for only a tiny fraction of computer users. By contrast, Google handled 46% of U.S. search queries in November, according to research firm Nielsen/NetRatings.

Google wanted Microsoft to ask consumers directly which search service they wanted as a default when upgrading from older versions of Explorer -- a change Microsoft felt was intrusive. Google also wanted to know if users had already selected it as the default search provider in Explorer. "We looked at that as a major privacy violation," Mr. Hachamovitch says.

In December, for these and other reasons, Google refused to sign an agreement with Microsoft relating to the new browser's search capabilities. Microsoft left Google off the list of alternative search services. A month later, Microsoft notified Google it would be included on the list with or without a signed agreement, according to people familiar with the matter. Microsoft says after a review of its legal position, it realized it could include Google without a formal pact.

As Microsoft tackled complaints from rival search companies, it also came under pressure from PC makers about the introductory screens that appear on new computers. That is another crucial route to establishing users' preferences early on.

H-P had a thriving business offering other companies' software and hoped to extend that concept into PCs running Microsoft's new operating system, Windows Vista, which is expected to hit the market this year. When a consumer turned on an H-P PC for the first time, H-P wanted a piece of software called HP Advisor to appear, according to people familiar with the company's thinking. It would walk users through offers for third-party products and ask them how they will use their PC, according to a version of the software reviewed by The Wall Street Journal.

H-P discovered, however, that Microsoft required use of its own equivalent of HP Advisor as a condition of licensing the operating system. Some H-P managers thought it would give preferential placement to Microsoft products by automatically choosing them or displaying them more prominently. Microsoft's terms limited the amount of time and space it would allot H-P's Advisor software and by extension H-P's partners.

Guiding Principle

Microsoft executives say their guiding principle is to give PC users a quick and easy way to set up a new computer. PC makers have plenty of opportunities to add software from Microsoft rivals; "it does not need to all be piled into the first 10 minutes," says Microsoft's Mr. Poole. "That's a fairly magic time for end users and it's a time that you want to be engaging them and having them feel great about the product."

As H-P pushed, Microsoft over the past six months gradually eased its stance. It agreed to share the screens with H-P, giving the PC maker around half of any given screen where it could present its offers. Talks concerning the other issues still are under way.

"Our belief is we should provide our customers with choice," says H-P Executive Vice President Todd Bradley.

Microsoft's Mr. Poole says most PC vendors are happy with Microsoft's set-up screens, which he says strike a balance between allowing PC makers to sell services and keeping installations simple. "It's always hard to please everybody," he says.

Now Dell is in talks with Google. For the Round Rock, Texas, computer maker, the talks are an opportunity to boost revenue from software shipped on new computers. For Google, it is another opportunity to erode Microsoft's dominance of the desktop.

This fall, Dell, the world's largest PC maker, set up a competitive bidding process for Internet companies who wanted the right to load their software on as many as 100 million new Dell PCs. Yahoo pulled out of the running, and then Google beat Microsoft, say people familiar with the matter. Microsoft wouldn't comment on the bidding.

Google and Dell now are negotiating details of the possible agreement; Google co-founder Sergey Brin and Dell founder Michael Dell are playing central roles in the talks, according to one of the people familiar with the matter.

Under discussion is the placement of Google's toolbar and desktop search software on new Dell PCs, people familiar with the matter say. Google also wants Dell to use its service to by default run the built-in search box that will appear on the new version of Explorer. Such an agreement would circumvent some of Google's sticking points with Microsoft's new browser.

People familiar with Google's thinking say the proposed deal with Dell wasn't designed exclusively to strike back at Microsoft, but rather to increase use of Google's services. Still, the tussle with Microsoft over the browser settings increased Google's desire to win the Dell agreement, the people say.

One downside for Google: PC deals can be costly. Last week Google cited distribution deals for its software as one of the main reasons for a 47% climb in sales and marketing expenses in the fourth quarter of 2005, compared with the third quarter.

Write to Robert A. Guth at rob.guth@wsj.com2 and Kevin J. Delaney at kevin.delaney@wsj.com3

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