Mr. Softie goes online – will “strong arm” business tactics work with Web 2.0?

Fortune Magazine’s blog post "The hard side of Mr. Softie", where some old school strong arm tactics are ascribed to Microsoft in trying to get startup  Web 2.0 companies to use Windows Live Messenger is interesting in a couple of ways.  Dare Obasanjo (and some commenters on the blog post) point out that Microsoft has an interest and an obligation in persuading new companies that are trying to leverage Windows Live Contacts to use them correctly (ie: not store the user information themselves, causing all manner of security issues).  One of the commenters said:

Do you know what a startup does with the username and password you provide when it imports your Gmail contacts? Do they store it? If they do, is it secure (including physically)? If they don’t store it, are you sure the startup is scrupulous?

It is scary how little people care about this stuff. And then you have respected publications not getting it.

Yahoo, Google and Hotmail provide secure means to do such stuff. I think it is incumbent on them to ensure that their users privacy is maintained in the Web 2.0 world.

And indeed there is a legitimate argument for Microsoft protecting its contact stores, which is what Dare focused on.  However, there’s more going on here, if the Fortune article is correct about the tactics Microsoft is employing to try to persuade these companies to get on board:

If the company wants to offer other IM services (from Yahoo, Google or AOL, say), Messenger must get top billing. And if the startup wants to offer any other IM service, it must pay Microsoft 25 cents a user per year for a site license.

If, however, the startup decides to use Messenger exclusively, the licensing “fee will be discounted 100 percent.”

Such a deal!

Or not. The standard Microsoft term sheet being shown around the Valley also instructs  startups that if they want to offer search at any point in the future, they must agree “to negotiate in good faith for a period of sixty days exclusively with Microsoft on the terms under which Microsoft may provide such search service functionality…”

In our question to him, Bill Gates was telling in his assessment of where Windows Live fits in the business model:

All those consumer services are basically big, big volume. They’re tiny businesses in a sense, but they’re very important for the population of users that you connect up to and the opportunities you get out of that.

Later in our discussion with him, Gates described Microsoft’s focus early on:

The breakthrough business idea of Microsoft, which is really 1974, is the idea of creating a critical mass of software developers on a platform, and that there was no software industry, there were five companies doing mainframe software, and we wanted there to be a software industry. So, a certain openness about our developer tools, our APIs, flying all over the world convincing ISVs to do something, that was my 1970s and 1980s, begging people to write software for MS-DOS. No, I didn’t have the megaphone of the Internet or of the sort of hyper success that Microsoft would achieve by the mid ’90s that meant that business writers or people were going to write about whenever we were doing something.

So, we certainly weren’t closed. We were out there just begging people to write software. Remember, people didn’t really believe in personal computing, then they didn’t believe in graphics user interface. They thought, oh, this is too slow, it’s too hard to write the software. It took a lot of evangelization, going out convincing people to do things.

But what Microsoft called "evangelization", others called "strong armed business tactics".  There are many many examples, but this article from 10 years ago alludes to the type of "salesmanship" that got Microsoft to where it is today:

"I’ve heard many, many second-hand reports of extreme hardball tactics that have knocked competitors out of markets, stalled products and forced vendors to buy Microsoft products even when they weren’t shipping Microsoft products," Michalski said. "I think this is a Microsoft core competence and there’s likely some fire here."
Michalski acknowledged that the reports of Microsoft bullying were second-hand, but added, "I’ve heard too many of these kinds of stories for them not to be true."

The article goes on to offer up more examples of the business practices that came to be synonymous with Microsoft:

Mitchell Kertzman, CEO of Sybase Inc., compared a call he got from a Microsoft official over Sybase marketing of a competing technology to a threat from the mafia, according to the WSJ.

And a consultant for Thailand’s National Science and Development Agency said he received at least 10 e-mails from Microsoft people complaining about his choosing Netscape software over Microsoft software, the report said.

"We, unfortunately, have been told many things in confidence" about Microsoft pressuring other companies, said Ed Black, president and CEO of the Computer and Communications Industry Association (CCIA), a lobbying group that represents a cross-section of software and hardware firms, of which Microsoft is not a member.

"But those reports clearly confirm the sense we have of the kind of heavy handed and even abusive practices that Microsoft has used," Black said.

It was clear from our discussion with Bill Gates that he considers Windows Live to be "a very small business", but one that is going to grow fast, and it’s not surprising to start hearing about Microsoft breaking out the old tried and true tactics to build the business.  Windows Live is very consumer focused, however, and "a threat from the mafia" is not going to go over the same with consumers who are offered a series of choices, only one of which (and not the most popular one, to be honest) is Microsoft.  In this new world, Microsoft is best served by concentrating on making their offerings better, by finding someone to stand as the face of the company, and treating customers with respect.  It would do well to leave the strong arm tactics to decades long gone by.