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June 6, 2012

Excerpts: Stolen!, an Excerpt from Digital Wars

By: 800-CEO-READ @ 3:57 PM – Filed under: Management & Workplace Culture

Reading JP Mangalindan's recent story about how the browser wars are back in Fortune reminded me of a great book by Charles Arthur that Kogan Page put out in late April. Arthur is The Guardian's technology editor, and the book is Digital Wars: Apple, Google, Microsoft, and the Battle for the Internet. It's a fascinating history, well told and concisely written. It's written so concisely, in fact, that he needed just five paragraphs for his introduction. In the final paragraph, Arthur writes of the beginning:
The first time that all three found themselves sharing the same digital space was 1998. They could not know of the battles to come. But those battles would be world changing.
World-changing, indeed. I'm only 31 years old, and the world of technology I remember from my youth looks nothing like it does today. Today's youth have never had to untangle a long phone chord, or wind up a busted cassette tape with a Bic pen. Their phone and music device are now the same thing, and there's no chord or magnetic tape to tangle with. They've never had to consider how much a long-distance phone call would cost—probably have never even heard the term "long-distance call." And if they've ever used a stylus, it's most likely been on a touchscreen, not a long-playing microgroove record.

That is just a small snapshot of the change these three companies have effected in our daily lives, and Arthur's history of covering the industry, following the intricate details of those changes every day for the last 25 years, has made him one helluva digital war correspondent.

Below we have an excerpt from Chapter 4, "Digital music: Apple versus Microsoft." It is a story of failed diplomacy in one digital battle, and how much that can cost.

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Stolen! BY CHARLES ARTHUR

On Sunday 3 October 2004, Steve Ballmer blew through London as part of a European tour. He was lined up with various meetings, including a couple of media events—a one-to-one meeting with the Financial Times and the other with a round table of technology journalists from newspapers and prominent online sites.

He had plenty on his mind. Oracle was making a $9.4 billion bid for PeopleSoft, which provided human resource management and customer relationship management systems, just the sort of field Microsoft might want to compete in. Ballmer indicated to the Financial Times that Microsoft would not be entering the bidding. If Microsoft was going to buy anything, he implied, it would be Germany’s SAP—a leading maker of CRM software—for which, Oracle had revealed in June, Microsoft had privately begun bidding in June 2003.

With the discussion about billion-dollar business deals done, Ballmer went on to the round table meeting. He was a veteran of such encounters; it was unlikely that he would encounter anyone who would know more about almost any subject than him, and certainly nothing regarding industry information. He could feel confident.

Ballmer began by declaring that he had a “fundamental optimism” about the future of information technology and Microsoft’s role in it, and especially integrated devices: “the number of smartphones [presently] sold is relatively small,” he said. “That number will grow.”

The questions moved through the European Commission antitrust case (which was grinding on over the tying of Windows Media Player to Windows, and access to Windows systems), the problems of security with Windows (“There are bad people out there in cyberspace and they are not going to go away”), browser rivalries, and spam.

Then came the question. “Despite digital rights management, isn’t piracy still rampant?”

The transcript by Jack Schofield of the Guardian, one of the attendees, records Ballmer’s reply:

Ballmer: Let me first talk about DRM. Now we’ve had DRM in Windows for quite some number of years, there’s nothing new about that...

Journalist: [interrupting] Having said that, that hasn’t stopped, you know, pirates from running rampant...

Ballmer: Of course not: nothing does! I mean, what’s the most common format of music listened to on an iPod?

Journalist: On an iPod...

Ballmer: Stolen! Stolen!

Journalist: [confused] On an iPod?

Ballmer: Yes. Most people still steal music. [laughing] The fact that you can buy it and it’s protected doesn’t affect the fact that most people still steal [music]. I’d love to say all problems have been solved, whether it’s iPod/iTunes—where Apple has done some nice work, no doubt about it—but the truth of the matter is we can build these technologies, but as long as there’s alternate forms of music acquisition, there still will be ways for people to steal music.

What Ballmer, then 48, meant was that it was inconceivable that someone under 25, as most iPod owners probably were, could possibly own the 8,000 songs you’d need to fill the largest 40GB iPod released that July; iPods at the time couldn’t display photos directly. Logically, the majority must have been “stolen”—downloaded from file-sharing systems.

On its face, this was true. But the chief executive of a truly consumer-facing organization would have recognized two elephant traps to avoid. First, telling iPod owners that they’re knowing thieves (which the news organizations did with delight, using headlines such as “iPod users are music thieves says Ballmer”) is hardly good marketing, especially if you want those people to use your forthcoming products.

Second, the majority of iPod owners used Windows PCs. (Jobs had con-firmed this at the European iTunes launch.) In that case those being insulted by Ballmer for their alleged thieving were using software from his company—and could feel doubly aggrieved. Jobs’s words at the April launch of the European store make an interesting contrast: “Piracy is the biggest market for downloads—we have to understand it and offer a better product,” he said. Conciliatory rather than confrontational.

Ballmer’s real error, though, was failing to realize the loyalty that iPod owners felt. The woman in the Guardian’s feature section pitying her friend with the MiniDisc was subconsciously preening about owning an iPod. Ballmer hadn’t grasped the emotional attachment and how, when you attack something people feel emotional about, they will react emotionally.

His attitude was entirely natural for someone more used to dealing with the corporate customers who would be expressing outrage at the wholesale theft of their content via file sharing. Had the room been filled with music executives, they would have been hanging on every word, waiting to hear what silver bullet Microsoft’s coders had created to solve the piracy problem. To a bunch of journalists writing for a consumer audience, though, he came across as gauche.

“Part of the reason people steal music is money, but some of it is that the DRM stuff out there has not been that easy to use,” Ballmer said. “We are going to continue to improve our DRM, to make it harder to crack, and easier, easier, easier, easier, to use.” He agreed that it wasn’t going to be simple, and pointed to his own child as an example: “My 12-year-old at home doesn’t want to hear that he can’t put all the music that he wants in all of the places that he would like it.”

Lapping it up, another journalist asked: were they close to a tipping point with digital media devices and home entertainment? “I think we are close to the tipping point, to where we may get a device that can take on critical mass,” Ballmer agreed. “There will be an explosion in demand. People weren’t really sure where these new devices fitted in. At 200 bucks, maybe, but at 300 or 400 bucks it was too hard to bootstrap the device type.” He paused:

You mention Apple, and with great respect for Apple I don’t think you’ll get... there’s no way anything gets to critical mass with Apple, because Apple just doesn’t have the volumes. They don’t have the volumes anywhere in the world; they don’t have the volumes particularly in some countries... The critical mass is going to have to come from the PC, or the next-generation video device. He made another comment that is interesting in hindsight. One journalist asked: “Microsoft’s smartphone has been a slow seller [its Pocket PC-based phones sold such small numbers Microsoft didn’t announce sales figures until 2005, when they hit nearly 6 million], while Apple and other companies have stolen a lead in portable music player markets. How will Microsoft tackle that?”
Ballmer’s reply:
Over time most people will carry a phone that has a little hard disk in it that carries lots of music. Mobile phones are about 600 million units a year. Now, how many devices do we want to carry? We have to have a more compelling value proposition. [Research In Motion’s] BlackBerry has a niche market position [at the time, around 2 million users worldwide] but it’s not a very sticky device. It allows you to make bad phone calls but it’s a good Exchange client. We will see an explosion of larger keyboard devices.
What’s interesting about that comment—apart from how well it illustrates Ballmer’s gadfly salesperson’s mind flitting about the subject in search of a compelling way to persuade people to buy an integrated device that could make phone calls and play music—is its lack of technological foresight. First was that most people would carry a phone with a “little hard disk.” Apple had already bought up supplies of solid-state flash memory for an iPod with no moving parts, and when meeting me four years earlier Hase had introduced the idea of a 1-gigabyte flash chip—enough to hold about 250 music tracks. The Motorola phone being co-developed with Apple would store its songs in flash memory; and any technologist knew that prices for flash storage were, like those for hard drive storage, halving every year.

Second, the idea of the explosion of larger keyboard devices is classically short-term thinking that also ignores the relentless march of processing power. Although touch computing was still mainly in the laboratory, it was already conceivable: Nokia had that year built a prototype touchscreen phone, and a small company called FingerWorks had been working between 2001 and 2005 on “multi-touch” systems for screens, and making presentations at conferences. A technologist—an engineer—keyed into the industry’s future would have known of it and seen its direction.

But it was Ballmer’s remarks about the iPod and piracy that captured the moment. The internet was soon aflame as the comments were spread from news site to news site; the story itself barely mattered. People didn’t like being called pirates by extremely rich people. Ballmer acknowledged that he might have put a foot wrong in subsequent interviews that week. “I don’t [recall] what I said, but it was bad,” he told some European journalists. But soon there was to be a growing gap between what the iPod offered—a simple system for getting music from your computer to a music player—and Microsoft’s efforts to build a DRM system called “Janus” that could be the Windows of the digital music player world.

Excerpted from Digital Wars: Apple, Google, Microsoft, and the Battle for the Internet Copyright © Charles Arthur, 2012 All rights reserved Reprinted by arrangement with Kogan Page Limited

About the Author
Charles Arthur is technology editor at the Guardian. An experienced journalist, he has also worked at the Independent and New Scientist—all adding up to over 25 years in technology and science journalism. He has met all the senior figures in the technology industry and has extensive experience of reporting on the activities of Apple, Google and Microsoft. He has interviewed Bill Gates and Steve Jobs on numerous occasions. Charles has a large following and regularly speaks, writes and blogs on all topics relating to technology.