Case Study The Coopetition Between Microsoft Versus AOL

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Microsoft and AOL have been bitter rivals for years. In the mid-1990s, AOL, the on-line service provider was worried about being marginalized on the desktop by Microsoft with its new service MSN Explorer, which had been launched in August 1995. In November 1998, AOL bought Netscape Communications, the leading Internet browser at that time and teamed with Sun Microsystems in order to create an alternate standard for servers and software for consumer-electronics devices to challenge Microsoft. In fact the alliance failed. Netscape's share of the browser market plummeted, while iPlanet, the software alliance between AOL and Sun gradually dissolved.

In October 1999, AOL came up with another plan to undermine Microsoft by investing $800 million in PC maker Gateway. AOL became the default ISP on Gateway PCs and the two companies announced the launching of a string of consumer-electronics devices. The first one was the Touch Pad, a Linux based home Internet terminal launched in November 2000, but 3 months later Gateway fired its CEO and killed its line of consumer electronics.

In the meantime, Microsoft had not managed to overcome AOL. In 2002, its MSN service had only 9 million subscribers, far behind the 32 million global AOL subscribers, and was losing money.

In May 2003, the two firms decided to make peace. Microsoft agreed to pay $750 million to AOL Time Warner to settle an antitrust lawsuit filed by AOL on behalf of its subsidiary Netscape. They also set a 7-year licensing agreement that allows AOL to use Microsoft's Internet Explorer browsing technology in its Internet service provider service without having to pay royalties. They also decided to make their AOL and MSN instant messaging services more interoperable, which will help allow the technology to increase. They also agreed to cooperate in digital music, developing new ways for Internet users to download copyrighted content legally. This new alliance seems to match the needs of both companies. Microsoft is extremely good at selling products to intermediaries such as PC makers, but less savvy when selling directly to consumers, a key strength of AOL. On the other hand, AOL won't have to worry about the back-end software, Microsoft's core competence.

How long the alliance will last is an open question. In 1996, AOL and Microsoft decided to team up together on the desktop. It worked well since AOL subscriptions increased while Internet Explorer began to catch up with Netscape's market share, but the cooperation died within less than 2 years.

Question 1: What are the internal and external forces at work in the competition/cooperation between AOL and Microsoft?

Question 2: Do the two companies belong to the same strategic group?

Table 4.2 Information Sources Used for Competitive Purposes

Type of Information

Type of Information

Table 4.2 Information Sources Used for Competitive Purposes

Information Source

Sales

Finance

Industry

Politics

Technology

Customers

x

x

x

Competitors

x

x

x

x

x

Reverse engineering

x

x

Benchmarking

x

x

Patents

x

x

Licenses

x

x

x

x

x

Trade shows

x

x

x

International

x

x

conventions and

conferences

Partnerships

x

x

x

Standardization

x

x

x

committees

Study trips

x

x

x

Consulting firms

x

x

x

Governmental

x

x

x

x

x

competitive intelligence

organizations

Data banks

x

x

x

x

x

Specialized press books,

x

x

x

x

x

other media types

Internet sites

x

x

x

x

x

Suppliers/subcontractors

x

x

x

x

x

Distributors

x

x

x

x

Sales force

x

x

Maintenance service

x

Employees who used to

x

x

x

x

x

work for the competition

Employment applicants

x

x

x

Former employees

x

x

x

x

x

Alumni networks

x

x

x

x

x

Fujitsu, a Japanese company, was a long-term supplier to British ICL before finally buying out the company in 1990.

Understanding a competitor's products is obviously an essential step. It can be realized through reverse engineering, which means tearing down the machines of a competitor and then trying to rebuild them. Reverse engineering has been used for a very long time as a source of innovation notably by the Germans during World War I, and by the Japanese during World War II [19]. More recently, a low-cost Chinese company, Huawei, has reverse-engineered some Cisco routers and has put similar products at roughly 40% of the price on the American market, much to Cisco's dismay.

Benchmarking (i.e., comparing the performance of a business component with others) is another source of competitive information [20]. In the early 1980s Xerox used benchmarking to obtain cost-reduction ideas. It targeted organizations in other industries that were particularly efficient in functional areas similar to those at Xerox. Hence, Toyota and Komatsu became models for quality control, American Express for invoicing, American Hospital Supply for inventory management, AT&T and Hewlett-Packard for research and development, Ford Motor and Cummings Engine for factories layout, Procter & Gamble for marketing, Deere and Company for information technologies management, Texas Instruments for strategy implementation, and L.L. Bean for warehouse operations. In the logistic and distribution area, the benchmark study of L.L. Bean, the outdoor sportswear organization and mail-order house, along with five other warehouse benchmark studies, helped Xerox improve its annual productivity gains from 3% to 5% to around 10% [21].

Patents are a useful source of information about competitors' technological know-how, as in the case that concerned the IBM personal computer. In the mid-1980s, various companies, including Compaq Computer and AMD Computer, succeeded in designing a piece of firmware, the Read Only Memory Basic Input/Output System (ROM-BIOS), which coupled the PC hardware to its operating system software. It was similar to that of IBM but did not violate the IBM proprietary microcode.

Consequently, such companies were able to make and sell IBM-compatible PCs, the so-called clones, without paying any royalty fees to IBM. For this reason, in some industries, it may be better not to patent a component or a process but to rely on secrecy. Coca-Cola or Michelin have used this rule for years to keep their technological know-how out of reach of their competitors.

Trade shows also present opportunities to examine competitors' products on display, especially new products. The Japanese have specialized in obtaining this type of information, using video cameras that are capable of capturing 90% of a product's interesting elements in less than 5 minutes.

Conferences and conventions also present the opportunity to meet competitors and to take advantage of information, often first-hand and very recent, presented at meetings. These types of events often facilitate the building of strong relations. Competitors become colleagues, and these contacts can become useful at a later date.

Partnerships with other companies for important projects are also a way to create privileged relations. In the partnership, information circulates more quickly and more easily. Sometimes this is the only reason to participate in an important project. For example, it is widely suspected that IBM wanted to stay involved in the European Union-funded JESSI project so that it could share the work of major European manufacturers.

Standardization committees, very common in the high-tech industry, often shed light on many topics. When competitors present propositions for standards, the competitors often use their own standards. On the contrary, a competitor's refusal to accept a product's standardization often reveals a company's technological, industrial, or political position.

Study trips, if well prepared, are a good source of sales and industrial information. These trips allow one to locate products that have not yet appeared on the local market or discover unknown manufacturing methods. These trips have a very high cost. To make them worthwhile, they must be planned and focused around a set of information-seeking objectives. The tasks should be divided in order to facilitate collecting information in a thorough manner but without duplication. In addition, the newly acquired information should be outlined in reports that can be distributed to interested parties.

Specialized consulting companies that follow a certain industry on a regular basis also supply sales, financial, or technological information. In the computer industry, companies such as Dataquest, the Gartner Group, the Meta Group, or Ovum send market information to their subscribers on a regular basis and provide forecasts and consulting specialists to obtain additional information.

All these companies, and some even more specialized companies or industry experts, can do targeted research in a certain field, a selected market segment, or a particular competitor. These studies are completed with the help of interviews with specialists, clients, distributors, or even competitors. The results are then analyzed and synthesized.

For consumer high-technology goods, panels are becoming a viable information source. These high-tech panels are based upon panels of more traditional goods such as detergents, soft drinks, and industrial goods. Consumer or distributor panels can very quickly follow changes in demand and a competitor's position. Panels provide a realistic picture of a competitive situation at a given moment, but the specific characteristics of high technology limit their usefulness. Particularly, a panel's predictive value is weak due to the fast evolution of products and the difficulty in understanding innovation.

Specialized administrative agencies assist technological development and can furnish useful information. For example, in the United States, the Federal Communications Commission (FCC), an independent government agency charged with regulating interstate and international communications by radio, television, wire, satellite and cable, provides a lot of useful information on the various telecommunication markets and their environment [22].

Public or private data banks furnish exhaustive information on nearly all subjects. Their main shortcoming is that they can furnish a limited piece of information immediately (often the size of one or two computer screens per subject) but require a long waiting period (1 month or even more) in order to obtain any additional documents. In the United States, the Securities and Exchange Commission's 10Q report is worth mentioning, because it includes information on suppliers, vendors, contracts, and CEO compensation.

The specialized press inundates its readers with information. The news that the press brings is readily available and relatively inexpensive but also often late and rarely confidential. The number of journals and magazines continues to grow exponentially.

For true operational efficiency, it is necessary to read useful periodicals, not only those for one's own profession but also periodicals in the competitor's field. Previewing information in magazines can be achieved by distributing magazines among members of the marketing department.

Periodicals can be used to acquire technical, marketing, financial, and industrial data on competitors in a useful and operational way. For example, small employment ads can often reveal a great deal to those who read between the lines. The same principles apply to the study of books and other media such as television (commentaries), films (for public relation purposes), or radio (interviews with managers).

Internet tracking also may be useful in order to track competitive information, such as when companies issue press releases, announce a new product, apply for trademarks and patents, register Web site addresses, post employment opportunity, or get press coverage. Furthermore, some free Internet site tools indicate whenever there are Web site page changes;that facilitates the screening of any changes in competitors' pages.

A supplier, or a subcontractor, who works with several competitors, often has valuable information regarding his or her customers' strategies. In the computer industry, 50% of all disk drives come from the same supplier, who must have an overall view of the market.

However, a talkative supplier chats with his or her own clients as well; one cannot keep hidden forever. The high-tech world is small and everybody knows everybody. Nevertheless, it is not the manufacturing secret that counts but rather how quickly a product is put on the market.

Distributors can provide information on the business policy and technological experience of competitors. These distributors are also centrally "located" so as to evaluate the general policy of different actors in the market. Not all distributors are able to do this, but time is never wasted in discussions with well-informed distributors.

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