Editorial: Older Microsoft seeks new allies

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Is Microsoft going soft? First came word last month of a potential MSN partnership with America Online. Then Microsoft struck a "strategic alliance" with Palm on Treo phones. Last week, it settled differences with RealNetworks and secured a deal with Yahoo on instant messaging. It's unsettling to see Microsoft play nice. It's also smart.

Microsoft isn't new to the alliance game. At one point, it owned stock in rival Apple. The winning partnership of Microsoft and Intel made "Wintel" the global computing standard. Tech execs have long trekked to the Evil Empire of Redmond, hoping to feed off Microsoft's fortunes without getting squashed.

Now the tables have turned. MSN, after plowing through various strategies over the past 10 years, hardly is the killer app of the Web. Windows Mobile didn't zap the ever-morphing Palm or, for that matter, BlackBerry. Windows Media Player didn't bury Real.

Microsoft is fallible. Worse, critics say Microsoft is IBM before Louis Gerstner saved Big Blue-big, bureaucratic, a dynasty in decline. Since the stock market bottomed post-bubble three years ago, rivals have rebounded: IBM, up 50%; AOL parent Time Warner, more than 60%; Yahoo and Apple, up sixfold. Microsoft? A piddling 10%.

Microsoft is hardly broke; its profits are twice Google's revenue. Then again, Google sales today are about even with Microsoft circa 1995. Windows 95 is a distant memory as Microsoft faces the threat of Google 2005.

Microsoft is taking action, streamlining its structure and mending fences. AOL, Palm, Real and Yahoo face their own challenges; alliances with Microsoft can help both sides. Alliances aren't certain; Google and Comcast, a sometime Microsoft partner, in recent weeks have pursued their own deal with AOL.

But it's taking the right steps, recognizing where it can't lead a category and where it can't go alone, and investing in areas, such as search, that play to its core competency of writing code. Microsoft is picking its battles carefully-with old enemies recast as new allies.

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