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ROCHESTER, N.Y.--Shortly after Thanksgiving
last year, Philip Gerskovich, who was deep into the
design of a new digital camera for Eastman Kodak,
discovered his company was headed for a collision
with Microsoft.
His team was developing new software to
manipulate digital photos and needed to make sure
it was compatible with Microsoft's latest version
of Windows, the basic software that runs most new
computers. An early version of Microsoft's newest
software, code-named Whistler, had just arrived at
Kodak's software labs. When Mr. Gerskovich and his
team loaded it onto their computers, they were
shocked by what they saw.
When Kodak cameras were plugged into a PC loaded
with Kodak software, it was Microsoft's own photo
software that popped up--not Kodak's. Camera
customers would have to go through a cumbersome
process to get Kodak's software to pop up every
time, and most would probably just use
Microsoft's.
More troubling, the Kodak team found that the
new program steered orders for picture prints to
companies that would have to pay to be listed in
Windows, and that these companies also would be
asked to pay Microsoft a fee on every photo sent
through Windows.
The Kodak team felt double-crossed. They had
worked with Microsoft and the camera industry for a
year on a new photo-transfer standard that allowed
Windows to recognize when a camera was plugged in.
Now, Kodak felt, the standard was being used
against Kodak and other digital-camera makers,
because it favored Microsoft's competing camera
software, embedded in the planned new version of
Windows.
"We were being frozen out," says Mr. Gerskovich,
a 44-year-old Kodak vice president. "Consumers were
effectively being denied a choice of which photo
software they could use. More important, they
should be able to send photos to any Internet
printing service they choose--without paying a tax
to Microsoft."
Kodak's story offers a snapshot of a
now-familiar tale in the software business. Despite
the government's antitrust case against Microsoft,
which was partly upheld and partly reversed by a
U.S. Court of Appeals last week, the software giant
continues to use its monopoly operating-system
software as a lever to pry its way into new
businesses. And companies such as Kodak are
responding by crying foul, hiring antitrust lawyers
and lobbyists.
Microsoft rejects any suggestion that it
misbehaved. "Kodak is an important partner, and we
want their products to work well with Windows,"
says Vivek Varma, Microsoft's chief spokesman. But
Kodak "didn't respond to our numerous attempts to
work with them to correct the problem. These are
complicated technical issues, and Kodak should have
tried harder to work them out with us before
running to their lawyers and Washington
lobbyists."
Mr. Varma adds: "Any suggestion that we had
hidden motives in the design of Windows XP is
untrue."
For Kodak, the battle for the PC-driven photo
business is crucial. Kodak is trying to transform
itself from a fading business icon into a nimble
technology company. It is the leading seller of
traditional film, which generates the vast majority
of its profits. But with the growth of filmless
digital cameras, that franchise promises to shrink
and might someday even disappear.
Kodak so far has been unable to create digital
products or services that could replace film in the
all-important consumer market. Mr. Gerskovich's
camera and its allied software are seen as the best
hope. The company's plan is to use the Internet to
drive its digital-camera customers directly to
Kodak picture labs to buy their prints. Any
Microsoft obstacle would be a critical strategic
blow to Kodak.
The confrontation hints of antitrust battles to
come, as other companies grasp the reach of
Microsoft's plans for the coming new version of its
operating system, Windows XP, and its ambitions on
the Internet. From photography to phone service,
music to banking, companies across the economy have
been waking to find Microsoft riding its operating
system into their markets--even as it was awaiting
the outcome of the landmark antitrust case.
Microsoft has targeted RealNetworks, the pioneer of
music and video on the Internet, and AOL Time
Warner, in the booming market for instant
messaging, with much the same aggressiveness it
once used in going after Netscape, in the browser
battle that led to the antitrust case.
Kodak launched Mr. Gerskovich's new camera,
EasyShare, at a splashy event this spring at the
fashionable W Hotel in New York's Union Square.
Chief Executive Daniel Carp opened the affair by
observing that digital cameras hadn't caught fire
with the mass market because they were too
complicated. "The key to this is to make it
simpler," he said. "No one wants to be called
average, but the fact is most consumers are
average." Then a parade of actors, from a
grandmother to a 10-year-old girl, ran the product
through its paces to prove the theme: "You press
the button, we do the rest."
The words were those of George Eastman when he
brought out the first mass-market camera, the
Brownie, in 1900. Now, Kodak hopes EasyShare will
be the digital Brownie. Kodak pioneered digital
picture-taking technology in 1976, and digital
products are its fastest-growing market, producing
$3 billion of its $13.9 billion in revenue last
year. But the company still relies on film, paper
and photo processing for most of its revenue.
Indeed, Kodak dominates photographic film in the
U.S. and has been accused of being a monopolist
itself. It faced private antitrust suits in the
1970s and 1980s, which were cited in last week's
appellate-court ruling in the Microsoft case. It
was Microsoft's chief trial counsel, John Warden,
who back in 1979 rescued Kodak from an $87 million
judgment, after a rival argued that Kodak had
broken antitrust law by making Instamatics that
didn't take standard film.
Price war
A price war in 1997 with archrival Fuji Photo Film
Co. of Japan led Kodak to cut its payroll, change
its strategy and invest in new technologies. The
results have included numerous digital-camera
products and now, EasyShare.
EasyShare was developed at Kodak's sprawling
research complex outside Rochester. There, Mr.
Gerskovich and his team work in a windowless lab
room ringed with computer screens, developing their
own photo software to let a PC user crop, rotate,
store or send digital photos.
They also study the latest "builds" of Windows
XP, which is due in stores this October. In
existing versions of Windows, the user can easily
make Kodak's product the "default" option for photo
software after installing it. But when Mr.
Gerskovich saw early versions of Windows XP last
fall, he realized Microsoft's photo software was
treated preferentially.
Over and over, Kodak's team tested the
installation process on Windows XP. They say it
took nine mouse clicks--through a series of Windows
instructions and folders--to get Kodak's software
installed as the default after a camera was plugged
in. "Every one of my customers is going to have to
call our tech-support line" to get the software to
work, Mr. Gerskovich said. "Many will give up," and
just use Microsoft's photo software.
Moreover, Kodak would be giving up online
photo-processing revenue, because users would be
guided to Microsoft's business partners. These
companies would be listed in a pop-up box and would
pay Microsoft a portion of their revenue for that
privilege. "It's obvious they wanted to make it as
hard as possible. A lot of thought went into this,"
Mr. Gerskovich contends.
Kodak, with a photo-printing business estimated
by analysts at $2 billion a year, hopes to be among
those listed in Microsoft's photo software. But
ideally, Kodak would prefer to reach customers
directly, through its own software installed in the
PC by Kodak camera buyers. This would allow it to
compete without paying what it calls a "tax" to
Microsoft.
Most galling for Kodak engineers, it seemed that
Microsoft had effectively hijacked the camera
industry's new picture-transport standard, its
common technical means of moving images from camera
to PC. "Together, we built a highway that everyone
could travel, and Microsoft put up a tollbooth,"
Mr. Gerskovich says.
Microsoft responds that users will be free to
install links to other photo printers. "Companies
can be added to that list at any time," Mr. Varma
says. "We designed it to be an open feature."
To the people at Kodak, Microsoft's photo
software didn't measure up. While testing a later
version of it, Mr. Gerskovich and his team uploaded
a dozen ordinary photos taken around town. Then Mr.
Gerskovich tried to rotate one of them, an image of
a Kodak engineer's mother at a birthday party. A
Windows warning box popped up, saying the photo
would be rotated--but doing so might eliminate the
original image. "Do you want to proceed?" it
asked.
The box also warned, somewhat mysteriously, that
"because the picture is not even a multiple of 16
pixels in both dimensions, the picture quality may
appear degraded after rotation." The user was
offered "yes" and "no" boxes to click. As team
members read the warning box, laughter filled the
darkened Kodak lab.
"We'd never put something like this in our
software," says Mr. Gerskovich, who has studied
what he calls the "chain of pain" that consumers
face when using current photo software, including
Kodak's. In designing EasyShare, he says, "we did
months of consumer testing and human-factors
research. Pictures are our business. We know, for
example, that consumers expect something like a
'digital negative,' " a copy of the image that
isn't altered when editing software is used.
Microsoft responds that its photo software, like
Windows XP itself, is still being fine-tuned. In
any case, the company says, it isn't intended to
replace fully featured programs such as those made
by Kodak, Hewlett-Packard or Adobe Systems.
The dispute came to a head at a meeting
Microsoft held near its headquarters in Redmond,
Wash., on March 22. The hotel gathering in Seattle
was billed as a pep rally for Windows XP, designed
to build support for the product and boost morale
at companies with a stake in how fast it was
adopted. Hundreds of managers and engineers from
computer, printer and software companies
attended.
During a break, Mr. Gerskovich approached
Microsoft President Steve Ballmer, who was standing
in a knot of people near a snack table, and asked
his question point-blank: Will Kodak's photo
software be able to launch easily, as it does in
current versions of Windows when a camera is
attached? Mr. Gerskovich won't say what Mr. Ballmer
answered, but Kodak has told its lawyers and others
briefed on the incident that the response was
unequivocal: "No way."
Mr. Varma, the Microsoft spokesman, rejects
Kodak's version of this exchange and says that Mr.
Ballmer asked another executive to work with Kodak
to resolve the dispute. The Microsoft spokesman
also says that Kodak was seeking special treatment
and had been unable to make its software work
"despite our repeated attempts to get them to
engage and deal with the technical problems they
were having."
Calling in the lawyers
Mr. Gerskovich sounded an alarm inside Kodak. Some
managers argued against taking on Microsoft, citing
the retaliation documented during last year's
trial. Others said Kodak had to take a stand. Kodak
hired antitrust lawyers in Washington and began to
map its options. At one point, it even considered
asking a judge to block release of Windows XP on
the ground that it was meant to obstruct Kodak's
software.
In April and May, Kodak lobbyists made the
rounds in Washington alleging that Microsoft was
again trying to abuse its Windows monopoly. The
message was heard on Capitol Hill. It was one thing
for Microsoft to attack another software firm, says
a Senate staffer, but muscling a household name
such as Kodak "could change the debate." Word
quickly got back to Microsoft, as well, and by last
month its public-relations firms were working to
counter Kodak's claims.
At the start of June, Kodak's Carp called New
York Attorney General Elliot Spitzer to brief him
on what Kodak considered an antitrust issue.
Spitzer won't comment, but others close to the
broader federal antitrust case suggest Kodak's
story could play a role in new proceedings on a
Microsoft remedy, which were ordered by the appeals
court.
Microsoft continued to send out versions of
Windows XP. Three weeks ago, Kodak got the latest,
numbered "build 2481." Kodak engineers say this
version has a new, simpler way to launch photo
software after a camera is plugged in. Instead of a
nine-click process of setting non-Microsoft photo
software as the default, it lists competitors'
programs alphabetically in a pop-up box, along with
Microsoft's.
It isn't all they want, Kodak engineers say, but
it's a big improvement. Instead of a roadblock,
"it's just a speed bump," Mr. Gerskovich says.
A 'miscommunication'
But Microsoft hasn't backed down on plans to charge
a per-photo fee for images that are sent through
Windows to Microsoft's partners, others in the
industry say. One of those partners is likely to be
Kodak rival Fuji, which already works with
Microsoft in an alliance with its MSN Internet
service. Microsoft says terms of its contracts with
photo-finishers aren't final; it won't comment on
how these companies will be charged.
Microsoft, trying to ease tensions between the
companies, says much of the flap with Kodak is a
result of "miscommunication." Any change in the
latest version of Windows XP, Microsoft adds, had
nothing to do with Kodak's complaints. "I wish we
could say we did this in response to Kodak, but the
fact is we always had a design goal of making the
experience easy for consumers and fair to all of
our camera partners," Microsoft's Mr. Varma
says.
Other digital-camera makers, such as market
leader Sony, are strong supporters of Windows XP
and haven't raised the same technical complaints
Kodak claimed. But among these companies, only
Kodak and Microsoft's partner Fuji are in the
online photo-finishing business.
In a letter to Microsoft after tensions began to
ease last month, Mr. Gerskovich sought assurances
that the pop-up box allowing users to choose their
photo software will be in the final version Windows
XP. "Our business plans depend on this, and its
absence would wreak havoc on our digital camera
strategy," he wrote. Microsoft says the box will be
there, and that Kodak's software will launch
easily, just as it has in past versions of
Windows.
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