Tangled Webs

    For a Few Dollars More
Issue 6.4
July 27, 2001

Escapade in Japan

For the past year, pundits have been trying to explain NTT DoCoMo's breathtaking success in the wake of the failure of so many other mobile phone companies. It is alternatively attributed to technical factors, HTML-based standards, social trends, superior product design, and occasionally even the "unique nature of Japanese culture."

While these all may have been contributing factors, in my mind, DoCoMo's success stems from their billing model. DoCoMo managed to create the first successful micropayment system on the Internet. DoCoMo approved sites can charge users small fees for information and entertainment, and these fees are added to that user's monthly phone bill. Users have been more than willing to pay a few pennies to access content, and with tens of millions of potential customers, those pennies add up. DoCoMo, of course, receives a percentage of the revenues for its troubles.

DoCoMo did not invent micropayments. The dot-com landscape is littered with the shells of companies who came before, but most ran into a chicken and egg problem. Merchants won't sign up for a payment service unless a large number of potential customers use it, and consumers won't bother to sign up unless they can use the system at a large number of merchant sites.

Of course, since DoCoMo already had a billing relationship with tens of millions of customers, merchants were pounding on their door from day one. DoCoMo now determines both which companies are allowed to compete in this marketplace, and the commissions they pay. If the merchants think the arrangement unfair, they are free to stop using DoCoMo's payment system and go out of business.

Absolute Power

While DoCoMo is happily fleecing its Japanese flock, Microsoft is sharpening its sheers for something far bigger.

Faced with a maturing computer market, one in which consumers and corporate customers are upgrading and purchasing less often, Microsoft is transitioning to "Software-as-a-Service". In the near future we will no longer pay for Windows and Office as licenses and upgrades, but in yearly or perhaps even monthly fees. Microsoft's new .Net initiative is the company's attempt to get this billing model adopted industry wide.

At the heart of .Net is HailStorm, a collection of tools and services that provides a central repository for user information and will enable any company to develop software that can be sold as a service. Microsoft has stated repeatedly that HailStorm services are based on open standards and that they do not require Microsoft tools to support, with one notable exception.


Simply put, authentication is making sure someone is who they say they are. There are dozens of accepted and common ways computers do this. Microsoft's .Net, however, requires that all authentication take place via Microsoft's Passport authentication system. By doing so, Microsoft forces any company wishing to use its tools to integrate Passport into their products.

The Wall Street analysts who applaud all this as a way for Microsoft to make revenues more predictable don't give the company nearly enough credit. Microsoft is laying the foundation for a software payment system on a scale of which DoCoMo can only dream.

Using Microsoft's tools, software companies can easily develop pay-per-use software, but how will they collect the license fees owed them? Let's see now. Since their customers will have to log onto Microsoft Passport before they can use the software, and since Microsoft will already have a billing relationship with a few hundred million customers worldwide, the solution is obvious.

Microsoft will already be sending Windows users regular bills for software usage, and they will simply add these other license fees to the monthly Microsoft bill. For their troubles, Microsoft will receive whatever percentage of the license revenues they care to take.


The end result is far from certain, of course. A lot of things that can go wrong before Microsoft is in a position to start taking their cut. Privacy advocates are already strongly critical of HailStorm saying that one company should not have access to detailed information on so many people. Microsoft is promising not to mine or misuse the data, but their past record on privacy issues is questionable at best.

There is also the very real concern that running such a massive, fail-safe system if far from Microsoft's core competency and perhaps even beyond the technical capabilities of Windows. These critics point to week-long outages of Microsoft messenger and even a past outage of Passport itself. With .Net in place, a lot of the world's software would become unusable while Microsoft sorted out these issues.

In the end, though, I think Microsoft will make it work because they have to. It will probably mean outsourcing much of the operations and even running some key components on non-Microsoft systems. If they pull this off, however, Microsoft will be in a position to both take a percentage of most of the software licenses sold and to dictate what that percentage will be. HailStorm and .Net could easily be the most important product for Microsoft since DOS.

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© Copyright 2001, Tim Romero, t3@t3.org
This article fist appeared in the July 25th edition of The Japan Times.
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