By Matt Rosoff [bio]
Posted: Dec. 10, 2007

• Chart: Windows Live Clients

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. More samples of our content, as well as a list of upcoming articles and reports are also available.

A new marketing campaign for Windows Vista gives equal billing to Windows Live, promoting online capabilities offered through downloadable Windows Live desktop clients. The new campaign will provide fewer opportunities for OEMs to sell high-margin hardware than Microsoft's past emphasis on digital media, and inconsistencies with the Windows Live brand may make it ineffective. Also, Microsoft's willingness to link Windows Live clients to third-party services shows that promoting Windows is a higher priority to the company than selling advertisements on its own Web sites.

The Changing Definition of Windows Live

When Microsoft introduced Windows Live in Oct. 2005, it was a set of online services for consumers, many of which already existed under other names. For example, MSN Search was rebranded Windows Live Search, Hotmail was rebranded Windows Live Mail, and MSN Spaces (Microsoft's blogging and personal Web page service) was rebranded Windows Live Spaces.

Despite the application of the "Windows" brand, the connection between the Windows OS and most of these services was slim to nonexistent. In fact, Microsoft said that the services were being designed (or redesigned) to work equally well with multiple browsers, including Firefox, which runs on both Mac and PC. This suggested that Microsoft was merely trying to apply its most successful brand, Windows, to its relatively unsuccessful online services, which have consistently lagged behind competitors in terms of financial success and innovation.

Since 2006, however, Microsoft has begun to apply the Windows Live brand to a new breed of PC client applications that link to online services, such as blogs or photo storage. Many of these clients are available as free downloads, and some include advertisements sold by Microsoft. (For a detailed chart of these clients, see "Windows Live Clients".)

The company's consumer instant messaging (IM) product, Windows Live (formerly MSN) Messenger, has always followed this model, but since 2006, the company has also developed an e-mail client (Windows Live Mail), a blog-posting client (Windows Live Writer), and a photo-editing client (Windows Live Photo Gallery). Unlike a Web browser, these clients are Windows-specific and offer some functionality even when the PC is disconnected from the Internet—for example, users can read and compose e-mails or blog entries in Mail or Writer and can edit photos in Photo Gallery. These clients exited beta testing on Nov. 9, 2007, and are available together in a single download with a unified installer.

Most important from a strategic perspective, each of these Windows Live clients connects not only to Windows Live services (or other services run by Microsoft) but also to third-party services: Messenger has full interoperability with Yahoo's IM system, Mail connects to any Post Office Protocol 3 (POP3) or Internet Message Access Protocol (IMAP) account, Writer interoperates with a wide variety of blogging services, and Photo Gallery lets users post photos to Yahoo's Flickr service. This suggests a shift in the Windows Live strategy. Initially, Microsoft envisioned Windows Live as a pure online play, in which the company would build best-of-breed services to attract users and advertisers away from competitors, particularly Google and Yahoo. Now it appears that Windows Live is more concerned with promoting Windows as the best possible platform to access a wide variety of Internet services, including services from competitors.

Microsoft has also applied the Windows Live brand to its OneCare security product, the second version of which launched in Nov. 2007. Unlike the other Windows Live clients, OneCare isn't free (it costs US$49.95 per year) and currently works only with Microsoft online services. Nonetheless, it does include online services for updating malware signatures and, optionally, backing up digital photos.

Campaign Promotes Vista, Windows Live

On Oct. 25, 2007, Microsoft launched its first major marketing campaign for Vista since the OS launched in Jan. 2007. This campaign, which will run at least through the end of Microsoft's current fiscal year (June 30, 2008) and will reportedly cost US$300 million, gives as much prominence to Windows Live as it does to Vista—the advertising tagline for the campaign is "Windows Vista + Windows Live."

This campaign—which Microsoft refers to as a "customer preference campaign"—is the first step in a multiyear effort to convince customers to actively choose Windows when they shop for a new computer rather than merely viewing Windows as a built-in component. The unspoken target of this campaign is Apple, whose Macintosh computers and OS are rapidly growing in popularity. In the third quarter of 2007, Apple surpassed Toshiba to become the number-three personal computer maker in the United States, trailing only Hewlett-Packard and Dell, according to both Gartner and IDC. (Apple did not place in the top five worldwide, and Acer's acquisition of Gateway will probably vault it ahead of Apple in subsequent quarters.) In addition, Apple showed unit growth of more than 37% from the previous year, nearly eight times the industry average, according to Gartner. If these trends continue, Apple would push Windows' market share below 90% in the United States by 2010. Moreover, there's a growing perception—fueled partly by positive reviews in major publications such as the Wall Street Journal and the New York Times—that a computer running Mac OS X is more reliable, more stable, and faster than a computer running Windows, giving Apple the leadership position in OS design.

Tactically, Microsoft's consumer preference campaign attempts to associate some of the excitement surrounding "Web 2.0"—an ill-defined term that encompasses the idea of user-created online content—with Windows, and specifically with Vista. By giving Windows users easy and free ways to post their content directly from within Windows Live applications, Microsoft hopes it can capitalize on a perceived weakness in Apple's offerings. That is, while Apple's iLife suite (which comes with OS X) provides excellent tools for creating and editing content, posting this content online isn't always easy—unless customers spring for Apple's .Mac set of services, which start at US$99.95 per year and are tightly integrated with iLife.

Microsoft's Vista + Live campaign focuses on the following three scenarios for consumers:

• "Memories" will focus on digital photos and images and feature Windows Live Photo Gallery for editing, organizing, and posting photos online
• "Communication" will focus on e-mail using Windows Live Mail and IM using Windows Live Messaging
• "Productivity" will primarily promote the consumer-oriented low-cost editions of Office 2007, but will also emphasize Windows Live OneCare for security and backup.

The campaign will be conducted primarily through online banner advertisements and retail in-store displays, and Microsoft expects the online campaign to generate between 7 million and 8 million desired "end actions"—one of which is to download and install the Windows Live suite. (Other desired end actions are viewing demos on the campaign's Web site.)

The Partner Picture

From approximately 2004 through the release of Vista, Microsoft's consumer PC marketing was focused on digital media scenarios, such as using the Windows Media Center interface to play DVDs and music and record TV programs and using the Windows Media Player to transfer digital media to portable or networked devices. Because working with digital media often requires powerful hardware, this strategy provided an opportunity for OEMs to piggyback on Microsoft's Windows marketing budget to help sell higher-margin PCs with cutting-edge CPUs and graphics processors, TV tuner cards, and large hard drives.

The latest marketing campaign makes little mention of digital media, perhaps because digital media—particularly music and content creation—are perceived to be among Apple's major strengths. But one of the main attractions of using online services is their relatively low hardware requirements. So if Microsoft's consumer preference campaign is successful, it may have the effect of guiding customers to lower-priced computers.

However, new OEM opportunities could arise. For example, Microsoft may be willing to compensate OEMs for prebundling the Windows Live software, although such deals would have to be constructed carefully to avoid antitrust complaints. OEMs might also be able to tie particular PC features into scenarios promoted by the campaign—for instance, a "communication" laptop might feature a built-in Web cam (for video IM) and support for the latest high-speed wireless access protocols.

At the same time, online companies may increasingly find themselves both competing against and cooperating with Microsoft: While some parts of Microsoft's Online Services Division continue to build and promote competing services and sell advertisements on those services, the Windows Live team appears ready to pursue partnerships to link Windows Live clients to competing services. Signing such deals could provide competitors with significant traffic.

Can It Work?

Microsoft's attempt to associate Vista with Windows Live may not resonate with consumers.

Most problematically, the Windows Live brand has been applied in random and haphazard ways since its inception—first it denoted some (but not all) Microsoft consumer online services, and then some of these services were rebranded almost immediately (e.g., MSN Search to Windows Live Search to Live Search; Hotmail to Windows Live Mail to Windows Live Hotmail). Now the Windows Live brand is being applied to PC clients that are both fee-based and free, and that connect not only to Windows Live services but to other services as well. If consumers don't understand what Windows Live means, they're unlikely to be swayed by a message that attempts to associate it with Vista. In addition, all of the Windows Live clients are currently available for Windows XP as well as Vista, further undercutting the message of the campaign.

However, the Windows Live clients are in early phases of development, and further improvements might make the overall "software plus services" picture more compelling for consumers. For example, Microsoft could replace Vista's built-in Calendar, Contacts, and Movie Maker applications with Windows Live versions that connect to various online services, and could allow users to save files from the Windows file system directly to Windows Live SkyDrive (the company's online storage service, now in beta testing).

In addition, while ties between the Windows Live clients and Windows OS are tenuous today, Microsoft will probably strengthen those ties as much as it can without spurring antitrust complaints. For example, the company could use Windows Update not only to update Windows Live applications that the user has downloaded but also to deliver new Windows Live applications to the overall suite. The next version of Windows, code-named Windows 7 and expected in 2009 or 2010, may have these Windows Live clients (or links to download these clients) built directly into the OS.

Moreover, while Microsoft's marketing strategies have been notoriously fickle, the conflation of Windows and Windows Live is not just a marketing strategy. Both teams are part of the same product division, led by Senior Vice President Steve Sinofsky, a Microsoft veteran who's credited with maintaining and growing Microsoft's Office business over the last decade, and who has the trust of the company's senior executives. If partners choose to sit this particular campaign out, they may find themselves surprised as Microsoft continues to devote not only marketing but development resources to this idea.

Resources

The Windows Vista home page, which features Windows Live and demonstrations of the scenarios discussed in this article, is at www.microsoft.com/windows/products/windowsvista/default.mspx.

The Windows Live suite can be downloaded at get.live.com.

OneCare is at www.microsoft.com/onecare.