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ROCHESTER, N.Y.--Shortly after Thanksgiving last year, Philip Ger=
skovich, 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 ne=
eded to make sure it was compatible with Microsoft's latest version of Wi=
ndows, 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 th=
eir 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 c=
ustomers would have to go through a cumbersome process to get Kodak's sof=
tware to pop up every time, and most would probably just use Microsoft's.=
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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 W=
indows, and that these companies also would be asked to pay Microsoft a f=
ee on every photo sent through Windows.
The Kodak team felt double-crossed. They had worked with Microsoft and t=
he camera industry for a year on a new photo-transfer standard that allow=
ed Windows to recognize when a camera was plugged in. Now, Kodak felt, th=
e 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 vic=
e president. "Consumers were effectively being denied a choice of which p=
hoto software they could use. More important, they should be able to send=
photos to any Internet printing service they choose--without paying a ta=
x to Microsoft."
Kodak's story offers a snapshot of a now-familiar tale in the software b=
usiness. Despite the government's antitrust case against Microsoft, which=
was partly upheld and partly reversed by a U.S. Court of Appeals last we=
ek, the software giant continues to use its monopoly operating-system sof=
tware as a lever to pry its way into new businesses. And companies such a=
s Kodak are responding by crying foul, hiring antitrust lawyers and lobby=
ists.
Microsoft rejects any suggestion that it misbehaved. "Kodak is an import=
ant partner, and we want their products to work well with Windows," says =
Vivek Varma, Microsoft's chief spokesman. But Kodak "didn't respond to ou=
r numerous attempts to work with them to correct the problem. These are c=
omplicated technical issues, and Kodak should have tried harder to work t=
hem 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 g=
enerates the vast majority of its profits. But with the growth of filmles=
s digital cameras, that franchise promises to shrink and might someday ev=
en 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 direct=
ly to Kodak picture labs to buy their prints. Any Microsoft obstacle woul=
d 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 o=
perating system, Windows XP, and its ambitions on the Internet. From phot=
ography 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 c=
ase. Microsoft has targeted RealNetworks, the pioneer of music and video =
on the Internet, and AOL Time Warner, in the booming market for instant m=
essaging, with much the same aggressiveness it once used in going after N=
etscape, in the browser battle that led to the antitrust case.
Kodak launched Mr. Gerskovich's new camera, EasyShare, at a splashy even=
t this spring at the fashionable W Hotel in New York's Union Square. Chie=
f Executive Daniel Carp opened the affair by observing that digital camer=
as hadn't caught fire with the mass market because they were too complica=
ted. "The key to this is to make it simpler," he said. "No one wants to b=
e called average, but the fact is most consumers are average." Then a par=
ade 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 re=
st."
The words were those of George Eastman when he brought out the first mas=
s-market camera, the Brownie, in 1900. Now, Kodak hopes EasyShare will be=
the digital Brownie. Kodak pioneered digital picture-taking technology i=
n 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 accus=
ed 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 i=
n 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 ri=
val 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 Koda=
k to cut its payroll, change its strategy and invest in new technologies.=
The results have included numerous digital-camera products and now, Easy=
Share.
EasyShare was developed at Kodak's sprawling research complex outside Ro=
chester. 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 store=
s 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 X=
P. They say it took nine mouse clicks--through a series of Windows instru=
ctions and folders--to get Kodak's software installed as the default afte=
r 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, beca=
use users would be guided to Microsoft's business partners. These compani=
es would be listed in a pop-up box and would pay Microsoft a portion of t=
heir 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 conten=
ds.
Kodak, with a photo-printing business estimated by analysts at $2 billio=
n a year, hopes to be among those listed in Microsoft's photo software. B=
ut ideally, Kodak would prefer to reach customers directly, through its o=
wn 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 effective=
ly hijacked the camera industry's new picture-transport standard, its com=
mon technical means of moving images from camera to PC. "Together, we bui=
lt 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 pho=
to 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. Wh=
ile testing a later version of it, Mr. Gerskovich and his team uploaded a=
dozen ordinary photos taken around town. Then Mr. Gerskovich tried to ro=
tate one of them, an image of a Kodak engineer's mother at a birthday par=
ty. A Windows warning box popped up, saying the photo would be rotated--b=
ut 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 th=
e darkened Kodak lab.
"We'd never put something like this in our software," says Mr. Gerskovic=
h, who has studied what he calls the "chain of pain" that consumers face =
when using current photo software, including Kodak's. In designing EasySh=
are, he says, "we did months of consumer testing and human-factors resear=
ch. Pictures are our business. We know, for example, that consumers expec=
t something like a 'digital negative,' " a copy of the image that isn't a=
ltered when editing software is used.
Microsoft responds that its photo software, like Windows XP itself, is s=
till being fine-tuned. In any case, the company says, it isn't intended t=
o replace fully featured programs such as those made by Kodak, Hewlett-Pa=
ckard or Adobe Systems.
The dispute came to a head at a meeting Microsoft held near its headquar=
ters in Redmond, Wash., on March 22. The hotel gathering in Seattle was b=
illed as a pep rally for Windows XP, designed to build support for the pr=
oduct and boost morale at companies with a stake in how fast it was adopt=
ed. Hundreds of managers and engineers from computer, printer and softwar=
e companies attended.
During a break, Mr. Gerskovich approached Microsoft President Steve Ballm=
er, who was standing in a knot of people near a snack table, and asked hi=
s question point-blank: Will Kodak's photo software be able to launch eas=
ily, 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 i=
ts lawyers and others briefed on the incident that the response was unequ=
ivocal: "No way."
Mr. Varma, the Microsoft spokesman, rejects Kodak's version of this exch=
ange 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 te=
chnical problems they were having."
Calling in the lawyers
Mr. Gerskovich sounded an alarm inside Kodak. Some managers argued again=
st taking on Microsoft, citing the retaliation documented during last yea=
r's trial. Others said Kodak had to take a stand. Kodak hired antitrust l=
awyers 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 th=
at 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 messa=
ge was heard on Capitol Hill. It was one thing for Microsoft to attack an=
other software firm, says a Senate staffer, but muscling a household name=
such as Kodak "could change the debate." Word quickly got back to Micros=
oft, as well, and by last month its public-relations firms were working t=
o counter Kodak's claims.
At the start of June, Kodak's Carp called New York Attorney General Elli=
ot Spitzer to brief him on what Kodak considered an antitrust issue. Spit=
zer 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 Microsof=
t 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 ve=
rsion has a new, simpler way to launch photo software after a camera is p=
lugged in. Instead of a nine-click process of setting non-Microsoft photo=
software as the default, it lists competitors' programs alphabetically i=
n 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 t=
he 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 s=
ervice. 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 t=
he flap with Kodak is a result of "miscommunication." Any change in the l=
atest 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 fo=
r consumers and fair to all of our camera partners," Microsoft's Mr. Varm=
a says.
Other digital-camera makers, such as market leader Sony, are strong supp=
orters of Windows XP and haven't raised the same technical complaints Kod=
ak 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. Ge=
rskovich sought assurances that the pop-up box allowing users to choose t=
heir photo software will be in the final version Windows XP. "Our busines=
s 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 tha=
t Kodak's software will launch easily, just as it has in past versions of=
Windows.
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