Goliath crushes David

Even as it was fighting its antitrust battle with the feds, Microsoft was already on to Round 2: Winning the streaming-media wars. Second of two parts.

By Farhad Manjoo

Oct 30, 2002 | [Read Part 1.]

If Burst.com CEO Richard Lang is right, and his company's video-delivery technology was better than everyone else's, then two questions must be addressed. Microsoft had identified the delivery of digital entertainment as a key market, and it had a formidable foe to beat in that market: RealNetworks. If Microsoft had hoped to catch up to RealNetworks, why wouldn't it have wanted a plug-in that improved its technology, instead of making the new version of its media player incompatible with Burst? And why wasn't it afraid that RealNetworks would get access to Burst's technology instead?

Burst answers those questions with two of its most damaging charges against Microsoft. Lang says that at first Microsoft wasn't fully aware of what made Burst so good. So in late 1999, under a nondisclosure agreement and as part of an effort to get Microsoft to license Burst technology, Burst showed Microsoft the company's "secret sauce," Lang says. The company disclosed technical information that went beyond what was published in its patents.

At least one of those meetings, Lang says, was with Will Poole, an influential Microsoft executive who directed the company's efforts in digital media. "And we could see the light bulbs go off," Lang says of the meeting. "We could see they got it. They understood why Burst was better."

But Microsoft declined to license Burst's technology at that time. Again why would it make that decision, if it was afraid of competition from Real? Lang's most explosive allegation is that Microsoft was in fact not afraid of competition from Real, because the two companies had long ago agreed to divvy up the market. On July 18, 1997, RealNetworks and Microsoft signed an agreement that, according to Burst, was something of a Faustian bargain for RealNetworks: In it, according to legal filings made by Burst, Microsoft essentially agreed not to "target" Real if Real gave Microsoft "veto power" over RealNetworks' software development, including Real's ability to deal with other companies.

According to this theory, then, Microsoft was never afraid that Burst's technology could go to anyone else, because it controlled what Real did. Therefore, it had no incentive to license from Burst.

By the end of 2000, Burst was a company in trouble. "The Nasdaq had begun to implode," says Lang, "and our investors were asking if we were ever going to license to Microsoft or RealNetworks. And it didn't make sense to us or our investors. We knew our technology was quality, but we couldn't see why one of them wouldn't want to sign with us." Lang reduced the company from 100 workers to five.

Burst continued to pursue a licensing deal with Microsoft, and in January 2001, after the firm showed Microsoft benchmark tests done by Approach, a technology company, which proved that Burst was more efficient than Windows Media, Microsoft said it wanted to license Burst's technology. It offered Burst $1 million for all rights "exclusively and in perpetuity" to Burst's software -- an offer Lang considered "a joke." He made a counteroffer, which Microsoft rejected. Negotiations ended.

"They knew we had nowhere else to go," Lang says, "and they left us on the vine to die."

Next Page: Microsoft's new streaming technology looks awfully familiar...

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