For years, Microsoft executives have bragged about "eating our own dogfood," or using their own products for critical systems inside the company. But like real animal cuisine, Microsoft's software is proving itself a poor substitute for the real thing. On Wednesday, October 25, Microsoft reported a severe breach to one of its internal networks. According to statements, a Microsoft employee running an outdated version of Outlook received an viral attachment sometime during the summer. That virus spread across Microsoft's insecure dogfood-based network and slowly collected a wide array of employee passwords, which were sent to an MSN Hotmail account belonging to someone in St. Petersburg, Russia. That person (or persons) then used those passwords to dial in just like a telecommuting employee would, and had free reign of Microsoft's internal networks for at least a month. Microsoft was completely unaware of the breach until someone finally found something suspicious in server logs - a good three months after the infiltration began.
Microsoft denounced the attack, called in the FBI to investigate, and vowed to beef up its security, but noone inside the company would specify what exactly the infiltrator had done while inside the corporate network. Steve Ballmer said source code for projects in development had been viewed, although he was not specific on which projects were involved. But with a month of uncontrolled access, we can assume that the persons involved gained access to almost all of Microsoft's crown jewels - current and future versions of Windows and Office.
While we have advocated the release of Microsoft's source code for years, its possession by only one small group of outsiders presents a huge risk for everyone - not just Microsoft or users of its products. Microsoft has in the past included secret backdoors in its products, to allow software updates, check for software piracy, and (in one alleged case) provide a way for the government to check encrypted files. Close analysis of the code by skilled programmers would make any such backdoors obvious, and would make the openings easily accessible to any group in possession of the code.
Since the breach was tracked back to Russia, it raises some significant concerns about who could now have the ability to enter into computer systems running Windows. By all appearances, this was carried out by a large well-organized group, most likely one of the well-financed mafias that have popped up across the Russian continent. Those groups are motivated by profit, and the best way to make a profit from valuable information like a Windows backdoor is to sell it - and the highest bidder would be a terrorist group or foreign government looking for an unfair advantage over developed countries that run everything with computers. Imagine if you will, Saddam Hussein or Osama bin Laden coming into possession of a secret back way into Windows - the same Windows that the United States Navy is quickly introducing into the navigation and weapons systems of its newest vessels.
ALSO SEE: Wired News, C|Net, Wired News, The Register, Salon.com, ZDNet

COURT NOTES: On October 11 the U.S. Court of Appeals for the District of Columbia Circuit announced its schedule for Microsoft's appeal of the antitrust case ruling. As we predicted last issue [see Oct. 09], the court decided to split the difference between Microsoft's excessive schedule and the speedy appeals process proposed by the government. That finalized schedule calls for Microsoft to file its primary brief on November 27, with the government's main brief coming on January 12. Oral arguments will begin in the last week of February, instead of the late March/mid-April start date required by Microsoft's proposal. Damaging Microsoft's plan of constant delay, the court added that it would not grant deadline extensions to either side for any reason. The ruling also limited Microsoft's filings to 150 pages, a cap closer to the one proposed by the government than the one Microsoft had requested.
A week later on the 18th, the court of appeals released a 2-page document, giving notice that it intends to seek a technical briefing from a computer science expert. That briefing - given by Michael H. Hites, CTO of the Illinois Institute of Technology - was intended to update the seven judges about 'automation', or a broad picture of technology and the computer industry. Or would have, if Microsoft or the government had allowed it to proceed. Microsoft applauded the court's interest in the subjects at hand, but objected to Mr. Hites presenting the information because of his previous work with Sun Micro, and his varying opinions of what constitutes an operating system. The government also objected because of the potential for Hites to present biased information. With both sides opposed to a briefing, the judges had no choice but to drop the plan and instead learn by reviewing transcripts from the original trial, as suggested by the DoJ.
ALSO SEE: C|Net, The Register, USA Today, InfoWorld, Court Site

The same day AOL launched version 6 of its client software, Microsoft officially unveiled a brand new marketing campaign for MSN. The campaign, which Microsoft says will cost $1 billion, consists of an expensive series of new touchy-feely television ads and millions upon millions of dollars in marketing deals and 'rebates' by various retail partners. The first part of the plan is another redesign of the MSN.com portal/search engine/default IE home page, adding customization (as offered by Yahoo! and Netcenter for several years), integrated instant messaging, and a new search engine powered by "local human intelligence" - whatever that means.
A large portion of Microsoft's advertising will go to promote MSN Explorer, a rebadged version of IE that will serve as the interface for MSN Internet Access customers. MSN-E is a beginning step for Microsoft's .NET strategy, so it fits into the overall bundling scheme by welding every MSN service and site to the browser, which is covered in a bubblegum colored wrapper that does nothing for anyone old enough to go online without sitting in another person's lap. But according to Microsoft, over 1 million copies of Windows-only MSN Explorer were downloaded in the first few days of availability, despite serious problems with beta versions of the product [see Last Issue].
Microsoft's strategy is, as usual (despite Steve Ballmer's claims to the contrary), to outdo America Online by any means necessary. The new ad campaign targets low-level and beginner customers AOL usually picks up, the new MSN Explorer interface mimics the one AOL uses, and the MSN.com enhancements target both AOL's popular Web site and Netscape Netcenter subsidiary. But new ad campaigns and a rebadged browser do little to hide the truth - namely, Microsoft has only 3.5 million subscribers while AOL has nearly 30 million, AOL has more popular sites, AOL has a more coherent satellite and broadband access strategy, and most of all, AOL Internet Access devices are beginning to cut into Windows' marketshare.
ALSO SEE: C|Net, The Register, ZDNet, Wired News, ZDNet

Microsoft and eMachines, a company famous for its rock bottom prices and tendency to borrow ideas from competitors, have announced an agreement to give MSN subscribers a free computer. To get the $349 device for free, a customer only has to sign a contract and prepay for three years of MSN Internet Access at $21.95 a month, or $790.02 before taxes. This time, to keep customers from getting the computers and then cancelling their contracts [see Jan. 10], Microsoft is giving away a computer that locks the customer into using MSN. The eMachines MSN Companion, an obvious imitation of Compaq's iPaq line, is a stripped down computer made from cheap hardware and a chip that isn't Intel-compatible. Windows CE and MSN are hard-wired into it, thus preventing rebate recipients from using a competing Internet service once they discover how horrid MSN Access is. The rebate promotions also don't mention that the computer package in question comes monitorless - an additional cost that makes the eMachines/MSN deal more expensive than buying a standard computer and separate Internet access would be.
ALSO SEE: C|Net, WinInfo

Microsoft CEO Steve Ballmer, whose comments last year sent stocks spiraling [see Sep. 27 '99], did it again on October 23 when he described several of Microsoft's competitors as being "dramatically overvalued." Ballmer, not the sharpest stick in Microsoft's pile, told a large crowd in Milan Italy to expect more market corrections in a year that has seen little more than a correction of the gains from years past. He then went on to express a desire that the AOL TimeWarner merger be approved by the government, because that would make AOL a media company instead of the "global supplier of core Internet services" Microsoft wants to become. [For the record, we don't understand that one either.] Stock traders rewarded Steve's insight by dropping Microsoft stock by more than 3 points.
ALSO SEE: Wired News, The Register

On October 19, Microsoft reported a quarterly profit of 46 cents a share for Q1 2001, six cents higher than the predictions of analysts who have consistently gotten it wrong by five cents a share for the last 3 years. Using a new accounting method that the law requires Microsoft to soon move to, earnings were actually just 40 cents a share - but the expert predictions were made without regard to that future change. While Microsoft bragged about the supposedly strong sales of Windows 2000, a closer look at earnings shows a serious decline in income from the usually dependable Office segment. That caused the profit from regular operations (like selling software) to DROP by $12 million, while Microsoft's profit from investments doubled to $1.13 billion, mostly because of the Expedia spinoff. That's 44% of total income for the quarter - making Microsoft as much mutual fund as it is software company. Microsoft's operating expenses also rose by 14 percent, mostly because of mysterious charges associated with the Caldera trial settlement [see Jan. 17].
ALSO SEE: The Register, C|Net, The Register

Less than a month after the product was 'released' (if you can call a distribution to 3000 people a release), Microsoft has sent out an update for the first beta of Office 10. The update primarily addresses security problems in the next edition of Outlook, Microsoft's software for managing contacts, e-mail, and viral attachments. So far Office 10 testers have been giving us negative reports, especially about the translation and speech functions Microsoft has been promising for several years yet _disabled_ for the beta release (never a good sign). The next beta of Office 10 is expected out in the next few weeks, with a full version of the product shipping about a year from now as Office 2002.
ALSO SEE: ZDNet

Microsoft's WebTV has reached a settlement agreement with the FCC over charges that it made false claims about the capability of its services. According to the FCC, Microsoft broke the law by first advertising WebTV as able to access all Web content, which isn't true [see Jun. 14 '99], and then by not mentioning that long-distance charges could be added to the basic cost. The settlement calls for Microsoft to add more fine print to WebTV ads and publish a series of howto guides about purchasing Internet devices.
Back in August, you may recall, the European Commission gave Microsoft two months to respond to charges that it had abused its monopoly position to gain an unfair advantage over competitors in the Internet server market. On October 17, as the deadline was nearing, Microsoft requested and was granted the one month extension.
Microsoft and Sony Music Entertainment Europe have said that they are working together on a European Internet music video channel. The broadband service, launching sometime in November, will apparently feature music videos, interviews and news focused on Sony's large stable of artists. The venture may stem from a partnership between Sony and MongoMusic, a company Microsoft purchased in September [see Sep. 25].
Filling a gap in its server software lineup, Microsoft has made an agreement with NetIQ, producer of software for automating computer management functions. The deal calls for Microsoft to pay some $175 million in licensing fees and $6 million in co-engineering costs over the next five years, along with $10 million per year to handle marketing costs. In exchange, Microsoft has been extended the right to offer its own version of NetIQ Operations Manager for Windows 2000.

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