By Josh Quittner
January 18, 2008

By Josh Quittner

Ah, Microsoft. Nothing gets the knickers of Silicon Valley startup guys more twisted than signs that the world’s largest software company is over-reaching again. The latest outrage? Some of my friends at the Valley’s best-known social networks and Web 2.0 companies are privately grousing that emissaries from Redmond are trying to “strong-arm” (their term) startups into giving special treatment to Messenger, Microsoft’s (MSFT) answer to AIM and other instant messaging programs.

The problem typically arises when a social network, say, offers its users the ability to import the list of contacts they’ve accumulated on Microsoft Hotmail.

Since the summer, my friends tell me, Mister Softie has been sending cease-and-desist letters to startups that try to do this. These nastygrams are typically followed up by a meeting with Microsoft reps, who then try a couple different approaches to get the startup to integrate Messenger into their service.

If the company wants to offer other IM services (from Yahoo, Google or AOL, say), Messenger must get top billing. And if the startup wants to offer any other IM service, it must pay Microsoft 25 cents a user per year for a site license.

If, however, the startup decides to use Messenger exclusively, the licensing “fee will be discounted 100 percent.”

Such a deal!

Or not. The standard Microsoft term sheet being shown around the Valley also instructs  startups that if they want to offer search at any point in the future, they must agree “to negotiate in good faith for a period of sixty days exclusively with Microsoft on the terms under which Microsoft may provide such search service functionality…”

Naturally–and no one is complaining this is unfair—Microsoft also demands reciprocity of contacts. They say, in effect, we’ll show you our Hotmail contacts, but you have to let your users share theirs when they sign up for Microsoft’s Windows Live services.

None of the folks I spoke to agreed to talk on the record for fear of reprisals. So I will refrain from blind quoting some of their more incendiary remarks. Well, all but one: “This is a great example of why Google is the leader in the Net ecosystem and Microsoft is not,” an angry entrepreneur (who does not work for Google) told me. “Microsoft is the anti-data-portability company.”

Google (GOOG) and Yahoo (YHOO) routinely allow users to take their contacts with them when they join new social networks. So why doesn’t Microsoft? Just who owns that data anyway?

We put the question to Brian Hall, general manager for Windows Live. “We want the user to be in control of their stuff,” he told me. “We believe strongly that it’s the user’s data, it’s the user’s choice.”

Hall said he was unaware of any Messenger tie-in being a part of a signed contract, but didn’t rule out the possibility. “I don’t know of any contract we’ve signed that has those terms,” he said, pointing out that the term sheets that are being passed around merely represent what Microsoft wants—not what it will ultimately get in each instance.

Aside, that is, from the social network Bebo, which in August announced an alliance with Microsoft that would bring Messenger in house for its users. In exchange, Bebo and Windows Live users are now able to exchange contact information to invite their friends to their respective services. (Hmmm, will Facebook—in which Microsoft is a minority investor—be next to make Messenger it’s official IM client?)

Hall did say that in situations where Microsoft was dealing with a tiny company with few users, Redmond might be looking for a more favorable deal simply because the exchange of contact lists was so lopsided.

“Let’s say you are a startup and we offer to do a reciprocity deal where you can access contacts for our 410 million [Hotmail] users and I have access to your zero users,” he said, noting that it took Microsoft 12 years to amass its enormous user database. Why should it simply allow that data to flow in one direction, without getting a little something back?

But wait a second. If I’m a Hotmail user, aren’t all the contacts I amass mine? Can’t I take my friends with me?

Hall said that Microsoft’s main concern, and the reason it sent out Big Foot letters in the first place, was security. “If you look at what a number of sites are doing, they’re asking for your Hotmail login info, They’re storing your identity, which is not a best practices [approach] for anyone’s data from a security standpoint. We want to make sure our data is kept between our users and our servers.”

The thrust of the term sheets, he said, was to create a process whereby Hotmail and other Windows Live data could be shared securely with third parties. Added Hall: “There are models for federation where you can trust other services—and that’s what we’re trying to do with our partners.”

Thats what doesn’t make sense to me. If this is such a security problem, why do Google and Yahoo let their users take their contacts with them?

Disclosure: Time Warner (TWX) is the parent company of Fortune and AOL, which competes with Microsoft via its AIM messenger service and other services.

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