Does Microsoft really want to get into bed with Sony?

Bill Gates has been quoted commenting that Sony and Microsoft ‘have a lot of incentive to work together’ to help break Apple’s dominance of the digital music space. Given the corporate history of these two companies there is every chance that this comment is mischievously designed to put the cat among the pigeons. For argument’s sake though, let’s take the comment on face value. Does any incentive exist? Yes it does, but the key reason is devices rather than services or stores.

One of the biggest differences between Microsoft and Apple is the conversion rates of the installed base of devices compatible with their audio codecs and DRM. In Apple’s case it is nice and straight forward. In Microsoft’s it is less so: they are a software company not a hardware company, so their installed base is of third party manufacturers, this implicitly gives them much less control. A large proportion of iPod owners have downloaded music from the iTunes Music Store. There is a much lower conversion rate for WMA compatible devices due to the fragmented and decentralised nature of both the WMA device and store/service landscape. Microsoft’s challenge is how to engage those ‘inactive” devices and get consumers to start consuming WMA content rather than just using the devices as MP3 players. Any initial success is going to be limited in comparison to Apple due to the aforesaid factors but the larger size of the WMA compatible base offsets that a small amount. However, Microsoft are further hamstrung by the fact they can’t push their own music stores or services too hard for fear of alienating software clients such as Napster and Loudeye/OD2, so they have to rely on their partners to do a lot of the work for them.

In this context Microsoft need to improve the percentages on all factors available to them. Increasing the installed base of devices to offset lower conversion rates by pooling resources with Sony would be one way of achieving this. However, whilst all of this hypothesizing might make sense from a Microsoft perspective, would Sony actually want to be party to an alliance? Past corporate history would suggest no, but then the same could have been said of other recent Sony developments in this space.