One last thing: I've been reviewing previous Microsoft Monitor blog posts, and the first one, on May 19, 2003, caught my attention. There I noted that Microsoft had launched the Virus Information Network, as the company sought to work better with security vendor partners. Three-and-a-half years later, the company instead competes with its (now former) security partners.

Today's Wall Street Journal has a story about Microsoft Chairman Bill Gates' claim that competitors tried to "castrate" Windows Vista. His comment referred to Windows Vista changes Microsoft made in response to questions raised by the European Union's Competition Commission, in response to complaints made by Microsoft competitors. I find Bill's language interesting, since the complaints were largely made by security vendors that used to be Microsoft partners and by companies that essentially argued that Windows Vista would "castrate" their businesses.

Security is as fitting a beginning as ending. My advice to Microsoft: Don't compete with your partners. It's bad business.

I just can't resist throwing in my 20 cents.

Nobody partners like Microsoft. The company is one of the shrewdest deal makers on the planet, when it isn't competing with partners (security vendors like McAfee and Symantec) or abandoning them (like the PlaysForSure supporters). There has been buzz for sometime that labels were unhappy with Apple's single pricing and were looking for a cut of iPod sales (David would have more inside scoop on either topic than me). Seems to me: Microsoft is looking to suave labels' hurts as it seeks to get the deals that could make table stakes for taking on Apple. After all, Apple doesn't control the content. David will be the first to say consumers buy way more CDs than digital downloads, but I'm thinking the right deals might give Microsoft exclusive or early access to choice content for the Zune Marketplace.

Then there is the question: What does any of this mean for the marketplace? Microsoft's nomenclature reveals something about its go-forward strategy. Already, the Xbox Live Marketplace is just that, a marketplace for stuff sold by Microsoft and its partners. There is plenty of revenue to share there, and I expect the same will be the case for the Zune Marketplace. I strongly suspect Microsoft's plans are much bigger than just music or even videos.

For example, what if as part of the Universal deal, Microsoft can distribute early tracks or even whole upcoming albums? The company's digital rights management technology could be used to time out music after a certain number of days or plays. I can envision a whole bunch of try-before-you buy or promotional opportunities. Surely, Microsoft sees them, too, and is making the deals to make the music happen. On Zune.

But before I pat myself on the pack, I also figured Wednesday as RTM day so that Microsoft could have Windows Vista on new PCs in time for the Consumer Electronics Show. Instead, launch date is January 30. I heard this date through the grapevine ahead of Amazon putting it on Windows Vista preorders back August. Looks like Microsoft has been shooting for January 30 for some time.

And it's plenty of time, even with the distraction of the holiday sales period. Most PC manufacturers say they need about 60 days from RTM to get systems ready. Today's announcement gives them much longer. I expect software developers will need the extra time more to get their software ready for Windows Vista.

Plenty of time is one thing. Timing is another. January 30 is right before Super Bowl Sunday, when consumers are thinking more about big screen TVs than PCs. Colleague Patti Freeman Evans could offer more perspective on the timing. I'm thinking that January 30 wouldn't be most retailers' first choice. Microsoft and partner marketing could make a huge difference, assuming there are some enticing, big screens and accompany media-centric PCs on store shelves. I'm skeptical, though, about the date being a good one.

Microsoft still has some tough decisions ahead, such as when to crank up the marketing volume. A little Vista noise could generate holiday PC sales, with the promise of a free or reduced-cost upgrade to the new operating system. Too much noise, and some of those same people could choose to delay purchases now for Windows Vista later. But later is potentially bad, because many people will buy, buy, buy during the holidays and delay, delay, delay in January. First rule of good retailing: Sell the customer now. People easily procrastinate, especially if the activity involves spending in the future on something they might want now. If I were Microsoft, I wouldn't start serious Vista marketing anytime before December 25. The January 30 launch just might signify that's Microsoft plan. The company and its partners could get a whole month of Vista marketing in without too much impact on holiday sales.

PC prices are another consideration and one with potentially huge implications for Windows Vista. Last week's Wall Street Journal story, "PCs Gets Cheaper, For Now," made a glum forecast: "The normally healthy holiday season might look like a going-out-of-business sale...PC makers are scrambling to entice consumers to open their wallets and not wait until the end of January, when Vista is expected to be available to consumers." The Journal had better be wrong (though I doubt it is), because raising prices in January won't be easy after slashing them in December, even with newfangled features in Windows Vista and a new "Ultimate" version that could justify premium pricing.

I would strongly caution Microsoft PC partners against price gouging the holidays. The worst approach would be the one described in the Journal story: Slashing notebook prices. I'm convinced that consumers still see the laptop as a premium item, and it's one that offers premium benefit because of portability. JupiterResearch surveys show that many households with Windows do not yet have notebooks--only about 35 percent. By contrast, Apple has done a good job emphasizing the premium value of (and greater cost for) laptops. About 65 percent of households with computers running a Mac operating system have notebooks. Granted, the number of households with Macs is much lower than those with Windows PCs.

PC manufacturers shouldn't kill the goose that lays the golden eggs.

Looks like I'm not the only on that remembers all the great Windows 95 marketing. Jim Allchin's video is reminiscent.

Back when I worked as a reporter, and around the time Microsoft launched Xbox, I wrote a story about the console being a kind of Trojan horse. No question, the device's primary function was and was going to be about gaming. But there was a question that Microsoft might do more around other kinds of entertainment in the living room. Since, Microsoft has extended Xbox through Extender and other technologies. As I said 18 months ago, Xbox hardware specs made it look more like a PC than a game console.

Microsoft has taken another step towards Xbox as a larger-than-console entertainment device, with yesterday's movie and TV content announcement. I will watch with fascination to see if people would really purchase movies locked into yet another largely closed system (Michael is better analyst for commentary on that subject). Apple's iTunes and iPod is largely a closed system for TV shows and movies (because of DRM formats), but the content can be played on a PC. Xbox content would appear to be more tethered to the game console, although I presume (but don't know) content could be streamed to a TV using Extender.

People might rent content for a closed system. I would. Rental is something Microsoft offers that Apple doesn't. And Microsoft will offer HD content, too, which is really smart. It's not just differentiating from iTunes or other services, but preserving the user experience. Xbox 360 is very much about the HD experience.

What I will be watching is Zune, which officially launches next week. Last month, my daughter was offered a Zune pre-order when pre-ordering a Nintendo Wii. Game Stop isn't an obvious distributor of a music player. On the other hand, Zune there makes sense because the Xbox folks are doing the music player and there is likely to be some connection to the devices.

Take for example the online experiences, the Xbox Live Marketplace and forthcoming Zune Marketplace. I can't believe there won't be a relationship between the two online marketplaces. The one would be great leverage for the other, say, if Microsoft points (the currency used on the Xbox Live Marketplace) could be used to purchase music for Zune. Microsoft plans for its Points currency is perhaps much bigger than many people outside the company suspect, me thinks.

Then there is the question of video content. Where the heck will the video content for Zune come from? Microsoft hasn't publicly disclosed plans, and I can speculate because I'm not privy to anything. But Xbox is one potential source. At the least, I expect that people will be able to synch their Zune player with Xbox as well as a PC, if not at launch sometime in the near future.

This is just my two cents, and Michael will have better perspective.

And it needs to be soon. Presumably, Microsoft would want to launch Office 2007 and Windows Vista during the Consumer Electronics Show, which starts January 8. In an ideal scenario, then, Microsoft would want to RTM both products this week, ideally no later than Wednesday. Particularly for Windows Vista, PC manufacturers, retailers and third-party software developers would need 60 days (more if possible) to get the goods on new PCs or on store shelves in time for launch. The later in November is Windows Vista RTM, the more likely product would be available after CES, even if both products are officially launched at the event.

There has been lots of blogs and news stories about the impact of Windows Vista's last big delay on PC manufacturers and retailers. Software developers felt some pinch, but now it increases by the day. PC manufacturers want to ship bundled applications with new Windows Vista PCs and retailers want Vista-supporting software on store shelves for launch.

The two constituents together make a vice putting the squeeze on software developers. The developers can't make their software Vista ready until Microsoft finishes its work on the operating system. So developers have even less than 60 days to get their stuff ready. The pressure will be greatest on those developers whose software is bundled with new PCs. Computer manufacturers will want to test and certify bundled applications as much Windows Vista.

Circling back to the start, which is Office 2007 RTM, Microsoft is supporting it with redesigned Office Online Website and software Test Drive, the latter which on December 1. The new Office Online is slick, but people will have to validate their software to get the goodies.

By the way, two of my recent reports offer insight on mid- and large-size business deployment plans for both products: "Office 2007: What Deployment Plans Mean for Microsoft, Its Partners, and Its Competitors" and "Windows Vista: What Deployment Plans Mean for Microsoft, Its Partners, and Competitors." Another report, on small business planned Office 2007 and Windows Vista deployments, could publish as early as this week. Small business deployment plans differ from those of larger businesses.

While the Journal did some good reporting, there is much more here--and the devil (or angel) is in the details. The agreement has three major facets: technical cooperation, patent coverage and business cooperation related to Linux or other open-source software.

The arrangement unexpectedly started when Novell approach Microsoft about entering into an agreement about virtualization. The early discussion quickly branched out into a much broader agreement.

The technical cooperation covers three areas: virtualization, Web services management and document compatibility.

For virtualization, the two companies have agreed to terms that would allow hosted version of its software on the other's product. So, Windows Server could run virtualized on SuSe Linux, or visa versa. Licensing fees would still apply to the software. Virtualization is the hot trend among enterprises right now, spurred by revitalized server consolidation--the likes of which the market hasn't seen for almost a decade.

The companies also will work together on building Web services management tools. The arrangement could be win-win for both Microsoft and Novell. Microsoft gets to pull some Linux systems under management of Active Directory, even if only through some federated arrangement. Managing disparate platforms is a huge headache for many IT organizations. Additionally, Linux is a popular hosting platform that could use some better management tools. Microsoft wants to reinvigorate interest in Internet Information Server (which requires Windows Server), at the expense of Apache Web Server. More importantly, Web services is a hugely important growth area. Those Web 2.0 products and services don't run in the sky. They still need software, but with more of the power on the server than the desktop. This is going to be an important space for businesses looking to deploy hosted applications on disparate platforms.

The final portion of the technical cooperation is sure to spawn lots of ridiculous speculative stories. For the record, Microsoft isn't planning to release a Linux version of Office, as someone will surely presume. Document compatibility is self explanatory--and it cuts both ways, for Microsoft and Open Document formats. Novell has agreed to develop an Office Open XML format plug-in for OpenOffice, which the vendor will eventually make available to the OpenOffice community. Similarly, Novell will join Microsoft's effort to produce an ODF plug-in for Office 2007.

If Microsoft were really committed to productivity suite interoperability, the company would do its own development work. Surely, with $7 billion dollars dedicated to research and development, Microsoft could spare a few bucks and a couple developers for file format filters. I guess the Novell deal lets Microsoft get the work done without getting its hands dirty.

The patent coverage is an interesting attempt to get Microsoft's commercial license to play nice with the GPL. Surely someone will presume that Microsoft and Novell have engaged in a cross-license deal, which would be wildly inaccurate. Mostly, the companies are agreeing to work together without suing each other or somebody else. Their agreement provides covenants releasing each other from risk of lawsuit by the other for products such as Mono, Samba and OpenOffice (distributions by Novell), .NET and Windows Server.

The arrangement is a make-shift way for the two companies to work around their oil-and-water licensing models. I'll try a different metaphor. Anyone remember the North American Free Trade Agreement (NAFTA)? Canada and the US are obviously separate countries, with different forms of government, economies and local laws. NAFTA allowed trade between the two without compelling either country to change how it conducts itself. The Novell-Microsoft arrangement allows for more technology exchange and cooperation between the companies without disrupting their different intellectual property licensing models.

Novell and Microsoft also will extend their patent protection to customers. Additionally, Microsoft is issuing what it claims to be an "irrevocable" agreement not to sue regular folks working with its software and open source. I was told that students, enthusiasts and academics can feel free to "go forth and play." Commercial interests must of course pay. The move is important for Microsoft, which wants to encourage creation of new products using its tools or platforms. Do teenagers choosing to develop for open source, the Web or Windows even care--or think about such liability? I surely wouldn't have.

Business Cooperation is really about Microsoft and Novell working together to produce joint solutions. Among other efforts, the two companies will set up a joint labs.

I don't see a lot of Linux risk here for Microsoft. JupiterResearch surveys show Linux largely as a migration path from Unix. Very few businesses swap out Windows for Linux, and the number of businesses running Windows Server is increasing. Microsoft and Novell will co-develop code to best facilitate the process and so the customer experience.

Microsoft also gains a few other things from the Novell arrangement. For starters, the company has engaged a single Linux/open source ally, giving the company stronger position against rivals like Oracle. I played Risk as a teenager, and I was a wicked good player. But I lost many games because I was so good the other players would gang up on me. Much good Risk play is about alliances, like in business. Microsoft has gained an important competitor-ally.

The Novell agreement recognizes that Windows and Linux will co-exist in the enterprise. So they might as well get along, even if they can't like each other. Interoperability is good for Microsoft customers, and the company is getting this benefit on terms that could benefit Office and Windows against open-source products. To that end, the patent agreements and file format converters are hugely important to Microsoft.

Finally, Microsoft may have no other choice but to more closely work with competitors. The company has finally met the unbeatable competitor: Microsoft. Older versions of Office and Windows are by far the most significant competitive problems for Office 2007 and Windows Vista. Alliances like the one announce today put Microsoft in a stronger position to take on weaker competitors that are more easily routed than, well, Microsoft.

Awhile back, I met with some folks on Microsoft's Genuine Advantage team and got to see many of the unique CD pirate packages (some quite good and others just laughable) that are distributed around the globe. In its testing, Microsoft found that software on many counterfeit discs had been changed, often with worms or Trojans added. I also got to see some key-generator Websites in action, where just going there would unleash attempts to install spyware and other software on the visitor's computer.

The point: Piracy isn't just about lost Microsoft revenue, it's about lost Office or Windows user privacy or security. While I'm convinced that Microsoft's main anti-piracy objective is revenue (based on behavior rather than rhetoric), the company clearly has self and customer interests in tackling piracy as a security problem. Such approach also might help add bite--whether from a public relations or law enforcement support perspective--to Microsoft's anti-piracy campaigns. Today, Microsoft announced "55 legal actions" against counterfeiters.

How much of a problem is there? Microsoft probably knows better than anyone. Microsoft's Genuine Advantage program has helped the company gather some amazing intelligence about the piracy of its software. The company has an expanding record of passed or failed Genuine Advantage validations around the globe. Now, Microsoft has more tactile data on piracy rates, based on real-time response from people using its software. Microsoft can use the information to discover areas of high piracy, such as specific US locales with unusually higher validation failures than surrounding areas or elsewhere in the country. This information, coupled with Microsoft's other counterfeit investigations, can help expose some hacker pirates.

The risk to everybody cannot be understated. While pirated software is but one attack vector used by criminals, it is one with potentially great reach. Recent stories in Wired and USA Today tell of lurid underground communities compromising PCs, using mechanisms like bots (I still prefer term RATs, as in remote access Trojans).

One benefit of being "genuine" is being safe--or safer, at least. It's bad enough that consumers must fight off attempted intrusions by malicious e-mail or Websites. Much worse: Getting malicious software pre-installed with Office or Windows, which is a likely enough scenario for counterfeit code.

Office Accounting Express 2007 is Microsoft's first, really new foray into the software-as-a-service model--and not by any typical definition. Most software-as-service definitions are about software subscriptions, subscription services or hybrid Web-desktop software/services. What's different here is the monetization model. Microsoft gives away software for free and makes money on the third-party service used by the customer, in this case ADP. So, it's software revenue from a third-party service.

The approach is wickedly savvy, and capitalizes on what Microsoft does very well: Partner with other companies (Yeah, I rake on Microsoft for partner competition, but the company still partners really well in the areas it chooses not to compete). The software-revenue-from-a-third-party-service approach bears similarities to the advertising model supporting software products like Windows Live Mail Desktop. Similarly, lots of vendors give away stuff (such as free checking or online banking) where revenue comes through a service. The major difference with Office Accounting Express is the revenue source: proceeds directly derived from a third-party service for software Microsoft gives away for free.

There are definite variations of this model among Microsoft consumer products or services, but the approach is highly unusual for the company's business software. If I were a partner offering any kind of service, my sales teams would have started booking flights for a Redmond pilgrimage yesterday. Microsoft is going to have to offer more stuff for free to take on Google and Web 2.0 vendors. The company's longstanding approach of giving away something valuable for free and pulling revenue from Office and Windows sales won't necessarily work in some of the new areas where Microsoft is advancing. Google may have a platform on the Web, but Windows is the platform by which most people consume Web services. Services partners could reap huge benefits from revenue shares with Microsoft.

It's strange in a way that small business accounting software would become a battleground for shifting Web services strategies. In September, Intuit extended some Google services to QuickBooks. From my perspective, the Intuit deal finally gives reason for Microsoft to view Google as a competitor. Microsoft's response, which probably is more coincidental than deliberate, pushes back at Google. Microsoft can leverage services revenue, too, and without relying largely or even solely on advertising.

For Intuit, from another perspective, Microsoft's freebee is business as usual. Microsoft has entered many, many new markets by giving away something valuable for free or much lower cost. I remember when Microsoft priced FoxPro at $99 and hundreds of dollars less than comparable Borland tools (circa 1997) or the original Office bundle that put together three products for the same $495 price of WordPerfect. The list of examples would fill up more than a few blog posts.

Intuit's advantage is relationship. QuickBooks is popular with accountants, which, according to JupiterResearch surveys, are important small business advisors--including technology purchases. More importantly, it makes sense that the accountant would want the small business to use the same accounting software, which is a lot more likely to be QuickBooks than Microsoft's competing product.

It's fascinating to see small business accounting become a fulcrum of software and services change. Considering that most US businesses have fewer than 10 employees and small businesses account for most employment, maybe Google and Microsoft have chosen the most appropriate proving grounds for change.

Microsoft has now officially launched OGA, which is kin to Windows Genuine Advantage. Office users must now "validate" before accessing certain online resources.

My problem: I don't yet see a genuine advantage. Microsoft's "genuine" anti-piracy program was conceived to use a carrot and stick approach--the stick being validation and the carrot the extras available to paying customers. Where are those extras? Microsoft instead takes stuff offered for free and now puts it behind a wall of validation. Of course, Microsoft can do this--it's the company's goodie bag. But the approach defeats one of the program's most important objectives: Changing behavior and attitudes such that people want to be genuine.

This is by no means my first criticism of the Office program, which digresses from its Windows counterpart with respect to customer satisfaction. There is more stick and must less carrot to OGA than WGA. If Microsoft wants to take an anti-piracy hardline, fine, but say so. Such an approach--of offering real, new benefits, or acknowledging there are no new goodies--would be, ah, more genuine.

in the report there's a pretty big bombshell, which could have some surprising consequences for Windows Server and particularly Linux.

Quarterly revenues were $10.81 billion, up 11 percent from a year earlier. Operating income rose 11 percent year over year to $4.47 billion from $4.05 billion. Net income was $3.48 billion and 35 cents a share, compared to $3.14 billion and 29 cents a share a year earlier. Sequential comparison: In the fiscal fourth quarter, revenue was $11.8 billion, with operating income of $3.88 billion and net income of $2.99 billion, or 28 cents a share.

In July, Microsoft projected fourth first quarter revenue in the $10.6 billion and $10.8 billion range and operating income between $4 billion and $4.2 billion and earnings per share between 30 and 32 cents.

Looking ahead to fiscal 2007 second quarter, Microsoft projects revenue between $11.8 billion and $12.4 billion, with operating income in the $2.9 billion to $3.1 billion range and 22 cents to 24 cents earnings per share. The projection accounts for a $1.5 billion revenue deferral from the second to third quarter mainly for the Office 2007 and Windows Vista technology guarantee programs.

For fiscal 2007, Microsoft projects revenue between $50 billion to $50.9 billion, with operating income between $19.1 billion and $19.5 billion and earnings per share between $1.43 and $1.46. In July, Microsoft projected revenue between $49.7 billion to $50.7 billion, with operating income between $18.9 billion and $19.4 billion and earnings per share between $1.36 and $1.41.

Unearned revenue grew 15 percent year over year to $10.1 billion, but declined $805 million from the previous quarter. The change had to do in part with recognition of unearned revenue exceeding deferrals. Recognized unearned revenue added $3.38 billion to Microsoft's total revenue for the quarter (Do I really need do the math to show that it's a huge contributor?).

Microsoft Enterprise Agreement renewals held pace at a 66-percent-to-75-percent rate.

Microsoft acquired four companies during fiscal 2007 first quarter; 23 during fiscal 2006.

For fiscal 2007 first quarter, Microsoft changed its reporting to five segments from seven. They are: Client, Server and Tools, Business, Online Services Group and MEntertainment and Devices. The previous segments: Client, Server and Tools, Information Worker, Business Solutions, MSN, Mobile and Embedded Devices, Home and Entertainment. Under the new structure, Information Worker and Business Solutions combine to form the Business division and Mobile and Embedded Devices and Home Entertainment combine to make Entertainment and Devices.

Breakdown by business division:

Client revenue was $3.303 billion and operating income $2.637 billion for the fourth quarter, up 4 percent and 3 percent, respectively. This compares to $3.167 billion in revenue and $2.57 billion operating income in the year-ago quarter.

License sales to Original Equipment Manufacturers (OEMs) again carried the quarter. OEM channels accounted for over 80 percent of Client revenues. Windows desktop OEM licenses grew by 11 percent and OEM revenue grew by 4 percent, compared to 19 percent and 13 percent, respectively, in the fiscal fourth quarter. I see the slowing sequential growth resulting from: $45 million deferred due to the Windows Vista upgrade program; cyclical business PC sales; and sluggishness ahead of Windows Vista's release.

Microsoft estimates that worldwide PC shipments grew between 8 percent and 10 percent during fiscal first quarter, spurred by back-to-school sales. Once again, in emerging markets, disparity of Windows sales and PC shipment growth stung Microsoft, primarily because of piracy. Consumer PC sales exceeded business, yet another sign that Windows Vista will launch following a major business PC buying cycle. Microsoft estimates 8 percent to 10 percent PC growth for fiscal 2007 and 6 percent to 8 percent for the the second quarter. Considering Microsoft's fiscal second quarter is the holiday sales season, the growth estimates are somewhat disturbing and foreshadow trouble for some PC manufacturers stuck selling Windows XP.

Server and Tools revenue grew 17 percent to $2.499 billion compared to $2.127 billion a year earlier, with operating income increasing 36 percent to $827 million from $608 million.

SQL Server continued to post strong growth, with revenue up 30 percent year over year. I’m not surprised by the strong uptake. According to JupiterResearch surveys, 33 percent of businesses with 100 or more employees already have deployed SQL Server 2005. Microsoft projects server hardware shipments of 10 percent and 12 percent for fiscal 2007.

Business revenue rose just 4 percent to $3.425 billion from $3.283 billion a year earlier. Operating income was flat year over year--$2.253 billion compared to $2.244 billion. The division, which recently absorbed products from the former Business Solutions division, remains dominated by Office, which accounts for more than 90 percent of revenues.

My expectation is that most businesses planning to get Office 2007 made that decision when renewing licensing contracts earlier this year. I'm quite bearish on deployments of the new productivity suite (See my report "Office 2007: What Deployment Plans Mean for Microsoft, Its Partners, and Its Competitors").

Online Services losses continued, with an operating revenue loss of $136 million compared to a profit of $68 million a year earlier. Revenue fell 4 percent to $539 million from $564 million, year over year. As previous quarters, much of the loss came from new technology, marketing and personnel spending and declines in online access subscribers. After several disappointing quarters, advertising grew 5 percent year over year to $374 million; the gains pail in comparison to Google.

Entertainment and Devices revenue rocketed 70 percent to $1.03 billion with an operational loss of $96 million, compared to $606 million and a loss of $3 million a year earlier. Microsoft sold about 900,000 Xbox 360 consoles during the quarter. Microsoft expects 13 to 15 million total Xbox 360 consoles sold since launch by end of fiscal 2007. The company now has 4 million Xbox Live subscribers, with the number expected to reach 6 million by end of fiscal 2007.

My 12 year-old daughter asked why it should be so easy for her to go into my iTunes account and change the password. She had been trying to play the "Ice Princess" soundtrack on her computer, which I had purchased with my account. Due to a bug (or so I presume), both computers had to be re-authorized after the upgrade to iTunes 7. Unfortunately, I now have two separate authorizations for one computer, which counts as two total. I hadn't re-authorized her PC.

When she tried to play a song from the album, an iTunes notice would come up saying that the "computer is not authorized" to play the content. The box contained my iTunes ID, which is an e-mail address. So iTunes gave her the first information that she needed: user name. Alongside the box for the password was a button asking, "forgot password?" By clicking on this button, my daughter ended up at a page asking for my birthday, which she knew, and the answer to a question I placed there. She didn't know the answer, but she eventually guessed it. This now took her to the option for changing the password to my account.

When showing me how easily she got through this process and reaching the change password option, she asked, "Why doesn't it ask for your old password first?" I asked myself the same question. But, duh, it's a dumb question because the point is to retrieve a forgotten password.

For all the talk about PatchGuard and protected or unprotected kernels, lots of good (or bad, I guess) hacking comes from little more than social engineering or good guesswork. With respect to iTunes, I set up the account three years ago and never bothered to really look at the security process afterwards. In looking at it again, I see several areas of concern.

The first is the presumption that only someone trusted would have access to the song in question, such as a family member using another computer in the home. But Apple now allows the moving of store purchased content from iPod back to any PC. So any kid with an iPod could carry around music that if transferred would give an outsider access to the account holder's ID. With that information, the person would need to get the birthday of the account holder, whether kid or adult. Birthday is not a hard piece of information to obtain.

The second is the secret question. Apple takes the commendable approach of letting people choose the secret question and answer. Too many security questions are set around guessable stuff like pet's names or hometown. So, good Apple, except: people might not understand enough to choose a good question or answer. I'm extremely security conscious, and still a 12 year old could hack my account. How many people will pick something with an answer tough to figure out, if I didn't?

I don't mean to single out Apple here. Probably swapping out the birthday for another security check would resolve any potential problems. But the example illustrates the point of how hard it is to do security well. Starting point is policy

Good and consistent security policy, along with a whole lot more education, is necessary so that people no longer do things like set their password to "password." I love the services that actually indicate how secure a password is as you type it. That's great policy that builds in some user education and added protection.

I'm as harsh a critic as anybody about Microsoft security. But Microsoft deserves--and doesn't get much--credit for a safety approach that looks to close down some of these social engineering mechanisms, with Internet Explorer 7 and its antiphishing tools as being one example. I've harped on this security policy topic before, in 2003 and 2004. And it's going to be a bigger problem as more people directly consume services from the Web. It's standard now for companies to post a privacy policy. But how many Websites offering services mandate a security policy and help customers abide by it? I tell you, not anywhere close to enough.

Under the programs, consumers purchasing Windows XP and/or Office 2003 on PCs would be eligible for free or discounted upgrades to comparable versions of Windows Vista and/or Office 2007.

There are important differences in the two programs that could affect complexity and what software consumers get and for how much. Microsoft will directly handle the fulfillment of Windows Vista upgrades through system builders and all Office 2007 upgrades. Microsoft plans to offer these upgrades at no cost. However, OEM PC manufacturers will directly handle Windows Vista upgrades, including terms and fulfillment. Those terms could mean nominal to hefty upgrade or shipping fees.

The latter scenario is problematic and could introduce unnecessary consumer cost and complexity to the upgrade program. Based on the "save-a-nickel" approach I've seen computer manufacturers take before--like shipping inferior graphics cards on entertainment PCs--things could get ugly for consumers. While Microsoft might take blame in the news media and from some customers, the company shouldn't be faulted for its partners sins, so to speak.

Uncertain cost isn't the only complexity consideration. PC manufacturers have some discretion over upgrade version and cost associated with it. So, conceivably, one computer could qualify for a free upgrade to Windows XP Home Premium for nominal cost, while a different PC might qualify for Windows Vista Ultimate for significantly higher cost. By contrast, the upgrade program for system builders, which Microsoft administrates, follows a clearer path: Windows Media Center PC purchases qualify for Windows Vista Home Premium and Tablet PC and Windows XP Pro qualify for Windows Vista Business.

I strongly encourage Microsoft PC partners to seriously consider how they will enact the upgrade program and for what cost. The program should be available for all Media Center, Tablet PC and Windows XP Professional PCs, regardless of age. If somebody sells the computer, whether sitting on the shelf for a few months at Best Buy or from Dell's Outlet store, and it has the right operating system, the upgrade guarantee should be valid. PC manufacturers also should take as consistent approach as possible. Too many different upgrade paths will confuse consumers. Different upgrade pricing for different SKUs will increase complexity, either delaying a PC purchase or sending the customer to a different manufacturer or retailer. I can't say this strongly enough: Simple, simple, simple.

Any PC manufacturer that treats the guarantee program as profit opportunity is missing the real opportunity: Selling PCs during the holidays. PCs sold during the holidays can command a premium price. The same cannot be said of PCs sold in January. In past years, PC manufacturers and retailers have offered deep discounts to clear out leftover holiday inventory. I predict that many consumers will expect bargain basement prices for January PCs, even those shipping with Windows Vista. I can't strongly enough encourage Microsoft PC partners to make the upgrade program as appealing as possible. Trying to cash in on the program during holidays could be costly come early 2007.

Finally, Windows XP Home PCs, which are increasingly the no-frills models, won't be eligible for free anything. There will be an option to buy Windows Vista Home Basic or Windows Vista Home Premium for about half the upgrade price.

One serious point of concern: Several PC manufacturers sell--heck, promote--small business PCs with Windows XP Home. It's a pervasive problem with some manufacturers. In one case I looked at earlier this month, all of about 20 small business SKUs came with Windows XP Home. That's a bad practice, and it's one about to get worse, if the small business' "guaranteed" upgrade is to Windows Basic or Windows Vista Premium.

Sometime last year, I heard someone at Microsoft use the word "goodness" to describe one of the company's new products. I found the usage unusual in context but dismissed it until I heard the word again. And again. And again. Now it's a rare product briefing when goodness isn't used someplace.

I blog about it now, because I've started hearing people outside Microsoft use goodness in a similar way: "It's all goodness," or something like that--and usually in reference to a Microsoft product.

Tragic is the blandness of the word. And it's kind of meaningless in the context usually used. Better: Microsoft propagating something more catchy, within and outside the company that achieves some real marketing objective. The viral spread of goodness shows the way for Microsoft to achieve, ah, well, greater goodness.

Over the coming months, Microsoft will almost certainly continue to tout development partner opportunities around new versions of Exchange, Office, SharePoint, Windows and other new products. All the while, Microsoft will continue to increase competition with many of those same partners. As I explained in last year's JupiterResearch report "Microsoft 2005: Uncovering Partner and Competitor Opportunities," Microsoft is increasingly turning existing applications into so-called platforms, with the expectation that other vendors will build onto them. So a CRM application is good partnering from Microsoft's perspective, as long as the developer build on top of Office and, say, Dynamics CRM. The developer of a third-party CRM application, one that doesn't rely on a Microsoft platform, would be a competitor. There will be little grey area.

Microsoft partners need to seriously understand that their development opportunities increasingly will narrow in the future. I do see potential benefits for corporate in-house developers whose businesses use Microsoft software. Third-party developers are another matter. If you're a Microsoft partner uncertain about the company's rhetoric, just look to companies like McAfee and Symantec, which until recently were coveted partners. The circumstance may foreshadow yours.

Back in May, Wall Street Journal columnist Walt Mossberg raised serious concerns about Microsoft's longstanding partner approach in column "In Our Post-PC Era, Apple's Device Model Beats the PC Way." While I'm sure Microsoft's developer relations folks would disagree, I absolutely see Microsoft moving to a model where it delivers more core end-to-end products. Partners opportunities would remain, but diminished compared to those available in the 1980s and 1990s.

Microsoft has been talking "Integrated Innovation" now for three years. What's not end-to-end about Microsoft tightly coupling together its core products? Xbox is the great consumer end-to-end example, so is forthcoming Zune. These products offer some partnership, but limited along the lines of the Macintosh or Playstation.

This last week, Microsoft CEO Steve Ballmer said the company had raised its research and development spending to around $7 billion. That's an enormous amount of R&D for a software company. It's not like Microsoft is designing jumbo jets or nuclear reactors. Would Microsoft really need to spend that much money if it relied on partners the way it did a decade ago? I wonder. I do believe the amount of spending suggests lots about the breadth of what Microsoft plans to offer end-to-end--Integration Innovation--on its own.

Microsoft partners should chew on this: When Intel becomes a Microsoft competitor, who is left?