HOW TO LIVE WITH MICROSOFT.

There's an old parable about a scorpion who hitches a ride across a river on the back of a frog, and then stings the frog in mid-river. "Why?" the frog asks. "Now you're going to drown." Says the scorpion: "I can't help myself. It's just my nature."

The past few weeks have not been happy times for anyone who hoped to see a kindlier, gentler Microsoft. The U.S. Court of Appeals effectively gutted the three-year antitrust case against the company, leaving only a few hard-to-prove loose ends for new lawyers at the Justice Department to take back to a new judge. Meanwhile, Microsoft has already begun making meaningless concessions: PC manufacturers will soon have the right to pre-install any browser they want with Windows XP machines. Oops, there really are no other browsers left, but presumably it's the thought that counts.

Elsewhere in the news, we have the sad tale of Eastman Kodak, which thought its new photo imaging software--desperately needed to help replace Kodak's old film-based business--would pop up more or less automatically on the new XP desktop. Oops, what pops up is a Microsoft knockoff; the Kodak product is buried so deep that Kodak officials say digital camera users will have to call Kodak's tech support to find it.

And so it goes. Microsoft swaggers through the market, jacking up prices, rewriting license agreements, demanding software piracy audits with no evidence of wrongdoing. In the enterprise world, Microsoft is finally winning serious market share in operating systems and SQL databases; in the consumer world, the X-box videogame system is likely to bring more millions of consumer households into the Microsoft camp. And on the Web, there's a good chance that Microsoft will eventually own much of the infrastructure for digital commerce, with a few well- placed toll booths to capture a brand-new cascade of cash. We're not talking 800-pound gorillas any more: This is King Kong reborn.

In fairness, much of Microsoft's swagger these days is the well- deserved payoff for good strategic thinking and ambitious investment. But Microsoft collectively is also a company with a culture that encourages petty, paranoid, manipulative behavior. A pinch of corporate paranoia may be useful, as Intel's Andy Grove once pointed out, but Microsoft's behavior goes way off the scale--often so far off that the company gets in hot water for no tangible benefit.

And the trouble is, Microsoft is now so pervasive in the software world that its presence and behavior have become crucial marketplace factors. These days, running a business without a solid "Microsoft strategy" is probably as dumb as--well, dot-com business plans come to mind, and we all know what happened to those folks.

So what sort of survival strategies make sense in a Microsoft-dominated environment? A few suggestions:

* Never ride Microsoft's coattails: Microsoft has a huge arsenal of marketing programs, ranging from Windows desktop real estate to deep discounts on OEM software. So it's no surprise that even giants like AOL and Kodak make respectful pilgrimages to Redmond, hoping to work out co-marketing campaigns. However, the risk from these deals is substantial: Microsoft gets some of its most valuable market intelligence from co-promotions, and regularly uses this intelligence to jump-start its own competing products. Bottom line: Marketing deals with Microsoft may look like a way to put growth on a fast track; in practice, they just speed up competition. (Partnering with Microsoft on purely technical issues seems to be less dangerous: The risk factor is usually directly proportional to the money on the table.)

* Establish a proprietary standard: An important part of the Microsoft playbook is grabbing control of weakly-defended interoperability standards, which it then "embraces and extends." Since most vendors let ineffectual committees handle the standard-setting process, Microsoft can usually co-opt a standard without much opposition (as it's now doing with digital imaging and XML standards). Microsoft has a much harder time when a company aggressively brands and controls a standard- -witness AOL's effective defense of its proprietary Instant Messaging protocols.

* Seize the high ground: If a technology can't be quickly transformed into a low-priced, mass-market commodity, Microsoft often has trouble turning a profit. Thus, it's generally safe to target high-end professional niches where customer acceptance depends more on hard-to- find domain knowledge rather than pricing or access to mass channels. Accounting and project management, for example, are two segments where Microsoft has never successfully challenged the high-end market leaders, despite hefty investments in product development and marketing.

* Build service-centric relationships: For all its new embrace of a service-oriented business model, Microsoft is fundamentally a product- centric company. At least for the moment, the company tends to offload the messy work of system integration and ongoing support to "business partners," who are much less formidable competitors than the Redmond steamroller. Companies that have built strong reputations for service expertise and responsiveness are generally able to hang on to customers, especially for relationships where services make up a large percentage of the total price.

* Trust the marketplace: Now that the Microsoft antitrust case has largely fizzled, it's worth remembering that the case was inspired-- rightly or wrongly--by unhappy competitors who hoped a big, bad government troll would defend their interests. It's also worth remembering that Lotus, WordPerfect, and SPC (all now gone as independent companies) once refused to develop Windows titles and instead tried to steer users toward IBM's OS/2. And it's also worth remembering Apple's long and wasted lawsuit over control of the desktop metaphor. In the end, political and legal challenges have been a losing alternative to the only sensible anti-Microsoft strategy: Listen to customers and deliver what the market really wants.

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