MICROSOFT ESCALATED ITS Web services battle with competitors such as Sun Microsystems last week by pouring $51 million into peer-to-peer pioneer Groove Networks, amounting to nearly a 20 percent stake in the startup.

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In the wake of last week's deal, some observers see Microsoft's investment as a way to bring Groove's p-to-p platform in as another weapon in its arsenal against Sun to complement the dozen or so services components in its MyServices.Net platform, formerly known as Hailstorm. It also may lend more credibility to p-to-p as a viable enterprise-level technology in the enterprise, some believe.

"With this deal we are entering into a new phase in the evolution of Web services in that major players are now bringing in key outside partners and essential best-of-breed applications," said Dana Gardner, an analyst at The Aberdeen Group in Boston. "So in addition to doing e-mail and instant messaging and single sign on, Microsoft can also create p-to-p links for collaboration services," Gardner said.

"This deal is an obvious thing they [Groove] needed to do for their own survival's sake. But for Microsoft it gives them a new deployment environment for their Web Services applications," said Simon Yates, an analyst at Forrester Research, in Cambridge, Mass.

Looking at the deal's potential longer-term ramifications, Yates said it may give Microsoft another viable option for delivery or otherwise making its Office products available to corporate users.

"When we buy apps from Microsoft today we go through the hell of loading them from the CD, getting the inevitable software configuration errors that comes from setting them up. But in the future you will be able to just call them through a Groove environment and use your favorite apps on a service model as opposed to a licensing model," Yates said.

Officials from both companies believe the deal will be mutually beneficial in that a tighter working relationship between the two will serve to strengthen Groove's p-to-p networking platform and Microsoft's .NET development initiative gains an attractive poster child.

"This relationship will accelerate our ability to deliver value to our mutual customers," said Ray Ozzie, Groove's CEO, based in Beverly, Mass. "We have been working with Microsoft on the .NET initiative and their .NET Framework which, when combined with tools like Visual Studio .NET, will make it easier for developers to write applications for Groove," he said.

"This investment demonstrates we are taking the relationship to the next level. It deepens our commitment to working with Groove on this shared vision we have centered around Web and per services," said Jeff Raikes, group vice president of Microsoft's Business Productivity Group in Redmond, Wash.

The two companies have been working increasingly closer together over the last year or so on multiple projects, including tighter integration of Microsoft's Windows Messenger with Groove's p-to-p platform, allowing users to communicate and collaborate more naturally; better integration with Microsoft Office XP and Groove centering around document collaboration; joint development work around Microsoft's Tablet PC and wireless networks believing the Tablet to be "an ideal device" for using Groove in a collaborative meeting environment; and work by Groove to produce a rich set of peer services to complement Microsoft's existing .NET Web and peer services.

Raikes had no trouble assessing the advantages the deal gives Microsoft relative to archrival Sun.

"The last few years Sun has taken the approach of focusing on dumb clients, which goes against the whole network computing approach. We recognize there are smart clients and servers out there all working together, and combined with what Groove can offer, we can deliver a much more comprehensive set of solutions," Raikes said.

While Ozzie and Microsoft Chairman Bill Gates have been trading compliments about each other's major products and initiatives over the past year, it remained unclear last week whether the two companies would be trading code to jointly develop new products that would be integrated in each other's core products.

"This figures to be an interesting decade for the creation of online collaboration and communications, and so we are focused on what Groove's strategy there is and we will support them. Over the long term there will be a lot of development we will be doing. How that is packaged in terms of products it is hard to say," Raikes said.