Update: Microsoft gets into the 'Groove'

Microsoft Corp. today announced it would put up approximately $51 million to fund the ongoing operations of Groove Networks Inc., a peer-to-peer collaborative application software company.

Groove, in Beverly, Mass., will remain independent after the deal, with Microsoft holding a minority equity stake. According to Groove, previous investors, including Accel Partners, also participated in Groove's $54 million financing.

Almost a year ago, Groove was launched with great fanfare, including a videotaped testimonial from Microsoft Chairman Bill Gates.

"There's a great deal of mutual respect here," said analyst Dana Gardner at Aberdeen Group Inc. in Boston. "This is a natural fit."

Groove uses a peer-to-peer model to initiate and maintain work spaces where users exchange text sessions with instant messaging software, applications, voice and video in real time through various panes within one frame. The data is stored on each user's hard drive. Off-line users download updated information from ongoing Groove sessions when they log on.

"It certainly fits well with the Microsoft vision of a fat client or a fully-enabled PC on every desktop that can work through an Internet infrastructure," Gardner said.

Ray Ozzie, Groove's CEO, also created the Notes e-mail and collaboration software through his company Iris Associates, which he founded in 1984. Ten years later, Lotus Development Corp. in Cambridge, Mass., purchased Notes from Iris, after spending hundreds of millions of dollars in development costs. Now IBM owns Lotus, which is the main competitor to Microsoft's Exchange platform for messaging and collaboration.

Yet again, Ozzie has found a large backer to fund his development costs.

"Groove is independent but has a sugar daddy," Gardner said.

In a teleconference this afternoon, both Ozzie and Jeff Raikes, Microsoft's Business Productivity Group vice president, said there is no explicit channel agreement with Groove. Groove, for example, won't be embedded into the Windows desktop or into its portal integration software server, SharePoint or SharePoint Team Services. However, they did acknowledge the overlapping functions of Groove and SharePoint.

"Groove will leverage (Sharepoint) to enhance knowledge workers. How this all plays out in terms of specific product services, all I'll say today is we're very pleased at the level of cooperation," Raikes said, "As [the] senior exec in charge of this relationship," Raikes said he would be happy to see the technologies combined. "I think there's going to be lots more work together in terms of how we can enhance our products together."

"As a direct result of the strategic relationship that we announced today, we will be working even more closely with Microsoft," Ozzie said.

"When Groove was first introduced about a year ago, we indicated how excited we were about the technology, not only because of its advanced use of our .Net tools and infrastructure, but also because it represented a new breed of innovative software that takes full advantage of the PC and the rich communication aspects of the Internet," said Steve Ballmer, CEO of Microsoft, said in a statement.

In the same statement, Ozzie said, "For nearly a year, we have been working with Microsoft on several initiatives, as our early customers have asked for tighter integration with Office applications, interoperability with Windows Messenger and an understanding of how we will employ .Net technologies and services. We've made significant progress on these and other initiatives and now look forward to working even more closely with Microsoft to ensure that we capitalize on the strengths of our respective technologies to deliver cross-enterprise collaboration solutions for our customers."

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