"Apple's done a very nice job that allows people to monetize and commercialize their intellectual property" in the App Store, Microsoft CEO Steve Ballmer told a University of Washington audience last week.

Playing Bing-o

Although Ballmer was stating the obvious, observers and analysts quickly surmised that he was trying to sweeten the waters in advance of Apple's decision on whether to replace Google with Microsoft's Bing as the default search engine on the iPhone operating system.

Business Week reported in January that the two giants were in negotiations for that deal. Asked by Reuters about the prospects after unveiling the Windows 7 Phone Series last month, Ballmer said, "I hear the same rumors you do."

The App Store has more than 130,000 products for sale or free, fueling the sale of iPods and iPhones and creating a user experience that other smartphone manufacturers have tried to emulate. Microsoft's Windows Marketplace for Mobile has less than 1,000 apps.

No Denying It

"It would appear that Microsoft is no longer in denial about what Apple has accomplished," said Michael Gartenberg of the Altimeter Group, a technology consulting firm. "The question is, will Microsoft be able to drive a wedge between Apple and Google and find a new and unlikely ally in the mobile space?"

As Ballmer praised the App Store, the Electronic Frontier Foundation (EFF), a San Francisco-based nonprofit, launched a broadside against Apple by publishing the company's 28-page developer licensing agreement on its web site.

Since NASA now has an iPhone app, the group cleverly filed a Freedom of Information Act request for the agreement that the government agency signed with Apple.

'Major Shift'

"The entire family of devices built on the iPhone OS (iPhone, iPod touch, iPad) has been designed to run only software that is approved by Apple -- a major shift from the norms of the personal-computer market," Fred von Lohmann wrote in a legal analysis for the EFF. "Software developers who want Apple's approval must first agree to the iPhone Developer Program License Agreement."

Von Lohmann said the agreement is particularly worthy of scrutiny given the imminent release of the app-dependent iPad and a U.S. Copyright Office ruling on whether tinkering with the iPhone -- known as jailbreaking -- is legal.

He mentioned as "troubling highlights" the agreement's ban on public statements about the terms of the agreement; a stipulation that any applications developed with Apple's software development kit be distributed only through the App Store (which can prevent rejected apps from going elsewhere); and a ban on reverse engineering.

He said the jailbreaking ban prevents developers from tinkering with not just the iPhone but any Apple product, potentially making it impossible for iPhone developers to make iPods interact with open-source software.