MICROSOFT'S
FUTURE
A band of powerful foes is determined to slow
the Gates juggernaut, but Microsoft's reach
already extends further than you may think
In December, Samuel Goodhope stood hunched over an Austin
conference-room table eyeing a dismembered personal computer. As
a special assistant in the Texas Attorney General's office and point
man in its antitrust investigation into Microsoft Corp., he needed a keen
understanding of a PC's innards. So a technician painstakingly
explained how each of the components is supplied by a different
company, but they must all work with the critical Windows operating
system made by a single corporation, Microsoft. That's when it hit him:
Microsoft owns a key monopoly in the Digital Age, and the software
maker is a lot like the Borg. These fictional Star Trek characters--part
flesh, part machine--prowl the universe conquering other races.
''Resistance is futile,'' says Goodhope in a mechanical, Borg-like voice.
''You will be assimilated.''
Microsoft and its hypercompetitive chairman, William H. Gates III, are
no science-fiction fantasy. And the Texas Attorney General's office fully
intends to resist. Indeed, Goodhope predicts that two dozen states will
soon join his effort--amassing some 100 attorneys for a Big
Tobacco-style courtroom battle that he says could reshape the
computing landscape. ''We're talking about what the high-tech world is
going to look like in five years,'' says Goodhope. ''Will the Information
Superhighway become the Bill Gates toll road?''
Microphobia, a national pastime in recent years, is reaching a new
frenzy. Since October, the most influential company in the $700 billion
U.S. computer industry has been under siege from all quarters. Texas
and eight other states have launched investigations into whether the
software giant is using anticompetitive tactics. Consumer advocate
Ralph Nader is calling for a breakup of the company. The European
Commission is mulling a probe of its own. And Microsoft is embroiled
in a knock-down, drag-out fight with the Justice Dept. over whether it is
violating a 1995 consent decree by requiring PC makers to ship its
Internet browser with Windows 95. ''This kind of product-forcing is an
abuse of monopoly power--and we will seek to put an end to it,'' vows
Joel I. Klein, Assistant Attorney General for the Antitrust Div.
For his part, Gates denies violating any laws and says the earlier
consent decree with Justice allows Microsoft to enhance Windows.
Browsing, he says, is a natural addition to an operating system. ''What
we're doing is quite straightforward and quite pro-customer,'' Gates
says. ''In no way are we eliminating choice.'' He also bristles at the
notion that Microsoft wants to turn the Internet into its personal toll road.
''We'll get our revenue from selling great software.''
Microsoft's dispute with the Justice Dept. is no mere joust over the
mechanics of linking a Web browser to the ubiquitous Windows 95.
The passions aroused in the government and industry alike reflect the
realization that this is a bruising fight over which companies will
dominate the Internet and move into new markets from there. The prize
is huge. The Net not only opens the possibility of a vast new
marketplace for everything from banking to buying cars, but it is also
the electronic gateway into homes and--perhaps more important--into
corporations. Owning the browser and Internet server software could
well become as key to the new age of Net computing as Windows is to
PCs.
If Gates extends his PC hegemony to these new realms, the little
software company he co-founded in 1975 could come to dominate the
nexus of computing and communications well into the 21st century.
''The question is, are we looking forward to the Information Age, or will it
be the Microsoft Age?'' asks Lawrence J. Ellison, chairman of
database maker Oracle Corp. ''It's kind of like Microsoft vs.
mankind--and mankind is the underdog.''
A BROADER CASE? Hyperbole aside, Microsoft wants to move into
every business where software matters--from the chilled rooms of
mainframe computing to the household appliances that are being
computerized. Gates wants to expand into the corporate-enterprise
market--from databases to E-mail. And he wants to play in consumer
electronics--from TV set-top boxes to car navigation systems.
Rivals and critics hope the Justice Dept. can slow down Microsoft's
pace. The current dispute, which centers on Windows 95, is likely to
have little effect on Microsoft. But if Justic broadens its suit to cover the
upcoming Windows 98--something it has hinted it might do--or attacks
Windows NT as well, Microsoft would suffer a devastating blow.
''Unless we're allowed to enhance Windows, I don't know how to do my
job,'' says Gates. It would also set an ominous precedent that cuts to
the heart of the software maker's strategy of melding Internet
capabilities into all of its products--from PC software to new
consumer-electronics offerings to corporate enterprise programs.
It could get worse for Gates. No matter how the current dispute is
resolved, Klein and his team could bring a broader antitrust case.
Caswell O. Hobbs, a Washington (D.C.) antitrust attorney with Morgan,
Lewis & Bockius, says the current consent violation case is just ''an
opening salvo. I'm sure it's not the last of the proceedings.''
In its thinking on Microsoft, Justice is relying on a novel theory in
antitrust law. It's not only about monopoly pricing power, as in the days
of the Robber Barons. Information technology, after all, is an industry in
which prices fall. Rather, Justice is concerned that Microsoft's
operating system is so dominant that it is the de facto standard, the
very springboard for all sorts of new applications software. By
controlling the standard, Justice fears, Microsoft stifles innovation. That
means competing technologies, even if they're better, stand little
chance, making it tough for startups to bring whizzy new inventions to
market. ''They're hell-bent on dominating the entire information
infrastructure of the world,'' says attorney Gary Reback, who represents
rival Netscape Communications Corp., ''and it scares the daylights out
of me.''
Such talk rankles Gates. He says his rivals should spend less time
obsessing about Microsoft and more time on their own businesses.
What's more, he argues, there's no assurance Microsoft will succeed in
any new markets, much less dominate them. The emergence of
Netscape's popular Navigator browser and Sun Microsystems Inc.'s
Java programming language--threats to Windows, as he sees it--shows
that the industry is highly competitive. ''No one has a guaranteed
position,'' says Gates.
Point taken. But if ever there was a company that has the best seat in
the house, it's Microsoft. It practically owns the PC software market. Its
Windows operating system claims some 86% of that segment, and its
Office suite of productivity programs, including a spreadsheet and word
processor, has an 87% lock. Game won--and the victor has emerged
enormously wealthy. Microsoft is expected to reel in more than $4
billion in profits this fiscal year, which ends in June, on $14 billion in
revenues, up 23% over a year ago. It looks even richer when compared
with the rest of the software industry: In calendar year 1996, its $8.7
billion in revenues accounted for 10% of all sales for the 613 publicly
traded software and information-services companies, says Standard &
Poor's Compustat. More significantly, its $3.1 billion in operating profits
was a remarkable 30% of all such profits.
With the company's pockets lined with riches from Windows and
related software, it can spend a staggering $2.5 billion a year on
new-product development--more than the annual profits of the next 10
largest software companies combined. And what it can't develop fast
enough, the company can buy. In the past two years, Microsoft has
invested in or acquired 37 companies. On Dec. 31, it added Hotmail,
an Internet E-mail startup founded by Sabeer Bhatia and Jack Smith,
for an estimated $350 million in stock (page 37). It has snapped up
technologies for surfing the Web via TV, for viewing video over the Net,
for authoring Web pages, and for computers to understand voice
commands. And still its cash hoard keeps climbing--from $6.9 billion in
mid-1996 to $10 billion today.
That has helped Microsoft extend its reach to brand-new terrain. In the
past year, Microsoft has gotten a jump in online travel services, car
sales, investment advice, and gaming. And Gates isn't shy about his
ambitions. ''We will not stop enhancing Windows,'' he says. ''We will not
succumb to the rhetoric of our competitors. We won't stop listening to
customers and being aggressive about meeting their needs.''
Indeed, 1998 may be the year Gates makes his biggest push yet
beyond the PC. Starting this month, planned new products will move
Windows into car dashboards, cell phones, point-of-sale devices, and
on up the food chain into powerful server computers that can do the job
of a mainframe. In short, the world ain't seen nothin' yet. Here's where
Microsoft is headed.
CONSUMER ELECTRONICS
On Jan. 10, the next chapter unfolds. That's when Gates will head to the
Consumer Electronics Show in Las Vegas to demonstrate new
$300-to-$500 palm-size devices that use a pint-size version of
Windows called CE, for consumer electronics. These gizmos go a long
way toward fulfilling Gates's dream of a ''wallet PC''--a tiny device for
keeping phone numbers, schedules, and zapping E-mail, all of which
can be synchronized with Windows PCs. A half-dozen manufacturers
are ready to ship the new palmtops, including Philips Electronics and
Samsung Co.
The real buzz at the electronics show could come from the debut of
Microsoft's ''Auto PC'' operating system. This version of Windows CE
is built into a car's sound system. It can handle cell-phone calls, fetch
E-mail, and dispense travel information--much like a ''Java car''
unveiled by rivals Sun, Netscape, and IBM in November. Nissan Motor
Co. will be the first to show Auto PC in an Infinity I-30 concept car. So
far only a handful of carmakers, including Volkswagen and Hyundai,
have signed up. Microsoft is betting that aftermarket car-component
companies will make Auto PC a hit. ''Windows CE gives us an
opportunity to sell more software to more people,'' says Kathryn Hinsch,
senior director of marketing for Windows CE. ''This could be the next
billion-dollar business for Microsoft.''
Windows CE is a classic example of how Microsoft stubbornly pushes
its way into new fields, even if it takes years. CE is the software giant's
third attempt to crack the handheld market--after its At Work and
Winpad operating systems that never caught on. Microsoft didn't give
up. Over the past seven years, it has continued to invest several
hundred million dollars to improve the basic software. CE was launched
in fall, 1996, and nine months later claimed 20% of the handheld
market, according to market researcher Dataquest Inc.
Today, CE is licensed by more than a dozen handheld manufacturers,
and it's finding its way into all manner of machines. Atlanta-based
Radiant Systems Inc., for example, plans to sell Windows CE
point-of-sale devices to fast-food restaurants this winter. Customers
press buttons on a screen to select the food and drinks they want--and
orders are instantly whisked to the kitchen. Such devices could help
boost Windows CE to 60% of the U.S. handheld market this year, says
International Data Corp.
What happens when even the try, try again approach fails? Consider
Microsoft's attempts to corral the TV set-top box market--the fulcrum for
software, entertainment, and Net cruising. In 1994, it debuted a scheme
for digital set-top boxes, but it fizzled along with the market for
interactive TVs.
So Microsoft tried a different method: acquiring the leading business.
Last winter, Microsoft spent $425 million to buy Silicon Valley startup
WebTV, which had pioneering technology for surfing the Net via TV.
Since then, Microsoft has improved WebTV with a faster setup and,
during the holiday shopping season, an added carrot--a $100 rebate to
anyone who bought a $279 WebTV device and signed up for six
months of the $19.95-a-month service. The result: WebTV has racked
up 250,000 subscribers, up from 50,000 a year ago, say WebTV
executives.
Still, the world of TV is proving tricky for Microsoft. Last spring, the
software maker once again began stumping to sell its designs to the
nation's cable-TV operators for their next-generation interactive
systems. The pitch: Microsoft would provide software for set-top boxes,
networks, and servers that pump info across the cable network. When
Microsoft paid $1 billion in June for a piece of cable operator Comcast,
it looked as though it might buy its way into becoming a top supplier of
software for interactive-cable systems. But no such luck--at least, not
yet. In October, the cable industry announced it would require all
suppliers to comply with a set of industry-standard specifications--not
necessarily those of Microsoft.
Gates regrouped. Microsoft revised its pitch to cable
operators--agreeing to comply with the specs and to sell pieces of its
software a la carte. It's unclear how Microsoft will fare, but one thing is
certain: Cable execs have seen how successful Microsoft is in PCs and
are determined not to let it control a key piece of cable-network
technology. ''We don't want to be Bill Gates's download,'' says
Tele-Communications Inc. President Leo J. Hinderly Jr. Still, rumors are
swirling that TCI is about to accept financing from Microsoft--which
could turn it into an ally overnight.
CORPORATE COMPUTING
Microsoft's high-stakes bid for the $30 billion corporate market has
never looked so good. Four years ago, it was nearly a no-show in
so-called ''enterprise'' software, which spans databases to E-mail to
powerful servers. After a dogged three years and $1 billion spent
beefing up its industrial-strength Windows NT, Microsoft is gaining
ground. Today, NT accounts for nearly 40% of server operating
systems, up from 24.5% a year ago, says IDC.
That share could take off even more when Microsoft ships its fifth and
most powerful version of NT late this year. With some 27 million lines of
code, it is the most ambitious program Microsoft has ever tackled--and
it could prove to be its trump card. NT 5.0 is designed to handle the
largest computing tasks, giving Microsoft a sorely needed piece to
push beyond midsize networks and small server jobs. Says James E.
Allchin, Microsoft senior vice-president of Personal & Business
Systems: ''Microsoft is betting the company on this.''
