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.''