Microsoft's Future 2/2

[Anonymous <anon@anon.efga.org>]

         Chances are it's a safe bet. While Microsoft concedes that Windows
         NT servers won't replace the world's supply of mainframe computers
         anytime soon, Jeffrey S. Raikes, Microsoft's group vice-president for
         sales and marketing, predicts that in the next few years, NT could
         unseat IBM's stalwart AS/400 minicomputer--a $3.4 billion annual
         business. By selling NT, Office 97, and a suite of networking software
         called BackOffice, Raikes' goal is to increase Microsoft's average
         annual revenues per corporate computer user from less than $150
         today to more than $200 in the next two years.

         Analysts like what they see. They predict the software maker will sell $5
         billion worth of NT and BackOffice by 2000, double what's expected
         this fiscal year. ''Today, we see Microsoft software at the heart of
         almost every desktop,'' says analyst Neil Herman of Salomon Smith
         Barney. ''In 10 years, we'll see Microsoft software at the heart of 90% of
         the servers out there, too.''

         One company already feeling the heat is Netscape. On Jan. 5, the
         Silicon Valley highflier announced that its quarterly sales would be $125
         million to $130 million--well below the $165 million analysts had
         expected. Worse, it will report its first loss in nine quarters. The reason:
         Netscape's server and browser sales are down because of stiff
         competition from Microsoft and IBM (page 69). ''Microsoft is the
         primary cause of Netscape's problems,'' says analyst Bruce D. Smith of
         Merrill Lynch & Co.

         That doesn't mean Microsoft will own enterprise. The operating system
         accounts for just 20% of the installed base of computer servers. And for
         the rest of that business Microsoft faces a revitalized IBM that is well
         entrenched in Corporate America and becoming a formidable
         competitor on the Net. After stumbling in the early '90s, IBM has made
         a remarkable comeback by using PC technology to sell mainframe
         computers costing less than one-tenth what customers paid in the late
         1980s. That has kept many major customers true blue.

         Database giant Oracle also has an incredibly loyal following. It has 39%
         of that sector, vs. less than 4% for Microsoft's SQL Server. Microsoft's
         database software is still seen as not powerful enough to handle the
         really big jobs at giant corporations. ''Microsoft has given their
         database away, but it hasn't helped--because their database isn't any
         good,'' says Oracle's Ellison.

         And then there's Java. Sun Microsystems' much hyped programming
         language offers the prospect of an alternative to Windows, since
         applications written in it can run on any operating system. So far,
         Microsoft has convinced hundreds of corporate customers that they can
         save money by running even their biggest jobs on NT. But many
         companies still have millions invested in mainframes, and moving
         everything to Windows could take years. Java offers an alternative. This
         software--used to write other programs--runs on a variety of computer
         architectures. That helps it to act as a digital glue for creating programs
         that allow companies to use existing software, such as mainframe
         programs, while still tapping into new Internet businesses.

         Early this year, Java will get better yet. Improved security and
         performance could make it more appealing to use on a slew of
         devices. ''Between Java cards and Java rings and Java phones and
         Java set-top boxes and Java everything else, we're going to destroy
         them on unit volume,'' predicts Sun CEO Scott G. McNealy. For all this,
         analysts don't see Java replacing Windows anytime soon. The 700,000
         software developers using Java pales next to the 4.5 million that
         Windows claims. Even John F. Andrews, chief information officer for
         transportation giant CSX Corp. and a huge Java fan, says: ''Java's a
         punch, but it's not a knockout.''

         That's because Microsoft is well protected. Many corporations have
         already standardized on Windows and its desktop applications. So
         now, they're interested in buying software from Microsoft that can help
         tie their computer systems together more simply and run their large
         databases, accounting systems, and manufacturing operations. ''The
         plan ultimately is to run everything on one platform. That's the carrot out
         there,'' says Dean Halley, an information-systems executive at Credit
         Suisse First Boston Corp.

         THE INTERNET
         When it comes to new markets, none is as vast and potentially lucrative
         as the Internet. Analysts predict that Net revenues from software and
         commerce will reach dizzying heights--as much as $100 billion by
         2000. And no single company is investing so much or so broadly--or
         holds as many of the pieces--as Microsoft. In the two years since it
         vowed to become a leader in cyberspace, Microsoft has been true to
         its word.

         The most visible proof is Internet Explorer. Since releasing the first
         version of IE a little more than two years ago, Microsoft has jetted from
         zero to 40% of the market. Moreover, if the software maker's plans to
         weave the browser into Windows 98 go unhampered by the Justice
         Dept., analysts expect IE to shoot past market leader Netscape to
         become No.1 this year.

         Microsoft's browser has one huge draw: It's free. Cash-rich Microsoft
         can afford such tactics, while scrappy rivals such as Netscape have to
         charge a few dollars. And that can make a difference. Internet service
         provider Concentric Network Corp., for example, switched from
         Netscape's browser to IE over price. ''We're operating on slim margins,
         so it matters,'' says Vice-President James Isaacs.

         That has sent Netscape looking for more lucrative server business. ''If I
         had to depend on the browser for profits, I'd be flat-ass broke,'' says
         Netscape CEO James L. Barksdale. In the face of a loss for the
         quarter, Netscape may be forced to match Microsoft's giveaway
         strategy.

         Internet Explorer is just the tip of the iceberg. Across the board,
         Microsoft is making the Net its No.1 priority. ''It's hard to think of much
         that we're doing that isn't influenced by the Internet,'' says Gates. ''All of
         our software is very tied up in helping people use the Internet in a better
         way.''

         That includes deep-pocketed corporate customers. As they refashion
         their businesses around the Internet, Microsoft is out to make sure that
         Windows NT will be the software of choice. In the past few months,
         Microsoft has updated all of its corporate software to boost the latest
         Internet features. BackOffice, for example, now includes Commerce
         Server, specialized software that companies such as Barnes & Noble
         Inc. and Dell Computer Corp. use to run their online sales operations.

         As it does in the browser market, Microsoft gives away much of its
         basic Internet server software. It packages Internet programs, such as
         Site Server for managing Web sites, with BackOffice at no additional
         cost. And each copy of NT includes Internet Information Server, a basic
         Web-server program. That has helped catapult Microsoft's share of
         Web and corporate intranet servers to 55%, with all rival Unix makers
         combined at No.2, with a 36% share.

         The Net initiatives that draw the most attention, though, are Microsoft's
         attempts at building new Web-style businesses. It has set up 16 Web
         sites for everything from online investing to travel reservations to home
         buying.

         Some of these Web sites are already leaders in their categories.
         Microsoft's Expedia is in a dead heat with Preview Travel and
         Travelocity for the top spot in online travel, with more than $2 million in
         bookings a week. CarPoint has quickly become a popular spot for car
         buyers. This year, CarPoint is expected to begin offering insurance and
         financing services that will make it a one-stop shop for auto needs.
         Forrester Research Inc. predicts that CarPoint will rack up sales of $10
         million a month within a couple of years. MSNBC, Microsoft's news
         venture with NBC, ranks third--after Softbank's news site ZDNet, and
         Walt Disney's site--in the most recent PC Meter Survey of Web-site
         viewership in the news, information, and entertainment category.

         Microsoft plans to launch a couple of new sites this year. One,
         code-named Boardwalk, will let home buyers shop for real estate and
         mortgages. The other is an online bill-paying service that will be
         operated as a joint venture with First Data Corp. ''There will be three or
         four major networks on the Internet, and we expect to be one of them,''
         says Jeff Sanderson, general manager for Microsoft Network, the
         software giant's online service. By some measures, Microsoft is
         already there. PC Meter rates Microsoft's 16 Web sites combined as
         No.4 in its monthly survey--behind only America Online, Yahoo!, and
         Netscape.

         LOCAL UPRISING. The prospect of Microsoft entering everything from
         travel to car sales has put competitors on alert. Indeed, even a rumor of
         Microsoft's imminent arrival can jolt formerly complacent industries into
         action. Take newspaper publishers. Last year, when Microsoft
         announced it would launch Sidewalk, a series of Web sites offering
         local-entertainment listings, newspaper publishers geared up to protect
         their $24 billion in annual local advertising. Some 136 newspapers
         signed up with Zip2 Corp., a Mountain View (Calif.) supplier of online
         publishing technology that helps publishers create electronic versions
         of their newspapers. ''Microsoft tries to scare people into giving up, but
         it's just not working,'' says Zip2 CEO Rich Sorkin, who claims that his
         combined newspaper sites are racking up 8 million viewers a
         month--nearly triple the traffic Microsoft's 10 Sidewalk sites are
         drawing.

         So are critics' fears founded? Gates claims Microsoft has no grand
         plan to control the Net. What's more, not all of his Web ventures have
         been hits. Microsoft Network, the company's online service, has failed
         to live up to its early hype.

         LONG-TERM VIEW. While some of these new business are starting to
         pay off, Microsoft views the estimated $250 million a year it spends on
         Web sites as an investment in the future. ''Anybody involved in this is
         projecting out 5 to 10 years and asking what can they start to build now
         that can become more valuable as the Internet becomes more
         mainstream,'' says Gates.

         For that reason, Microsoft's biggest Web opportunity may lie in doing
         what it does best--creating software for others to use and build upon. It
         has begun selling its online travel software to airlines, including
         Northwest Airlines Corp. and Continental Airlines Inc. And American
         Express Co. is selling travel services to corporations based on
         Microsoft software called Microsoft Travel Technologies. ''They paid us
         quite a bit for that,'' says Gates. The potential looks huge: American
         Express Interactive is being rolled out in 20 large corporations,
         including Monsanto and Chrysler. An additional 180 companies will be
         using it by the end of 1998. All told, these companies represent more
         than $5 billion in yearly travel purchases, according to Microsoft's
         Richard Barton, general manager of Expedia.

         Still, it is unlikely that Microsoft will dominate the Web the way it has PC
         software. For one, it must compete against the giants in their fields, be
         they bankers, stock brokerages, real estate empires, auto makers, or
         travel agents. And the Web is still a work in progress, with new sites
         and opportunities popping up every day. Even with Windows as a
         starting point for most computer users, ''everything else is just a click
         away,'' says Bill Bass, a new-media analyst for Forrester Research.

         For his part, Gates doesn't show any willingness to let up to placate his
         critics or government investigators. And there's no sign in Redmond of
         complacency. In fact, Gates sees threats all around--even from
         operating systems that few people have ever heard of and Web sites
         that haven't been created yet. The key for Microsoft, he says, is
         satisfying customers, innovating, and keeping prices low. ''If we don't
         do all of these things,'' says its 43-year-old chairman, ''Microsoft will be
         replaced.''

         It's that sort of paranoia that has enabled Mircosoft to survive and thrive.
         It's possible, of course, that competitors will blunt his new attack in at
         least some areas. But unless the government succeeds in a full-scale
         antitrust assault, Bill Gates and Microsoft are destined to become a still
         more potent force in the world's most important industry.

         By Steve Hamm in Redmond, Wash., with Amy Cortese in New York
         and Susan B. Garland in Washington, D.C.