Microsoft's Future

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

                       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.''