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Microsoft's Future 2/2
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- Date: Fri, 9 Jan 1998 18:42:40 -0500
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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.
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
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
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
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
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
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
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
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.