The untold story of how the Internet forced Bill Gates to reverse course

Oh, our eyes have seen the glory of the coming of the Net,
We are ramping up our market share, objectives will be met.
Soon our browser will be everywhere, you ain't seen nothin' yet,
We embrace and we extend!

Battle Hymn of the Reorg
Anonymous Microsoft employee
MicroNews, the in-house newsletter

It's nearly 6:30 p.m. on a Friday in mid-May. Microsoft Corp.'s lush campus looks like one of Monet's paintings--a landscape afire with the rich purples and electric pinks of springtime flowers. But no one seems to notice. In the 800-person tools division, where they make products to help developers create software, nearly half the programmers are still hunched over computers, even though for many it's now hour 13 of the workday. Empty cups of espresso and the sleeping bags hooked to the backs of doors speak volumes about the night ahead. And the next night and the next. And probably the next year.

Microsoft, already the ultimate hardcore company, is entering a new dimension. It's called Internet time: a pace so frenetic it's like living dog years--each jammed with the events of seven normal ones. Microsoft employees are pulling all-nighters to make up for the precious time the company has lost to Internet go-getters such as Netscape Communications Corp. and Sun Microsystems Inc. ``O.K., so we missed the first round of the Internet. Bummer,'' says Cornelius Willis, Microsoft's product manager for Internet tools. ``But we're mobilized now!''

Until six months ago, it looked as if Microsoft might, in fact, be lost in cyberspace. It was so far behind Internet upstarts that industry analysts wondered if the company whose software dominated the PC era might be sidelined in a new age of Internet computing.

It's easy to see how Microsoft might have missed the warning signs. In the early 1990s, while the Net was making its amazing transformation from a nerd's network to a global communications and computing medium, Microsoft was growing explosively, tripling sales, to $3.8 billion, and boosting its payroll from 5,600 to 14,400 between 1990 and 1993--all thanks to the success of Windows.

By 1993, techno-hipsters were discovering something called the World Wide Web. It let you display graphics and photos on the Net and most important, let you jump from one Net computer to another by clicking on a highlighted word. At Microsoft headquarters in Redmond, Wash., however, the Net was little more than a curiosity. ``I wouldn't say it was clear it was going to explode over the next couple of years,'' says Chairman William H. Gates III. ``If you'd asked me then if most TV ads will have URLs [Web addresses] in them, I would have laughed.''

``DRIVING EVERYTHING.'' Even if Gates and his executives had had an inkling of the Web's trajectory, they had more pressing concerns. Government regulators were in the midst of a huge probe into Microsoft's alleged anticompetitive practices. A hush-hush group was creating a service to rival America Online Inc. Another was building Information Superhighway goodies--video servers for interactive TV, programs for settop boxes, and so on. Most importantly, legions of programmers were jamming to finish what would become Windows 95.

Microsoft's public reaction to the Web remained muted until last fall, when the Web's momentum was too great to ignore--as was the threat to Microsoft. Some 20 million people were surfing the Net without using Microsoft software. Worse, the Web--with a boost from Sun Microsystems' Java programming language--was emerging as a new ``platform'' to challenge Windows' hegemony on the PC.

Gates had had enough. On Dec. 7, he staged an all-day program for analysts, journalists, and customers to show that Microsoft had every intention of playing--and winning--in the new software game. It would make Web browsers, Web servers, and ``Web-ize'' existing Microsoft programs. It would even license Sun's Java--whatever it took.

Since then, everybody in Redmond has been on Internet time. Net projects are under way in every corner of the 35-building campus. The Internet Platform & Tools Div., created in February, has swelled to 2,500 employees--more than Netscape, Yahoo!, and the next five Net upstarts combined. Slate, a high-profile Web magazine edited by Michael Kinsley, debuted on June 24. MSNBC, a cable news channel/Web site being produced with NBC Inc., begins on July 15. And Microsoft Network will be reborn as a mega-Web site this fall. Says Gates: ``The Internet is the most important thing going on for us. It's driving everything. There is not one product we have where it's not at the center.''

The impact of those products has yet to be felt, but the speed and intensity of Microsoft's offensive has already changed the calculus of competitors and analysts. ``People aren't asking anymore if Microsoft will be killed by the Internet but whether Microsoft will dominate the Internet,'' says Scott Winkler, vice-president at market researcher Gartner Group Inc.

Indeed, in just six months, Gates has done what few executives have dared. He has taken a thriving, $8 billion, 20,000-employee company and done a massive about-face. ``I can't think of one corporation that has had this kind of success and after 20 years, just stopped and decided to reinvent itself from the ground up,'' says Jeffrey Katzenberg, a principal of DreamWorks SKG, which has a joint venture with Microsoft. ``What they're doing is decisive, quick, breathtaking.''

Gates, a keen student of business history, has been intensely aware of how other market-leading companies--from General Motors Corp. to IBM--have stumbled when their top executives failed to read the signs of fundamental change in their industries. Tackling that problem was a prominent theme in his best-seller, The Road Ahead, published last fall. ``I don't know of any examples where a leader was totally energized and focused on the new opportunities where they totally missed it,'' he says.

Our competitors were laughing, said our network was a fake,

Saw the Internet economy as simply theirs to take.

They'll regret the fateful day

The sleeping giant did awake,

We embrace and we extend!

Here, for the first time, is the inside story of Microsoft's dramatic turnabout. It's a tale full of twists, turns, miscues, and even a fatefully timed illness. And it's a story of how three young programmers became Net preachers, spreading the gospel and peppering management with E-mail that eventually helped get Gates and his team to act.

The Web-izing of Microsoft begins in February, 1994, when Steven Sinofsky, Gates's technical assistant, returned to his alma mater, Cornell University, on a recruiting trip. Snowed in at the Ithaca (N.Y.) airport, he headed back to the Cornell campus. That's when he saw it: students dashing between classes, tapping into terminals, and getting their E-mail and course lists off the Net.

The Internet had spread like wildfire. It was no longer the network for the technically savvy--as it had been seven years earlier when Sinofsky was studying there--but a tool used by students and faculty to communicate with colleagues on campus and around the world. He dashed off a breathless E-mail message called ``Cornell is WIRED!'' to Gates and his technical staff.

The response from one of Gates's staff: Someone in networking has been ``bugging us about this same stuff. Maybe you should get together.'' The other guy was J. Allard. While being recruited in 1991, the cherub-faced programmer had worried whether Microsoft ``had a clue about the Internet.'' He signed on anyway, figuring he could help make the company hip to the Net. In 1992, Allard was the only Microsoft programmer who had it on his business card: Program Manager, Internet Technologies. ``I was a lonely voice,'' he recalls.

FIXING BUGS. Allard's job was building TCP/IP, the Net communications format, into Microsoft LAN Manager and Windows for Workgroups. TCP/IP had long been standard on the Unix computers made by companies such as Sun Microsystems. But for Microsoft, says Allard, it was just a ``checkbox item''--ordered by Executive Vice-President Steven A. Ballmer. ``I don't know what it is. I don't want to know what it is. My customers are screaming about it. Make the pain go away,'' Allard recalls Ballmer saying.

In an unsanctioned project in early 1993, Allard oversaw the development of Microsoft's first Internet server--a computer that could link Microsoft to other Net sites. It was programmed to distribute test copies of the TCP/IP code to customers. Soon, they were posting other bug fixes, and it became one of the 10 most-used servers on the Net.

Little of this was registering with top management, though. Gates, then 37, and his lieutenants had never seen the Net in use the way the incoming legions of twentysomethings had. And with so much riding on the Windows rewrite, they had little time for new projects.

Allard was increasingly frustrated. The Net was abuzz over Mosaic, a ``browser'' program created by a precocious computer-science undergraduate at the University of Illinois and posted on the Net for anyone to download. Suddenly, the Web had an easy, point-and-click format--for the masses. On Jan. 25, 1994, he penned a call-to-arms memo titled ``Windows: The Next Killer Application for the Internet.''

Allard recommended building a Mosaic-like browser and including TCP/IP in Chicago, the code name for what became Win95. This memo also introduced the language that would become Microsoft's battle cry nearly two years later: ``Embrace'' Internet standards, and ``extend'' Windows to the Net. Says Allard: ``I finally just couldn't take it anymore. I felt the company just didn't get it.''

Once Sinofsky weighed in, things started happening. The two began talking, and Sinofsky soon got a Net connection. ``I dragged people into my office kicking and screaming,'' says Sinofsky. ``I got people excited about this stuff.'' Among the infected was Gates. ``When Sinofsky started talking about the phenomenon he'd seen at Cornell and [showing] me Gopher and the early Web caught my attention,'' says Gates. ``I thought, `That's a good thing.'''

The boss gave the go-ahead for an executive retreat to discuss the Net. That was a key breakthrough: At Microsoft, such gatherings are convened when Gates feels execs need to focus on a critical issue. On Apr. 5, 1994, two months after Sinofsky's Cornell visit, top brass holed up at the Shumway Mansion in nearby Kirkland, Wash., a 1909 estate used for conferences. Gates and his chiefs pored over a 300-page Internet briefing compiled by Sinofsky. At issue: How important was the Internet? And how much should Microsoft invest in it? (Continued in Part 2)

By Kathy Rebello with Amy Cortese in New York and Rob Hof in San Mateo, Calif.


Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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