THE SOFTWARE REVOLUTION--Part 2

FED UP WITH THE MANIA. Microsoft, too, may be a prisoner of its own success. With an installed base of 100 million computers running Windows, the company puts more and more resources into keeping new versions of the program compatible with previous ones.

In Win95, a big chunk of the 15 million lines of code are there just to ensure compatibility.

The new competition has no such baggage. Java--and programs like it--are ''a direct assault on Microsoft's whole paradigm,'' says Robert Aston, president of market researcher Market Vision in Santa Cruz, Calif.

Leading the assault, Sun is busily seeding the Java software market. It's selling Java licenses at $125,000 a crack--and downloading free HotJava browsers with Java clients to workstation and PC users on the Net. Licensees include Oracle, Macromedia, Toshiba, Borland, and Spyglass. Sun is also making Java freely available for research, education, or evaluation purposes.

The Java mania grates on Gates. ''What's new about [Java] vs. other programming languages? Why is BUSINESS WEEK writing about Java?'' he says. ''Just having another computer language doesn't change the dynamics of any of these things.'' But Doug Henrich, Microsoft's director of developer relations, says the company ''is looking hard'' at licensing Java, since the market is clamoring for it.

For now, Microsoft is racing to get its own Web software going. It's pushing Visual Basic as the programming language for developing Web applications. A complementary software scheme, called Object Linking & Embedding (OLE), lets developers create objects--say a spell checker--that can be moved from one program to another. Originally designed for use on stand-alone PCs, OLE is being extended to operate across networks--no easy task. Blackbird, the proprietary ''authoring'' tool originally designed to create multimedia content for the Microsoft Network, is being reworked for the Web.

Because its tools are already used by thousands of developers who have invested hundreds of hours learning the intricacies of Windows software, Microsoft can be assured that many will follow it to the Internet. There is already a thriving market for ready-made Visual Basic and OLE objects, such as spell checkers or chart objects, that developers can drop into their programs. Microsoft would like to extend those to the Net--before another scheme catches on.

At this point, Wall Street is betting on the challengers. The stories (often exaggerated) of Java's potential--along with a booming market for Web servers--has helped Sun's stock more than triple this year since June. Netscape's shares continue their gravity-defying rise, reaching a new high of $120 on Nov. 20. That gave the startup--with projected sales of $47 million this year--a market value of more than $6 billion, exceeding that of $11 billion Apple Computer.

No wonder Netscape is providing the business model for the new software industry. It won 70% of the browser market by giving its product away on the Net. Now dozens of startups are doing the same. Take Progressive Networks Inc., a Seattle-based startup that makes software for delivering real-time streams of audio over the Net. The company's Real Audio player--which is needed to play the sound clips--can be downloaded for free from links to dozens of Web sites. ''The marching orders are: Get big fast, subjugate profit--even revenues. Just get your product out there,'' says Hambrecht & Quist's Weintraut.

How will these strategies ever pay off? Netscape has started to sell Navigator for $40 in stores, and bulk sales to corporations helped it turn its first profit--ahead of schedule--in September. But the master plan is to cash in by selling the lucrative ''server'' software that companies use to create and run Web sites.

SEEDING THE BROWSER MARKET. In its own way, Netscape hopes to gain the type of leverage on the Web that Microsoft has with the Wintel lock-in. Having seeded the market with millions of Navigator browsers, it is feverishly adding extensions to the HTML standard so that Web pages programmed with Netscape software will look their best only when seen with the Netscape browser. Anybody can use the extensions, but by the time they do, Netscape will be adding something else. That creates the potential for locking in operators of Web sites with the Netscape server. ''When you see a Web page that says Netscape 1.1-enhanced, you're looking at the value of Netscape's stock,'' says David Winer, a veteran software developer and commentator.

Not to be out-Microsofted, developers there are working on their own browser and server software. The browser, called Internet Explorer, has been available since shortly after the August release of Windows 95, as part of an add-on package called Microsoft Plus! And it has been shipping with new Windows 95 PCs. A new version, Explorer 2.0, is now available. Like Netscape, it includes proprietary changes to the HTML format to enhance graphics and improve performance--and plant the seeds of software lock-in.

Microsoft could afford to lose the browser market. But it's determined not to give Netscape the strategically important server business. It is testing a Web-server program, dubbed Gibraltar, that it expects to release early next year. Gibraltar is based on the two-year-old Windows NT but adds features for handling HTML documents. Another product due next year, called Catapult, will add security features. The server market, expected to zoom from just $20 million this year to $300 million by the end of the decade, ''is much more up for grabs,'' notes Sherlund.

Like its new competitors, Microsoft is giving away software to get a position in the Web market. Some 500,000 copies of the Internet Assistant, a program that converts Microsoft Word documents to HTML, have been downloaded free from Microsoft's Web site. In addition, Microsoft just came out with Word Viewer, a freebie for viewing or printing Microsoft Word documents on the Net without having Word installed on your PC.

Microsoft isn't the only software maker to feel the effects of the Net software revolution. Lotus, now an IBM subsidiary, is furiously attempting to adapt its information-sharing Notes program to the Web--before cheap Web-based products displace it. Lotus is trying to convince corporations that Notes offers more than they can get with simple Web tools. It's also adding features to smooth the flow of information between Notes and the Web and to let the Notes ''client'' view Web information. A likely next step: drastically cutting the price of the Notes ''client'' software.

''RECREATING WINDOWS.'' As the old gang learns new tricks, so do the newcomers. The next version of Netscape Navigator 2.0, due in December, will include tools for developing Web applications, E-mail, and workgroup software gained from the company's purchase of Collabra Software. In addition, Netscape will bundle ''plug-in'' programs, including Java, Adobe's Acrobat document viewer, and the Real Audio player. Netscape is also exploring other areas, including such applications as word processors. The danger: In its attempt to be more like Microsoft, Netscape could succeed--in the wrong ways. ''Pretty soon, you end up recreating Windows,'' says Sherlund.

So who will come out on top in the new software business? Perhaps no single company. If the Web revolution really creates a level playing field, then the days when a few giants call the shots could be gone forever. Let the games begin.