| BUSINESSWEEK ONLINE : NOVEMBER 22, 1999 ISSUE | ||||||||
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| COVER STORY -- THE MICROSOFT RULING
So What's in the Cards for Microsoft? The Web--even more than the courts--gives rivals a shot. But don't count out Gates & Co. While the wheels of justice continue their slow grind in Washington, the technology business hurtles forward. Sure, the news of Judge Thomas Penfield Jackson's harsh ''findings of fact'' on Nov. 5 prompted some folks in Silicon Valley to take a moment and celebrate and perhaps ponder a future in which Microsoft Corp. (MSFT) may be hemmed in by a settlement or by limitations imposed by the courts. But they soon got back to business. This is, after all, Internet time and that, more than anything the courts do, sets the agenda. Barring a quick settlement, Microsoft and the Justice Dept. will be wrangling for years to come up with an appropriate remedy, assuming Jackson follows up with a judgment against Microsoft. And by the time the U.S. Supreme Court rules on a Microsoft appeal--the longest route to resolution--in 2002 or 2003, technology will have moved far beyond the desktop PCs where Microsoft built its monopoly power. Consumers and businesses will be using all sorts of devices--handheld communicators, smart phones, interactive-TV sets--to get on the Web. Software may come in small dollops across the Net as needed--not in megabytes on your hard drive or in pricey shrink-wrapped boxes. And new powers may well emerge to challenge Microsoft's hegemony. ''The Internet is the biggest remedy of all,'' says venture capitalist Jonathan D. Feiber, a partner at Mohr, Davidow Ventures. The Web has already placed limits on Microsoft's power by making Windows itself less important. Since the emergence of the World Wide Web and Web browsing software in the mid-1990s, the balance of technology power--and the focus of innovation--has been moving to the network and away from the desktop, where Windows rules. Indeed, when Microsoft saw the threat to Windows from Netscape Communications Corp. and reacted with all sorts of dastardly schemes to head it off, the feds turned up the heat. And, despite its setback in court, Microsoft has won the browser battle, snagging 64% of the market. But that is only a small part of a far larger war. Despite its aggressive moves--legal and otherwise--and massive spending, Microsoft is only one among a group of giants on the Web. In the new realm of Web computing, America Online, IBM (IBM), Yahoo! (YHOO), Amazon.com (AMZN), Sun Microsystems (SUNW), AT&T (T), and MCI WorldCom (WCOM) all have huge businesses, too. And each of them is scrambling to keep ahead of the unending tide of Web upstarts such as Priceline.com (PCLN) and eBay (EBAY) that overnight, it seems, nail down strategically important chunks of cyberturf. All told, the Web markets are expected to be worth $800 billion, compared with about $300 billion for the PC industry alone. By 2002, annual shipments of information appliances may exceed those of PCs. Microsoft could fall behind in the race to build new e-businesses on the Web. If its legal battles cause the company to divert its energies, everybody else could have a little more room to run. Indeed, competitors noted that when the feds bore down last year, Microsoft modified its behavior--a bit. It voluntarily backed off some of its most aggressive practices, including forcing PC makers to display only Microsoft Net access icons on the Windows screen, for example. And recently, a handful of major PC makers, including Gateway Computer Inc. (GTW), have announced plans for devices that won't use Microsoft technology at all--apparently without fear of retribution. That's something that would have been unthinkable before the legal tide turned against the software giant. ''This gives enormous breathing room in the new areas,'' says Paul Saffo, director of the Institute for the Future think tank in Menlo Park, Calif. ''The judge just put a leash on the bulldog.'' FEVERISH. But it would be a mistake to underestimate the determination of Chairman William H. Gates III to prevail--in court and in the race to the Web. And even as the Web grows up around its empire, Microsoft retains almost all its power. The $19 billion software giant still controls roughly 90% of the markets for PC operating systems and applications. And it is working feverishly to gain a similar hold in the market for server software. ''They will not have lost anything in their basic core business. They'll still have their monopoly,'' says James H. Clark, a co-founder of Netscape Communications Corp. who is now CEO of startup myCFO Inc. Looking ahead to 2003, Clark predicts, ''Microsoft will have grown four- or fivefold in the areas where they dominate today, and maybe tenfold in the services market.'' And warns Stephen M. Case, chairman of America Online Inc.: ''Just because other brands emerge doesn't mean that Microsoft is fading. It's the world's most valuable company because people recognize that it has a firmly entrenched position and it's likely to leverage into new markets.'' Might Microsoft become more aggressive, figuring it has nothing to lose? Only Gates & Co. know for sure. However, some insiders say, a key signal to watch for is the rising role of Steven A. Ballmer, Gates's slightly less competitive sidekick. If Ballmer, made to president in August, 1998, really dictates day-to-day strategy, the industry could see a more accommodating Microsoft. After Jackson's fact-finding report, Ballmer told BUSINESS WEEK: ''We are going to continue to do our jobs with the same vigor, energy, and passion that we always have.'' But he emphasizes that Microsoft will play by the rules. ''The No. 1 thing is that we are going to continue to do business with a high level of integrity,'' he says. For something more concrete to hang their hopes on, competitors can consider Microsoft's many missteps in its ventures beyond PCs. Take operating systems for handheld devices and other ''information appliances.'' For nearly a decade, Microsoft has pushed Windows CE in this niche, but it holds just 12% of the market--vs. 51% for 3Com Corp.'s (COMS) Palm computing system, according to International Data Corp. And Microsoft is just one of the crowd in a handful of other new markets, too, including interactive-TV software, consumer e-commerce Web sites, and Web applications. AOL's instant messaging software, for instance, is far and away the leader in Web chat--with 53 million users, compared with just 4 million for Microsoft's chat software. BIG BET. When it comes to the basic software that runs the Web, however, nobody expects Microsoft to settle for less than being No. 1. With Windows NT, it has captured 38.3% of the market for operating systems on servers--the machines that handle corporate networks and run Web sites. Now comes Windows 2000, which Microsoft has been working on for half a decade and plans on finally delivering in February. With this new product, the company hopes to become the software supplier of choice for large Web sites and corporate computing centers. ''We've been quiet for the past year,'' says Gates. ''Next year will be a very big year for us--kicking off with Windows 2000.'' Microsoft has a lot riding on Windows 2000. While the product's delivery was being pushed back, rival products such as Sun's Solaris gained momentum. So, too, did Linux, a variation of the Unix operating system. Linux is a $30 software package in stores and can even be downloaded from the Web for free. That compares with $109 for Windows 98 and more than $1,100 for the Windows NT server. Linux captured 16% of the computer server market last year, and International Data expects it to rise to 18% in 2002. Two years ago, no major PC maker would sell a computer with Linux on board. But the product is getting enhancements daily from hundreds of volunteer programmers, and customers are demanding it. Compaq (CPQ), Dell (DELL), and IBM started shipping it on desktop machines and servers in the past few months. And the upstart got another boost--unintentionally--from Microsoft when its lawyers told Judge Jackson that it was a credible threat to Windows. ''The dam broke, and it was because of the microscope on Microsoft,'' says Ransom Love, CEO of Caldera Systems Inc., a Linux company in Orem, Utah. Meanwhile, computer makers are branching out from the Microsoft-dominated part of the market in other ways. Gateway Computer Corp. recently aligned with the software giant's archrival, AOL (AOL). The online giant is soon expected to reveal details for a new kind of information appliance, to be made by Gateway and possibly other manufacturers. This new device will boot directly to AOL, making it simpler for consumers primarily interested in the Net to get online. HOSTAGES. This isn't the only effort to divert consumers from Microsoft technology. NeoPlanet Inc. of Phoenix is just now releasing a new kind of browser that sits on a consumer's PC but connects with the company's Web site--where the customers can use e-mail, chat electronically with friends, keep a calendar, and store letters. These are the tasks that people once bought Microsoft products to accomplish. The software is free, and NeoPlanet hopes to make money off of advertising. Startups that are creating new Web services see the Internet as their foundation--rather than Windows. Farzad Dibachi, CEO of Niku Inc. in Redwood City, Calif., offers his service for computing consultants on a Web site--plus versions that run on other operating systems in addition to Windows. In fact, Microsoft people have come to him with hat in hand asking him to take advantage of its special so-called knowledge-management technology. ''I feel comfortable saying no,'' says Dibachi. ''Three years ago, if they did this, I'd jump on it. There was no other choice.'' Even some former Microsoft employees are confident that it's no longer suicidal to challenge their former bosses in the Web marketplace. Qpass Inc. of Seattle, for instance, has just begun a new Web service called PowerWallet--which allows online shoppers to fill out their personal and credit-card information once and then use the wallet to quickly make purchases on a wide range of Web sites. Among the company's founders are CEO Chase Franklin and Vice-President for Marketing Cornelius Willis, both former Microsofters. Microsoft is building a similar service into its MSN portal. But Willis dismisses the threat. ''We're competing with Microsoft's third-tier priority. This is not Windows,'' he says. The climate of fear surrounding Microsoft hasn't completely dissipated, though--not by any means. PC makers are still reluctant to speak out against their sole supplier. Yet privately, some let 'er rip. ''Microsoft doesn't have friends among its customers; it has hostages,'' says the CEO of one PC company. PATTERNS. And companies in the Web world still wonder whether then can trust Microsoft to play fair when they try to do business. Priceline.com, for instance, in October sued Microsoft for violating its patents on so-called reverse auctions on the Web--something Microsoft denies. Priceline.com charges that Microsoft executives, including Gates, seemed to want an alliance, but ultimately broke off talks after they had gathered enough information to copy the smaller company's technology. It's the threat of that kind of dirty dealing that worries Clark. He believes that as soon as Microsoft has an ironclad lead in browsers, it will build in technology that makes its MSN portal the first stop on everybody's trip to the Web. That could hobble portals like Yahoo! and hundreds of consumer e-commerce sites. ''If someday they grow bold again they can make all Web services come through them and pay them a fee,'' says Clark. Microsoft certainly isn't backing off when it comes to winning on the Web. On Nov. 10, it announced that early next year it will begin offering online versions of its Office applications. That strategy comes in response to announcements from competitors Sun and Corel Corp. (CORL) that they'll sell their own Office-style applications as services. Sun and Corel are expected to price their apps very cheaply, or even for free in Sun's case, because this isn't a key part of its business. But Microsoft can't afford to ruin its $7 billion a year Office franchise. It hasn't announced prices yet, but a PC company executive says he expects the Microsoft service to cost around $75 per month per user. Still, he says Microsoft is serious about this market and will eventually price more aggressively. ''They're willing to pour a lot of money and marketing into this to make it successful. They're following the same pattern they did with Netscape,'' he says. That's a handy reminder: Microsoft may have sanded off some of its harder edges, but this is no pushover. The company still has two monopolies, billions in the bank, and 33,000 hard-charging employees. All Judge Thomas Penfield Jackson's ruling does is begin to level the playing field. By Steve Hamm in New York and Peter Burrows in San Mateo, Calif., with Michael Moeller in San Mateo, Catherine Yang in Washington and Paul C. Judge in Boston _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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