BUSINESSWEEK ONLINE : JULY 3, 2000 ISSUE
INFORMATION TECHNOLOGY

Windows of Opportunity
Microsoft has a new vision for the Net. Will it get it right this time?

Steven A. Ballmer, Microsoft Corp.'s (MSFT) effervescent CEO, steps outside company headquarters in Redmond, Wash., smacks his meaty hands together, and looks to the skies. ''What a great day,'' he booms. Except it's not. June gloom is in full force, and the Northwest is under a blanket of gray. It takes a bit of optimism to believe there's actually a sun on the other side of those clouds. Optimism, though, is something Ballmer seems to have in excess.

He'll need it. Ballmer and his longtime boss, William H. Gates III, are about to embark on their second attempt at remaking Microsoft into an Internet powerhouse. On June 22, the duo planned to launch a broad initiative called the ''.Net.'' The endeavor is designed to deliver software and services that automatically link various Web sites so people can use the Internet to organize all of the information in their lives. To Ballmer, Microsoft's new strategy will change computing as profoundly as the Internet has. ''We need to be ahead of the curve on this,'' Ballmer says.

The .Net technology is complex, but at its core is a simple yet powerful idea: letting unrelated Web sites talk to one another and to programs that run on PCs. When that happens, one click could set off a cascade of actions without requiring the user to open new programs or visit additional Web sites. Booking an airline ticket online, say, might trigger a link that updates your calendar with the flight times. That might alert another site that will later check the status of your flight and e-mail your spouse if you're delayed.

And that's just a warmup. Within a few years, Microsoft imagines e-mail that can find you whether you're working at your computer, sitting on the subway with a handheld device, or walking down the street with your mobile phone. Travelers might be able to store huge music files online and have them downloaded into rental cars, ready when they arrive at the airport. And a sports fan could use voice-recognition and instant-messaging technology to shout at the TV, with the rant automatically finding a buddy also online.

For Gates & Co., this is big stuff. Microsoft calls it the most important shift in its corporate vision since the software giant launched its Internet strategy five years ago--so important, in fact, that in January, Ballmer took over as CEO so Gates could better focus on it. Gates--now chief software architect--has spent much of the past five months refining the $1 billion initiative. One day, it may even replace the familiar Windows desktop. ''It's the future of the company,'' says Ballmer.

''THIS CLOUD.'' Or is it? The June 7 ruling by U.S. District Judge Thomas Penfield Jackson to cleave Microsoft in two could turn .Net into little more than a clever grad-school thesis. Jackson wants to split Microsoft's Windows business from its Web sites and the group that makes word-processing software. If that happens, Microsoft says, .Net won't. Echoing the argument that failed to sway Jackson, the company says .Net will be too tightly woven into future programs to separate the pieces.

Even if the company ultimately wins in court, waiting for the case to wend its way through the halls of justice creates problems. It's already a challenge to get customers and software developers to focus on the message of .Net while Microsoft fights the government. ''With this cloud hanging over Microsoft's head, it's going to be hard to get people to buy into'' .Net, says analyst Dwight Davis of technology research firm Summit Strategies.

There's plenty of skepticism among Web-site developers. Their backing is crucial to making the vision fly--and many of them are leery of adopting technology that Microsoft controls. David Cardinal, chief technology officer of Calico Commerce Inc., a San Jose (Calif.) maker of e-business software, criticizes .Net as a ''last-decade'' idea because it's too closely tied to Windows PC operating software. ''Microsoft still doesn't get it,'' Cardinal says.

Not so, argue Microsoft executives. They get it, and that's why they want a piece of a market that's pegged to be worth tens of billions of dollars. So, too, do a lot of rivals. Hewlett-Packard Co. (HWP) last year launched its e-speak technology that attempts to do many of the same things as .Net (page 144). Archrival Oracle Corp (ORCL). offers applications that manage everything from customer service to supply chains, all running on the Web. Sun Microsystems Inc.'s (SUNW) Jini software lets devices on the Net speak to one another. And startups such as Fairfax (Va.)-based e-commerce software maker WebMethods Inc. are changing the rules so fast that Microsoft sometimes seems to be playing a different game. ''The pendulum has been swinging away from Microsoft over the last few years,'' says Goldman, Sachs & Co. analyst Rick Sherlund.

All that just makes Microsoft hungrier. ''We can't wait around,'' Ballmer says. Within a year, Microsoft plans to introduce .Net technology in two broad areas: Web-based services and the workhorse programs--called servers--that power everything from the smallest Web site to massive corporate-computing networks. Microsoft last year claimed 28% of the $5.3 billion in worldwide server-software sales, says researcher International Data Corp. As Microsoft infuses its servers with .Net, it hopes to carve out a bigger share of that market.

Then there are Web services. Microsoft envisions a range of services similar to the Passport technology that it launched last fall. Passport lets online shoppers store their credit-card and shipping information on its Web site. When they buy from an e-tailer that uses Passport--200 have signed on so far--the buyer's information is automatically transferred. That eliminates the lengthy form-filling that can stop an e-commerce transaction in its tracks.

BIT PART? By next summer, Microsoft plans a half-dozen Passport-like services. One will let users set preferences about who can e-mail or message them and when. Another will reformat data on the fly to run on PCs, handheld gizmos, or television set-top boxes. Analysts don't measure this nascent market yet, but that's not to say there isn't money to be made. Like Windows, .Net-type services could be ubiquitous. ''This is going to be a slice of everyone's business,'' says Forrester Research Inc. analyst Ted Schadler. ''It's as big as all outdoors.''

Consider Inverge Inc. The Addison (Tex.) startup is developing a Web service, using Microsoft technology, that lets online retailers calculate shipping costs and state-by-state taxes. Today, Inverge would have to write different software code for each customer. With .Net, Inverge could offer its service over the Web with minimal tinkering. Shoppers tap in their order and address on an e-tailer's site. That information automatically shoots off to Inverge's computer servers. Inverge runs the calculations, then fires the results back to the merchant. The consumer never sees the exchange. And the e-tailer doesn't have to worry about, say, Fedex Corp. increasing rates or Maryland changing its sales-tax rules.

All that threatens to relegate desktop software to a bit part. In a tacit acknowledgment that the Internet, not the PC, is the heart of the computing experience, Microsoft has created a user interface that looks a lot more like Amazon.com Inc.'s (AMZN) home page--with links and tabs--than the current Windows desktop, with folders and icons. Clicking some of the tabs will launch programs on the PC, but many more will link directly to Web services such as news sites or financial data. While the new format won't unseat the Windows desktop this year or next, look for it to be rolled out sometime in mid-decade as the .Net initiative percolates through the company's products.

Much of what .Net promises, though, is available today--with no help from Microsoft. Gates and his executives boast that .Net could help financial Web sites interact so that all an individual's personal finances can be managed online. Intuit Inc.'s (INTU) Quicken software lets customers do that already. Another Microsoft promise: marry location technology in cell phones to .Net and you'll easily find the nearest white-tablecloth Italian bistro. InfoSpace Inc., a publisher of online directories and maps, offers that. And folks who want to translate e-mail from English to French don't have to wait for .Net. They can cut and paste at AltaVista's Babel Fish site and, voila, c'est fait.

DEEP POCKETS. So what does Microsoft bring to the party? It says it has all the pieces to put the puzzle together. Start with the army of 4.5 million developers who create Windows programs--the largest stable of programmers in the world. They've ridden Microsoft's coattails to success and may quickly adopt .Net. Then add Microsoft's arsenal of products, everything from database software to its monopoly operating system. Mix in its Web businesses, including the MSN portal, the Hotmail free e-mail service, and the popular CarPoint auto buyers' site. Together, they add up to the third-most visited family of sites on the Net after Yahoo! Inc. and America Online Inc. That gives the company a better understanding of how consumers use the Internet than any other software maker. ''Microsoft shows how easy it is,'' says analyst Mike Gilpin of researcher Giga Information Group. And don't forget about resources: Microsoft's pockets are $21 billion deep.

Will you need Windows to make this work? Microsoft says not necessarily--but it'll sure help. The next major overhaul of Windows--code-named Whistler and due out next year--will have some of the .Net features built in to make Web services run more smoothly. The company also will debut some elements of the new user interface. And the operating system itself will feature some .Net-based services, such as an auto update feature that downloads virus protection and bug fixes automatically.

That leads critics to say Microsoft is up to its old tricks. The company today plans only to release .Net software tools for Windows developers, with no timetable for letting others in. Microsoft says it just wants to get the new strategy rolling before making tools for rival software. ''Take care of your own children before you try to put shoes on everyone else's,'' says Microsoft Group Vice-President Paul A. Maritz. He says competitors such as IBM and Sun are developing their own versions of .Net, and because it is based on open Internet standards, they don't need Microsoft's help.

That's a dangerous attitude. Judge Jackson found that Microsoft used its power to squelch competitors such as Netscape Communications Corp. Forrester's Schadler thinks Microsoft should bend over backwards to avoid any such impression with .Net. ''The executive team is having trouble adopting the values of the Internet,'' Schadler says.

That could be the most damning criticism of all. Microsoft isn't just trying to roll out a new desktop computing product. It says it's revolutionizing the Web. But it's hard to fight a revolution without troops. Microsoft has plenty of money, ambition, and smarts--and that will get .Net off the ground. But to really make it a hit, the company needs the Internet industry to share its vision. If Microsoft can't adapt to the openness of the Net, it may find itself looking for yet another way to become an Internet powerhouse.

By Jay Greene in Seattle

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