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Windows 95


Cover Story

WINDOWS 95

Deep in the heart of Building 5 on Microsoft Corp.'s sprawling campus in Redmond, Wash., hundreds of men and women hunch over PCs in dimly lit, windowless rooms. They're bug testers, and they have been toiling 'round the clock to find and fix the last glitches lurking in the 15 million lines of computer code that make up Windows 95. In a couple of weeks, the final, "golden" version of the operating system must go to manufacturing, where Win95 will be etched into CD-ROMs and recorded on diskettes.

Microsoft plans an Aug. 24 blowout in Seattle, where Bill Gates and several hundred of his closest friends will celebrate the official launch. And computer makers around the world are poised to start a massive fall sales push behind the software that will, Gates says, unleash the full powers of personal-computer hardware, bring millions of new consumers into the market, and provide the bridge between the klunky PCs of the past and the intuitive, user-friendly information appliances of the 21st century. "Part of the big deal with Win95 is fixing all of the sins of the past," he says.

Things are tense around the bug room and across Microsoft's 27-acre campus in a woodsy Seattle suburb as the final countdown begins. In a hallway in Building 5, a large sheet of paper tacked to the wall bears the words: "Where do you want to go when we ship?" (a play on Microsoft's advertising tagline: "Where do you want to go today?"). Bleary-eyed programmers have scrawled dozens of responses including "Disneyland," "Home," and "To find me a husband." One employee has tacked up a picture of Gates and scribbled the boss's answer: "To the bank."

Not quite yet. There are still horrendous technical and logistic issues to tackle--checking the bug reports from 400,000 PC owners who have been testing "beta" copies since last fall, getting hundreds of PC makers ready to switch over to the new software, putting the last-minute fixes into manuals and other documentation (in some 12 languages), preparing dealers, firing up marketing campaigns, and working with other software companies, whose products will be critical to Win95's success. At the same time, a new division is gearing up for the simultaneous launch of the Microsoft Network, the software giant's online service that will be available to all Win95 users.

Nobody has ever done quite what Microsoft is attempting--to get 85 million customers and a $130 billion industry to move en masse to a new technology. Hardware and software makers in all corners of the world are gearing up to build the machines that will live up to the demands of the new operating system. And they're bracing for a surge in demand for everything from memory chips to CD-ROMs as Microsoft starts spending hundreds of millions in advertising and marketing to promote Win95 and related power-hungry programs.

Add to that the Win95 marketing budgets of computer and software makers, and you've got a billion-dollar blitz. "This is the biggest marketing thing we've ever done," declares Steven A. Ballmer, a Microsoft executive vice-president. "Windows 95 will be as prominent as Coca-Cola on people's minds," says Lorie Strong, vice-president for marketing services at Compaq Computer Corp.

How quickly will the world turn to Win95? For consumers, the shift will be a no-brainer: By fall, virtually every Intel Corp.-based home PC on the market will have Windows 95 as its main operating system. You'll have to special order to get Windows 3.1 or IBM's OS/2. Retailers are already gearing up for another record holiday buying season. "It's going to be a blockbuster quarter," says Peter A. Janssen, vice-president for merchandising and advertising at software retailer Egghead Inc. Microsoft has 100 employees making sure the shelves of more than 15,000 stores will be brimming with Win95 boxes--each with a suggested retail price of $209 ($109 for customers upgrading from Windows 3.1).

"JUST SOFTWARE." In corporations, the shift will be more gradual. While Win95 has features designed with corporations in mind--such as built-in network connections and administrative software--the cost of installing Windows 95 on hundreds or thousands of machines and training employees is steep. Many will stick with Windows 3.1--or the more industrial-strength Windows NT--for at least a year. Even so, analysts figure Win95 shipments could hit 50 million the first year.

What can go wrong? The worst-case scenario would be a buggy--or late--Windows 95. But despite rumors of possible delays, Microsoft inists Win95 is on track. To get it right, Gates already pushed back the launch of the Windows rewrite (originally known as Chicago) from mid-1994. "It's the most in-depth, widespread testing program in the history of software," boasts Brad A. Silverberg, senior vice-president of Microsoft's Personal Systems Div. Microsoft has even jettisoned parts of the program that aren't quite ready for prime time. Some of those features, including advanced electronic-mail functions, will be sold in a $49.95 add-on package later.

The biggest challenge may be living up to the massive expectations for Win95. Microsoft executives spent the last year crisscrossing the globe to convince customers, consultants, and journalists that Windows 95 is truly revolutionary. And the campaign succeeded. Lately--perhaps because the company doesn't want to look too dominant (page 101)--Microsoft officials are trying to bring expectations down to earth. "It's just software," says Silverberg. "It doesn't cure cancer. It doesn't grow hair. It's not a floor wax. It's Windows."

Still, by most accounts, Microsoft has another slam-dunk winner: Early reviews have praised Win95's greatly improved "user interface" and its dozens of handy new features (page 106). If just 15% of Windows customers upgrade to the new version--the ranks of Windows users is expected to hit 100 million by the time Win95 ships--Microsoft will rake in close to $1 billion in the first year. Some analysts figure the upgrade rate could be twice that.

There's more. Microsoft, which is expected to close its June 30 year approaching $6 billion in sales, will get an additional $400 million to $500 million in 1996 from sales of a Win95 version of Microsoft Office, due out around the same time, figures Michael Kwatinetz, an analyst with PaineWebber Inc. Best of all, it could almost double, to $2 billion, the revenues Microsoft makes from copies of Windows sold with new PCs--a lucrative profit stream since costs are minimal.

CHAIN REACTION. Of course, this being Microsoft, the Win95 launch is tinged with controversy. The Justice Dept. is investigating charges that by building connections to its new online service into Win95, Microsoft gives itself an insurmountable edge over online competitors such as CompuServe Inc. Justice investigators are also looking into terms of the contracts that Microsoft is negotiating with PC makers who will ship Win95 on their machines (page 100). Just weeks before Win95's launch, top PC makers, including Hewlett-Packard Co. and Dell Computer Corp. have not yet signed.

None of this, however, is likely to put much drag on Microsoft's bullet train. HP's business PC chief, Jacques Clay, predicts that the PC makers will sign their contracts--after negotiating better terms. And even if Justice forces Microsoft to disconnect the automatic links to the Microsoft Network, say industry insiders, it's not likely to push back the launch--or slow Windows 95's sweep of the PC industry.

Bottom line: While computer and software makers may privately enjoy seeing the feds make Microsoft squirm, they don't want Windows 95 to falter. They're counting on Win95 to set off a chain reaction that will sweep through the entire computer industry. Examples: PC owners who buy the Windows 95 upgrade may want to buy additional memory chips. And with an operating system that hogs 27 to 50 megabytes of storage space, you might want a bigger disk drive.

Don't want to sink more money into your old machine? PC makers will have lots of new models this fall geared specifically to the needs of Win95. Packard Bell Electronics Inc. recently announced what it says is the first officially sanctioned (by Microsoft) Win95-compatible machine, and Compaq promises an entirely Win95-ready lineup for the home market by September. "It's a chance to set off a whole new explosion," says Microsoft's Ballmer.

How big? Hard to say. But there are signs. Orders for semiconductors--a leading indicator of PC sales--are up 54% over last year. Iwatinetz of PaineWebber projects that Win95 could boost PC sales by an additional 5% in the first 12 months. "We want to sell a ton of Pentium processors in '96, and [Win95] will help," says Intel Senior Vice-President Ronald J. Whittier.

GAMES PLAYER. The cycle won't stop there. Owners of souped-up PCs will want new software programs to match. Plus, the combination of powerful Pentium PCs, multimedia technology, and Windows 95 should spur all sorts of innovative programs and launch the PC into new markets. For instance, the PC has played second fiddle to Apple Computer Inc.'s Macintosh in publishing circles. "People didn't take it seriously," says Jerry Barber, chief technology officer at Adobe Systems Inc., which makes desktop-publishing software. Windows 95 could change that. "We expect to sell a lot of new applications," he says.

Software developers also see a major opportunity in games for Windows 95--perhaps stealing part of the multibillion-dollar video-game market now owned by Nintendo Co. and Sega Enterprises Inc. Microsoft paid special attention to making Win95 a better platform for games, speeding up graphics performance, and improving its ability to play video clips. "Win95 is a huge step forward," says Ron D. Gilbert, co-founder and creative director at Humongous Entertainment Inc., which makes "edutainment" software. "You'll see Windows become the predominant game platform."

So what will Windows 95 do for you? For starters, it should make computing a much less frustrating experience--at least for people who haven't been spoiled by Apple's Macintoshes. The first thing you'll notice when you turn on your Windows 95 machine is a simplified graphical interface that reduces screen clutter by organizing contents into a few areas represented by icons on your screen. For instance, by clicking on an icon labeled "My Computer," you can view the contents of your disk drive. Similarly, an icon called "Network Neighborhood" offers up a graphical view of any other computers or printers you are connected to on a network.

Windows 95 also goes a long way toward making it easier to set up a system or add new devices--a modem, say, or a CD-ROM player. With a feature called plug-and-play, Windows will--in most cases--be able to identify a device and automatically figure out how to work with it. And if you've ever lost a file because you forgot what you named it, you'll love long file names. Windows 95 gets rid of the eight-character limitation for file names, so you can use more meaningful names--julysalesreport instead of july.rpt.

True, IBM's OS/2 and Apple's Mac OS have long had many of those same features--and more. So has Microsoft's Windows NT operating system. But now, these features will be built into tens of millions of home PCs. As applications software arrives to exploit some of Win95's capabilities--built-in communications that make reaching across the Internet as easy as pulling a file from your hard drive, for example--new uses for PCs will become possible. "This is a watershed event, in that the PC becomes a consumer device," says Mark Eppley, CEO of Traveling Software Inc. Win95 may provide the final nudge that makes the PC an indispensable consumer appliance--for entertainment, online communications, and interactive media. "You're looking at the PC taking more time from TV, it will cause a shift in your leisure time," says Rich Edwards, an analyst at Robertson Stephens & Co.

And guess who's geared up to take maximum advantage of the new home-PC phenomenon? That's right, from the Microsoft Network to a raft of new titles from Microsoft Consumer Div., the folks in Redmond are working overtime to think of new ways to lure you from the TV to the PC. The Microsoft Network is intended to be a giant electronic bazaar of information and online shopping--with Microsoft taking a commission on all sales. Microsoft Home is readying dozens of Win95 titles for Christmas, including updates of the popular Encarta and Cinemania CD-ROMs and Fury, a new arcade action game.

Other software makers have a lot to lose. While a new operating system gives everybody in the industry a chance to create fresh applications programs, Microsoft is often the biggest winner. Take office applications. Before Windows 3.0 came out in 1990, Microsoft trailed in two key categories: word processing and spreadsheets. But the category leaders, WordPerfect Corp. and Lotus Development Corp., were slow to ship Windows versions of their packages. Now, Microsoft Office commands 80% of the market for suites--bundles containing word-processing and spreadsheet programs.

The lesson wasn't lost on Lotus, whose declining desktop software business helped make it takeover bait for IBM. The experience with Windows 3.0 is "one reason why we decided early we would go with Windows 95," says Ilene H. Lang, senior vice-president for desktop software at Lotus. Lotus plans to update its programs for Win95 "as soon as possible," she says. Analysts figure it will be yearend at best before a version of Lotus SmartSuite for Win95 hits the streets. That will give Microsoft only a three-month head start--rather than the two years it had with Windows 3.0. Novell Inc., which acquired WordPerfect last year and is the other top competitor in suites, isn't concerned about giving Microsoft a bit of a lead. "What's the big deal if you ship in August rather than October?" asks Glen D. Mellar, vice-president for marketing at Novell.

Some companies lucked out when Microsoft decided it could not complete some things it set out to do with Win95. When the program was under development, players in niche markets--such as fax, communications, and utility programs--were spooked by reports that their bread-and-butter products would become mere features in Windows 95. Delrina Corp., a $100 million maker of communications software based in Toronto, feared that Win95's communications software would torpedo its business. But, says President Mark Skapinker, Microsoft left room for a more sophisticated package such as Delrina's Winfax program. Still, he knows better than to rest easy. "It's not Win95 I worry about now, but Win96 and Win97."

Eppley of Traveling Software likens competing with Microsoft to mountain-bike riding, his favorite sport: "You have to be focused and looking ahead at the terrain," he says. So far, Eppley has prospered by exploiting holes in Microsoft's offerings. Microsoft has built into Win95 software for transferring files between a laptop and a network back at the office--just what his flagship product, LapLink, does. But Eppley found a hole. The next version of LapLink will work between Windows 95 computers and those running older versions of Windows--something Microsoft won't do. Compaq plans to ship LapLink on all of its Windows 95 PCs. "We think [Win95] will be a boost of 20% to 30% over our existing business, at least in the first couple of months," says Eppley.

MAC ATTACK. Another survivor: Symantec Corp., a maker of utility programs that keep PCs running smoothly by sniffing out viruses, cleaning cluttered disk drives, and diagnosing problems. With each version of Windows, Microsoft adds more such capabilities, but the latest version is less ambitious than planned. Symantec CEO Gordon E. Eubanks says he still has plenty of opportunity with Win95. In fact, investors have bid up Symantec shares by 50%--from around $20 to nearly $30 this year.

Microsoft's rivals in operating systems won't get off so easily. While Mac lovers say Win95 just barely catches up with the Mac OS, the differences may not be apparent to most consumers. "We have better technology, a better system story, an easier migration path," contends David C. Nagel, Apple's senior vice-president for research and development. But if Apple--and its new Mac-cloning partners--can't convince customers of that, the Mac OS will become a tiny minority. Already, its share of the global PC market has slipped, to around 8.3% from its peak of 9.4% in 1993. Step one will be a huge Christmas-quarter marketing blitz--with an estimated $100 million budget range. "Otherwise," says Nagel, "we're in danger of getting drowned out in a tidal wave of information coming out of Redmond."

IBM's defense appears to be to pretend Win95 doesn't exist. IBM's Personal Software Products group, which once pushed its technically superior OS/2 as a "better Windows than Windows," is sitting on the sidelines. PSP execs say they won't try to find a way for OS/2 to run Win95 applications and will focus on persuading developers to write programs for OS/2. "OS/2 is everything Windows 95 hopes to be," says PSP President Lee Reiswig. But analysts say IBM will have a hard time attracting developers, with less than 10% of the desktop market.

WIN-WIN. Big Blue will continue to take on Microsoft, however--just not on the desktop. The computer giant is shifting the battle to networked computing, where Microsoft remains relatively weak. With the $3.5 billion purchase of Lotus, IBM now looks relatively strong: Lotus Notes is the leading software package for helping people work together over a network.

If IBM can capitalize on Lotus by grabbing a commanding position in networked applications, it may not become a Win95 loser. But if IBM doesn't make its move quickly, it could get rolled over by Microsoft's next network-computing push, centered on Windows NT. An improved, slimmed-down version of NT released last year has been gaining market share--especially as a system for running network servers. It also has the industrial-strength security and dependability characteristics that corporate customers demand--and that are absent from Win95. And next year, NT will get crowd-pleasing Win95 features such as the new user interface. That's why, when it comes to Win95, "it may make sense to skip it," says Don Delson, manager for office automation and workstations standards at Nestle USA Inc.

Either way, Microsoft wins. NT is clearly the company's long-term strategic platform, and Win95, while a major step forward, is ultimately a placeholder for bigger things to come. In fact, Windows 95's most important role could be to set up a smooth transition to NT and its successors, including Cairo, a distributed operating system based on NT that is expected in 1997. To make sure developers of applications software know the route, Microsoft is forcing them to develop for both Win95 and NT. To qualify for the "Windows-compatible" stamp, a program must now work with both operating systems.

Windows 95 "is 10 steps forward. But it's not the end of what we want to do with Windows," says Brad Chase, general manager of the Personal Systems Group. Those sentiments resonate back at the bug room. In answer to "Where do you want to go when we ship?" one tester has written: "To get a cup of coffee, then start work on Win96."

The Forecast for 1996 and Beyond

WINNERS

MICROSOFT will rake in some $1 billion on Windows 95 upgrades in year one--not including applications programs.

PC MAKERS will see a quick boost, especially in the home market.

MAKERS OF CHIPS, MEMORY, GRAPHICS EQUIPMENT, AND MODEMS will see a surge in demand as PC owners upgrade and PC makers crank out faster machines for Win95.

SOFTWARE COMPANIES get a fresh opportunity to sell customers upgrades for all kinds of applications programs.

LOSERS

SOFTWARE COMPANIES could be losers, too. As Microsoft builds more features into Windows--such as messaging, fax, and networking--it could wipe out niche software players.

IBM'S OS/2 looks vulnerable: It has only about 10% of the market, and Windows 95 matches many of its features.

APPLE COMPUTER With Windows 95, Microsoft finally catches up to the Mac's ease of use--hardly good news for Apple. Apple's comeback plan: A new operating system in '96.

What's New

Windows 95 replaces the old Windows user interface with an uncluttered work space. Hit the "Start" button, and a series of nested menus lead you to your programs. Or write your own shortcuts and launch your favorites with a single click. Finding files--on your hard drive or on a network--is no longer a job for a cyberdetective.

PLUG-AND-PLAY means you can add new hardware without hassle--your PC will automatically take care of configuration

MULTITASKING

Lets you do simple tasks in the background

NETWORK READY

Built-in network connections make it easier to fit into a wired corporation

MULTIMEDIA

An AutoPlay feature makes it a snap to load CD-ROM disks

GOING ONLINE

Unless the Justice Dept. forbids it, Microsoft's new online service will be just a click away

TASK BAR

The launchpad lets you switch among often used programsBy Amy Cortese in New York, with Kathy Rebello in Redmond, Wash., and bureau reports


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