The Redmond Menace
By Dominic Gates and Mark Boslet
A throbbing techno dance beat filled Seattle's convention center earlier this month as 3,000 computer scientists broke into applause. Bill Gates strode onto the stage, his normal geek pallor replaced by a healthy, confident glow. Forget that whining, evasive CEO who testified during the antitrust trial -- Gates is in command again.
This spring, the founder and chief software architect of Microsoft has been busy, in his element and on the offensive. Inviting prospective Silicon Valley partners to come dance with the devil, Gates opened a new Microsoft technology test facility in Mountain View, Calif. Flying to the heart of Sony territory, he revealed plans at the Tokyo Game Show to bring the Xbox videogame console to Japan. Back in Redmond, Wash., ignoring an ongoing European Union antitrust investigation, he touted the British government's adoption of Microsoft technology for its Internet portal. Most significantly, Gates announced Hailstorm, a bold multimillion-dollar initiative that could win Microsoft dominance of the next generation of Internet computing.
In short, the software giant is on a tear. The threat of a court-ordered breakup has diminished. So, too, has the fear of obscurity in the face of faster Internet innovators. While the rest of the tech industry reels from the dot-com collapse, Microsoft's leaders consider themselves once again poised to rule the world.
"We are a vital company," asserts ever-bullish CEO Steve Ballmer. "There's another revolution coming in computing. I think we are way out front. I don't think there's really anybody else to look to as providing any leadership."
Competitors have been dancing on Microsoft's grave for the past couple of years. The antitrust trial was an embarrassing debacle. Internet startups were as sexy as desktop software was passé. Top execs were leaving in a brain drain. But now that the dot-coms have flopped, a favorable outcome in federal appeals court could bring Microsoft back with a vengeance. At a crucial and daunting moment for the industry, when many of its rivals are struggling and strapped for capital, Microsoft has $27 billion in ready money to rebuild the growth engine that for years dazzled Wall Street.
The company, which saw $23 billion worth of sales its latest fiscal year (ending June 2000), is making sweeping moves onto the Internet, into corporate business software and onto handhelds, phones and game consoles. To build a new empire online, Microsoft is inviting partnerships from software developers and companies that need applications. It's also eyeing a slew of acquisitions this year to snap up tools and services for its Internet push.
If that push fails, Microsoft loses the battle of its life. If it succeeds, the company will be guaranteed a heavyweight title on the Web that could match its supremacy on the desktop.
Speaking in February before a crowd of 200 journalists at the National Press Club in Washington, Sun Microsystems CEO Scott McNealy, who rarely passes up an opportunity to bash his Redmond, Wash., rival, urged the Bush administration to continue to push the antitrust case against Microsoft. "I'm the only one who can stand up and tell the truth," McNealy said, because Microsoft customers are "scared to death." He added: "I don't believe in pardon. I believe in personal responsibility."
McNealy can be forgiven for his chagrin. In 1998, Sun paid at least $3 million to fund a team of legal experts that helped persuade the Justice Department to file suit. McNealy got his money's worth -- at first. Judge Thomas Penfield Jackson delivered a withering judgment and ruled that Microsoft had abused its monopoly position to exclude rival software illegally, specifically Netscape's browser and Sun's Java. As a remedy, Jackson ordered the company split in two.
But in the appeals court, the government's momentum slipped away, as appellate judges seemed skeptical of Jackson's rulings and concerned about possible prejudice. (In the press, the federal judge had characterized the 5-foot 10-inch Gates as having a Napoleonic complex.) The appeals court decision, which should come down within the next few months, could return the case to the lower court with a new judge and less bite. At that point, with everyone -- not least the new Bush administration -- looking for a way out, a settlement seems likely.
The upshot is that Microsoft, months after being faced with government-sanctioned dissolution, could in the end get away with a wrist slap.
That prospect galls longtime critics, who foresee Microsoft reverting to its old ways. Ransom Love, CEO of Linux company Caldera Systems, says if the case were thrown out, his company "would feel the brunt of their illegal business practices."
Yet the primary reason for the spring in Gates' step isn't the trial turnaround; it's the technology.
Dick Brass, VP of technology development for Microsoft, insists that when the company was most derided and under legal attack, his engineers had their heads down, working. Brass, who once wrote speeches for Oracle CEO Larry Ellison that routinely condemned Gates as a monopolist, now has the zeal of a convert. "I think there was an expectation, a hope by our rivals, that we'd shrivel up and vanish," he says. "But adversity, if anything, served as a stimulus."
A breakup seemed grotesque to Gates and his fellow wonks, but the real horror to contemplate would be technological irrelevance. In the 21st century, the Internet -- not the PC, on which Microsoft had reaped its fortune -- would be the universal platform for business software, running bite-size programs that customers linked to online. Worse, it was shaping up to be a realm dominated by Unix servers, IBM or Oracle databases, and Sun's Java programming software. The Redmond giant would be left out in the cold with an old business model.
Microsoft's solution to this coming crisis -- a bet-the-company initiative called .Net - began to come together only in 1999. The fundamental .Net concept is that, while Windows applications still will work best on Windows-based systems, with .Net they'll be able to talk to non-Windows machines and applications across the Internet. In the long run, the shift online will completely change the Microsoft business model.
Desktop applications, which currently account for 70 percent of the company's sales, gradually will morph into Web services over the coming years. They'll no longer be sold in a package. Instead, they'll be delivered online via subscription to consumers and businesses.
Microsoft announced .Net in June 2000, right after the trial ended. Rivals quickly dismissed it as vaporware. But this March, Hailstorm added flesh to the .Net bones, and the scope of Microsoft's ambition became more visible.
In a small conference room on the Redmond campus, Senior VP Paul Flessner can barely contain his excitement about Hailstorm. An Oracle T-shirt bearing the grinning mug of Gates nemesis Larry Ellison hangs on the wall, left over from a previous meeting. ("Our chief motivator," he quips.)
Flessner leads Microsoft's plans to bring these Web services into the IT departments of large corporations. The company wants to do on the Internet what it's done on the desktop: make it possible for developers to write applications with off-the-shelf components.
The Hailstorm platform will be like a half-built skyscraper. It will offer basic Web services, such as a notification service to contact a user, so developers can simply add them to their own applications and finish the building. To house all this information, Microsoft will build and operate -- at a projected cost of more than $50 million per year, according to one source -- a network of secure data centers capable of hosting the data of 100 million users.
Flessner pumps the air with both fists and flashes a great grin. "We are on the verge of weaving together our assets on the desktop, on the server and on the Internet."
Hailstorm services will begin rolling out next year.
Developers and software vendors seem impressed. "This will bridge to the anti-Microsoft camp in a big way," says Navin Chaddha, CEO of online services company Rivio, who sold his first company, vXtreme, to Microsoft for $75 million in 1997.
It's a measure of the company's renewed confidence that Microsoft executives aren't shy about leveraging existing products to help open a new market -- in the same way the company notoriously used its Windows operating system to give Internet Explorer a boost. At the recent Hailstorm launch, Gates declared that the imminent new XP versions of Windows and Office will have built-in support for Hailstorm services.
Because of its putative embrace of open standards, however, the reigning desktop monopolist foresees no new antitrust problem. "It's a level playing field," says Flessner. "There's nothing proprietary about this."
Of course, not everyone buys that. "I understand the theory," says Scott Cosby, manager of IBM's e-business Technologies Marketing Team. "I'd love to see the technology that [works] in an equally robust way on Linux or on Windows 2000."
What Microsoft needs to do is open up .Net to Java so the two technologies interact smoothly, says Michael Crosno, chief executive of software maker Epicentric. "Otherwise, they will lose their head of steam."
That might not be Microsoft's priority, though. It has effectively abandoned its own version of Java and is promoting a new Java-like alternative language, called C# ("C sharp"). In its most pleasant dreams, Redmond sees Hailstorm as a Java killer. The promise of Sun's Java was that developers could write applications that would run on any platform: "write once, run anywhere." By committing to standards, Microsoft is essentially making the same promise of open communication between machines, without the need for Java.
No wonder Sun's McNealy is still spewing anti-Microsoft bile. Hailstorm is nothing less than an effort to eclipse competing Web services platforms from IBM, Sun, Oracle and smaller players like BEA Systems. The desktop isn't enough. Microsoft wants to own the Internet.
That means Microsoft needs not only developers, but big Internet partners. That's a bit tricky when your nickname is the Evil Empire. But in difficult times, Hailstorm offers companies an important opportunity for growth.
Prospective partners are not only high-profile dot-coms (eBay was the first to sign up with Hailstorm), but also enterprises from banks to automakers. American Express executives attended the Hailstorm launch. Other targets on Microsoft's list include Amazon.com, Disney, credit concern MBNA and United Parcel Service, according to a company source. Microsoft has to convince such businesses that their customers' data is safe in its data centers -- no easy task given that the personal information of millions of users will be stored on Microsoft servers, which have caused the company numerous public embarrassments for its security holes.
Throwing more weight behind its punch, Microsoft is ready to buy support for its technology. With stock a deflated currency, cash is king, and Microsoft has quite a war chest. Investment bankers have been parading a string of eligible acquisition targets before Microsoft -- among them EarthLink, Interwoven, Macromedia, SilverStream and WebMethods. "You name it, they've been shown it," says one Microsoft insider. (None of these companies would confirm this.)
Recent acquisitions hint at Microsoft's interest in businesses that enhance its Internet strategy. It bought Bungie Software and Digital Anvil, both computer gamemakers, to support its push into the games market with its Xbox console. It bought WebAppoint, which has online scheduling software that will become a Hailstorm service.
In December, Microsoft surprised the industry with its acquisition of Great Plains Software for $1.1 billion in stock. The move lands Microsoft in business process software, a segment of the market it had long said it would avoid. Addressing a dinner crowd in mid-March, Ballmer described the business applications market for small and midsize businesses as "terribly underserved by our industry."
Among the fast-growing segments that Microsoft is checking out are customer service and online marketplace software. Onyx Software and PurchasePro are considered potential targets in these areas. Many Wall Street investors speculate that NetIQ's online operations-management software also would be a good fit. (None of these companies would comment.)
Some high-tech companies must be glancing wistfully at that great pile of cash. Internet superstars from Amazon to Yahoo have been bombarded by negative news and pessimism. Even stalwarts Cisco, Oracle and Sun have succumbed to the market's downward pressure. Although Microsoft has not escaped -- its shares remain in the doldrums and its quarterly earnings are threatened by the economic downturn -- no company has greater financial strength to weather the market. As the floodwaters rise, there's no question that Microsoft will survive and its competitors' ranks will be thinned.
Make no mistake, neither the move toward open standards nor the gentle wooing of partners makes Microsoft any less tough to beat. The company is as voracious and aggressive as ever. Microsoft execs are specifically targeting Sun's business accounts, for example, internally calling the project "Sun Down."
"I don't think anybody sees a new Microsoft out there," says Jeffrey Rodek, CEO of software maker Hyperion Solutions.
Inside Microsoft, though, the .Net technology shift is lifting spirits. "I liken it to the transition from before Windows 3.0," says 12-year Microsoft veteran Kathleen Hebert, VP of business applications. "It feels like it's all ahead."
In the current economic climate, workers are again flowing into Redmond. Many of them come from wannabe returnees who have taken enough lumps at failed dot-coms. "It's been a tough time in the market. Lots of people were asking themselves questions: 'Shall I stay at Microsoft? Is this a cool place to be?'" says Senior VP Flessner. "We're getting these questions answered now."
In this most bearish of markets, the combination of decimated competition, legal optimism and real traction for their technology strategy is turning Microsoft execs into rampant bulls. "With the emerging products and services out there," says Alan Yates, a VP in the TV platform division, "there are plenty of opportunities to double or triple the size of Microsoft."
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