Microsoft Poised to Lead .Net Shift
REDMOND, Wash., Jul 29, 2002 (The Boston Globe - Knight Ridder/Tribune Business
News via COMTEX) -- It's hard to believe now, but Microsoft Corp. almost missed
the Internet wave.
Not until December 1995, when chairman Bill Gates ordered his troops to focus
every product on the emerging medium, did the software giant turn its full
attention toward the Internet. That decision spared Microsoft the ignominy,
suffered by so many other companies that have risen to dominance, of being left
behind during a monumental technology shift.
Now Gates and other top Microsoft executives are afraid of missing the next
wave. They say they are on the brink of another major technological shift, one
that, if they do not lead it, could drop them from the top of the high-tech
pyramid.
Those executives say their most recent effort, called the .Net (pronounced
"dot-net") initiative, is a "bet the company" strategy as important as any they
have gambled on before, including their change to the point-and-click navigation
methods of the Windows 95 graphical user interface, or their embrace of the
Internet.
The tactics it used to crush what was then its most dangerous competitor,
Netscape Communications Corp., creator of the first commercial Web browser and
now part of AOL Time Warner Inc., landed Microsoft in a bitter antitrust case
with the Justice Department that left many observers believing Microsoft was on
the ropes.
But the company has rebounded. Microsoft has ridden out the devastating economic
downturn better than many of its competitors, thanks to the dominance of its
Windows operating system and Office software tools.
While most other companies are slashing their payrolls and reducing spending,
Microsoft said last week that it would add 5,000 jobs to its work force of
50,000 and boost its research-and-development budget by 20 percent, to $5.2
billion.
"There was a time when many of us thought that Microsoft was past its prime,"
said Jerry Fiddler, chairman of Wind River Systems Inc., which makes operating
systems for everything from tape recorders to cars -- a market Microsoft has
been eyeing for years. "But they've definitely strengthened, no question."
The company's latest sea change is coming in the emerging market for Web
services, in which software is hosted entirely on the Internet, instead of on
individual computers.
The new model is intended to allow a much richer exchange of information between
vast repositories of corporate or personal information.
Microsoft's strategy is to use its enormous cash reserves to fund assaults on
new markets, bringing Windows to as many devices as possible, then use .Net to
tie them together through the Internet. Every part of Microsoft's business will
be "profoundly affected" by its success in establishing .Net as the industry's
next major computing platform, CEO Steve Ballmer said.
"If we're going to see growth in any of our businesses -- client, office,
server, anything else we do -- it's because we've correctly embraced this
opportunity and we've laid a foundation for making software more valuable as a
service," Ballmer told financial analysts here last week.
If Microsoft succeeds, for example, a customer's name on a Word document would
not be a mere series of letters, but a deep link to the customer's personal
information and purchase history. Or a car manufacturer's computer system could
detect that the factory is running low on bolts and automatically place an
order, which would be automatically processed and shipped by the supplier's
computing system.
Microsoft figures that the new capabilities would encourage sales of new
versions of its most popular programs, as well as of the Windows-based data
serving computers that power these networks.
But it's far from certain that Microsoft will succeed as it did in building a
monopoly on operating systems for personal computers. Although nearly 140
million PC's are expected to ship this year, nearly all running Windows, the
industry's growth is slowing.
"The two risks Microsoft has to steer between are underreaching -- crawling back
into what they know -- and overreaching, which in this case is trying to control
too much," said Mark Specker, analyst with the SoundView Technology Group, a San
Francisco-based investment bank.
The company's chances hinge upon getting software developers to adopt open
standards that align with its vision of the future.
Microsoft and its competitors are creating standards based on a programming
language called XML, or extensible markup language. They will then race to sell
programming tools and new applications.
Its competition is formidable. IBM Corp. has rolled out its Web-sphere
middleware to customers, leading Gates last week to call IBM a worthy
competitor. Novell Inc. makes a similar product called OneNet. And led by
Microsoft's scrappy rival Sun Microsystems Inc., a coalition of high-profile
merchants calling itself the Liberty Alliance is working on building a system so
customers can use one password to access and give information to a wide range of
e-commerce sites.
Web services also face resistance from those who would use them. Privacy
advocates worry that personal information would be spread too easily. Customers
have expressed concerns about placing Microsoft between them and their
customers. Both concerns led Microsoft to scrap, at least for now, a program
called .Net My Services that aimed to give each computer user an online persona
that would follow him or her to whatever Internet device they were using.
At last week's analyst meeting, Gates acknowledged that Microsoft had made some
missteps since announcing the .Net initiative two years ago.
He said some products had been prematurely labeled as part of .Net, leaving some
customers to wonder if this was what they had been waiting for, and others
unclear on exactly what .Net was.
Microsoft is using the transition to change its business model. Instead of
selling software licenses to customers who don't need to pay again until they
upgrade, vendors now want to host software on the Internet and charge
subscription fees for access to the constantly updated software.
Microsoft has given its largest customers until Wednesday to change to the
subscription model or be charged more for software upgrades. Wall Street likes
the steadier revenue streams, but many customers have complained they are being
fleeced without receiving better products. Still, with Linux, an open-source
alternative that operates many server computers, still too unreliable for
average PC users, customers have little alternative but to stick with Microsoft.
"There are plenty of customers who are irritated and want to go away from
Microsoft, but they recognize and admit that they have no options," said Al
Gillen, a research director with IDC, the Framingham-based market research firm.
So far, Microsoft has had mixed success at cracking its new markets. Despite
some $10 billion in investments in the cable industry, the company has made
little headway in placing Windows in set-top television boxes. Car makers,
meanwhile, have been reluctant to build Windows into their in-dash computers.
And although Microsoft had a judge's antitrust breakup order overturned on
appeal, the company still faces significant legal challenges. Most significant
is a ruling, expected as early as next month, by Judge Colleen Kollar-Kotelly,
on the stricter remedies sought by Massachusetts and eight other states that
refused to join the Justice Department's settlement agreement with Microsoft.
But with such enormous cash reserves to bankroll its efforts, no one is betting
against any of Microsoft's efforts in new devices or in .Net. After all, they
saw what Microsoft did to Netscape, which withered before being acquired by AOL,
and worry that similar carnage might happen to smaller companies in Microsoft's
way.
Said Mitchell Kurtzman, CEO of Liberate Technologies Inc., which makes
interactive TV systems: "Even though they've essentially given up on our market,
I still worry about them more than I worry about any other competitor."
By Chris Gaither
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(c) 2002, The Boston Globe. Distributed by Knight Ridder/Tribune Business News.
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