Thought everyone in the great "margin debate" would find this interesting...
Marketing, Performance Earn
Windows NT Place in the Sun
By DON CLARK
Staff Reporter of THE WALL STREET JOURNAL
July 29, 1996
Three years ago, Microsoft Corp. launched its
most ambitious technological undertaking,
Windows NT. The operating system was designed to
be personal computing's new software foundation
-- and the company's lever to pry open new
corporate computing markets.
It bombed.
Despite Herculean efforts, the new software was
slow, didn't run many key programs and required
six times more memory than most PCs had at the
time. Microsoft, used to steamrolling
competition in the PC market, found that it had
little pull with executives in charge of
corporate data networks.
"Frankly, the company hyped NT way way too
much," concedes Jim Allchin, the senior vice
president in charge of the effort. "There was a
huge letdown ... . Some other companies would
have said, 'I give up.' "
Microsoft didn't, and the implications are
beginning to roll through the computer industry.
Windows NT has come from nowhere to capture
nearly a fifth of the booming market for
operating systems shipped on midrange computers
called servers, and the company believes NT is
now outshipping all rivals in the server
business. The momentum, particularly on desktop
machines, should accelerate Wednesday; Microsoft
will release to production a long-awaited NT
version offering the easy-to-use graphical
appearance of the popular Windows 95.
Trojan Horse
Indeed, the product whose initials were once
jokingly said to stand for "Not There" has
suddenly become the most important weapon for
maintaining the software giant's stunning
growth. While the world's attention is fixed on
the PC market and the Internet, Windows NT is
Microsoft's Trojan horse to attack a $30 billion
market for networks, databases and specialized
application programs that keep big companies
running. Microsoft's server-software business
alone surged from $401 million to $1 billion for
the year ended June 30, and should double again
in 12 months.
"It's huge, approaching an avalanche," says
William Tauscher, chief executive officer of
Vanstar Corp., a Pleasanton, Calif., company
that sells and installs big computer systems at
major corporations. "I don't ever have a
customer discussion that's not about NT."
Internet Role
The competitive fallout from Windows NT's
rebirth is likely to be widespread, and possibly
devastating for some Microsoft competitors.
Already, Windows NT is siphoning off new sales
that might have gone to Novell Inc. and numerous
backers of the rival operating system called
Unix, including Sun Microsystems Inc.,
International Business Machines Corp.,
Hewlett-Packard Co. and Silicon Graphics Inc.
Windows NT also will play a huge role in the
battle over the Internet, in which Microsoft is
vying with Sun and Netscape Communications Corp.
to establish the most popular World Wide Web
standards.
Windows NT's rise from the ashes is a potent
symbol of Microsoft's maturation, although it
must be noted that artificial dog droppings and
eggbeaters played an important role. At a total
development cost of close to $500 million, the
program became a costly lesson that technology
is necessary but not sufficient to penetrate new
businesses. In particular, the renaissance of
Windows NT required an extraordinary effort to
link the company's technologists with the
customers who would ultimately use their work.
First, a primer: Like other operating systems,
which control the basic functions of computers,
Windows NT was designed to handle key internal
housekeeping functions of machines, such as
organizing how documents are stored and printed.
But product-development leader David Cutler was
asked to make a quantum leap beyond the
Microsoft DOS and Windows systems used on most
desktop PCs. The new system would get more power
by crunching 32 bits of data at a time, rather
than 16. It would run multiple programs at the
same time; if one crashed, the others would keep
going. It was expected to run all existing
application programs, as well as a new
generation that would exploit its unique
attributes.
Running It All
While Windows 95 and its predecessors run
individual PCs and portables, Windows NT was
designed to run anything from high-end desktop
machines to refrigerator-sized computers that
serve as data repositories for hundreds of
workers. It currently comes in versions for
workstations and servers.
One principal target was Novell, an Orem, Utah,
company that sells server software to let PC
users swap files and manage printing over a
network. The other was Unix, a standard
operating system that many computer makers use
to run a broader variety of server programs,
such as transaction systems that let clerks
enter customer orders or sort employee records.
NT was expected to do both jobs on the same
piece of hardware, an important cost saving to
some customers.
By all accounts, the four-year gestation of the
Windows NT 3.1, the inaugural version, brought a
400-person development team close to mental
meltdown. Windows NT 3.1 had a staggering 6.1
million lines of computer code and was
agonizingly slow. In 1993, Microsoft Chairman
Bill Gates predicted the company would sell one
million units in the first 12 months on the
market; it wouldn't reach that mark until its
third year.
As it quickly became evident that Windows NT's
first version was a dud, Mr. Allchin, a highly
regarded code designer with a trademark shock of
white hair, was charged with rallying the
burned-out troops. Many of them drifted away or
became despondent as Windows 95 and other
projects rose in stature at the company. The
magnitude of the flop was brought home to Mr.
Allchin at a companywide meeting in the fall of
1993, when Executive Vice President Steve
Ballmer held up a laptop computer and boasted
that he was still running Windows NT on it.
Though designed as a gesture of support, that
Mr. Ballmer felt compelled to make it at all
also suggested that faith in the product was
waning around Microsoft.
In retrospect, Mr. Allchin believes, the team
became cloistered so long that they had lost
touch with the people who used it. Team members
used computers with vast amounts of memory, so
they didn't object when Windows NT required a
whopping 24 megabytes. And virtually no one had
any contact with customers who needed to run big
data centers around the clock.
'Blissful Ignorance'
"It was a case of waking up from this blissful
ignorance," Mr. Allchin says. "People had to
realize that it wasn't going to sell the way it
was."
To save NT, Mr. Allchin and other managers homed
in on one key tactic: Setting up systematic
links between engineers and customers.
Programmers took turns fielding customer calls
for technical support, and traveled to company
sites where Windows NT was being used. Using
electronic mail, every member of the development
team received a message from the field each time
Windows NT won a bid from a big customer -- and
each time it lost. Microsoft also began sending
thousands of customers test copies, or "betas,"
of new versions of the program; a small group of
these outside testers are polled by telephone to
help Microsoft decide whether all bugs have been
stamped out.
Mr. Allchin clipped bad reviews of Windows NT
from trade publications, and assigned members to
ensure that the product would next be ranked
tops in each category measured. "If I ever found
someone who made a bad comment about NT in the
press, we separately called that person," he
says. "We did whatever it took to solve their
problem."
The company hired a special 16-member team of
programmers to design special pieces of code
whose only function is to wring tiny speed
boosts from sections of the program. Mr. Cutler,
a charismatic, hot-tempered figure who dabbles
in driving race cars, last year found an
additional prize to drive his team: A hand mixer
and a bowl full of mock dog droppings, which are
ceremoniously passed to the development manager
whose team has the most bugs.
Tandem's Bet
The tactics paid off. Subsequent versions of
Windows NT worked far better. Windows NT 4.0,
though it has swelled to 16.5 million lines of
code, runs up to eight times faster than the
first version -- and uses one third less memory.
A server that could once support 150 users now
can serve 1,000 with the same response times.
One new convert is Tandem Computers Inc., which
makes industrial-strength computers and software
that won't break down under heavy transaction
loads. "We clearly are betting on NT," says Roel
Pieper, Tandem's chief executive.
Why? For one thing, faster Intel Corp.
microprocessors are spawning powerful servers at
attractive prices. In some cases, a $4,000 box
can do work previously handled by machines
costing $25,000 to $1 million. PC maker Compaq
Computer Corp., for example, has created a big
business in Windows NT servers; so have Digital
Equipment Corp. and Hewlett-Packard, though they
also sell proprietary Unix computers.
Unix also can run on Intel machines, and it can
scale up to much larger computers needed for big
computing jobs. But Windows NT is easier for
nontechnical people to install and operate, and
has generated a broader array of server and
desktop programs. Microsoft has also used
not-so-subtle pressure to drum up more programs:
A software company that puts out a program for
Windows 95, and wants to use a
Microsoft-approved logo on its packaging
advertising that fact, must pass tests showing
the program also works on Windows NT.
With those lures, Microsoft's sales team,
sometimes going around computer managers to
individual company department heads, began
racking up wins in the corporate world, in the
brokerage business and a few other key
industries. "It's been a hard-fought battle
every step of the way," says Paul Maritz, a
Microsoft vice president.
Microsoft seems to be gaining the upper hand.
General Motors Corp. is installing 8,500 Windows
NT servers at car dealers around the country.
One program on the system will allow customers
to configure the car model they like on a PC
screen, and compare it with comparable models
from competitors; another helps locate cars at
other dealers or in transit to meet customer
orders, says Wayne Stein, an Electronic Data
Systems Corp. director who has worked on the GM
project.
Bypassing Windows 95
Some companies skipped Windows 95 on their
desktops to wait for the new version of Windows
NT. Montgomery Securities, a San Francisco
brokerage firm, has decided to install 1,300
Windows NT desktop machines. Larry Sikon, its
director of technical services, estimates that
Unix machines and software would have cost
$2,000 more per desk. Another lure was the
easy-to-use interface of the forthcoming Windows
NT 4.0, comparable to the Apple Computer Inc.
Macintosh systems it will replace. "For us it
was a godsend, because it is so Mac-like," Mr.
Sikon says.
By some measures, of course, Windows NT is just
starting to get going. In 1995, market
researcher International Data Corp. estimated
that Windows NT had only 18.7% of all server
operating-system shipments, while Unix machines
collectively had 24% and Novell had 42%. Both
rival systems continue to boost sales in the
growing market, and have huge installed bases
that won't go away soon.
But NT clearly has momentum. Unit shipments of
the server version tripled to 450,000 for the
year ended June 30, and Mr. Ballmer projects
sales will nearly double to 840,000 units in the
current year. The company believes it is already
shipping servers at a faster rate than all
versions of Unix combined. Novell insists it is
still well ahead, but Mr. Allchin says the lead
vanishes if you count only new installations of
both companies' software.
The Internet could change the battle. Many
companies are buying servers to dispense
information in Web format to their employees and
customers through in-house "intranets." Web
browser programs can run on virtually any
desktop computer, which could reduce pressure to
rely on Microsoft's software.
Netscape, the top Web browser maker and a big
force in Web servers, hopes Sun and its hot new
programming language, Java, will create a new
breed of programs that can be transferred over
networks and run on any operating system,
reducing the need to standardize on Windows NT
or other operating systems. Though Windows NT is
gaining ground fast, Sun's Unix-based computers
account for the largest volume of Web servers;
its executives say Java has Microsoft on the
defensive.
Free Alternative
"I'm not going to tell you NT is not going to be
a success," says Ed Zander, president of Sun's
computer business. But he says top corporate
information officers sense a historic
opportunity to get more choice than they have
traditionally had from Microsoft. "They're
telling me, 'We want to be free from the lock-in
of the Microsoft operating system,' " he says.
Other customers, argues Mr. Tauscher at Vanstar,
welcome Microsoft's plan to make Internet
technology and other features a free element of
the operating system. Windows NT 4.0 will
include a new Web server and software for
designing Web sites and indexing files in a more
efficient way. Ethos Corp., a San Francisco
start-up company that offers a Web information
service called InvestorsEdge, recently chose
Windows NT and Microsoft's Web server simply
because it was easy to use and, unlike Netscape,
it was free.
"Netscape is still out there trying to sell
their product," says Kevin Vaughn, vice
president of advanced technology for
HarperCollins Publishers, a News Corp. unit that
also chose Windows NT. "That makes it very hard
to compete with Microsoft."
To critics, Microsoft's pricing -- or lack of
pricing, in this case -- is an unfair artifact
of its monopoly in the PC market. But Mr. Gates
shows no signs of slowing down. The company,
with nearly $7 billion in the bank, plans to
spend $2 billion on research and development in
the current fiscal year -- a pace that would
make it No. 8 among U.S. companies, though it
won't make the top 100 in size. Profits should
rise 18% to $2.6 billion in the current fiscal
year, estimates analyst Rick Sherlund of Goldman
Sachs, and revenues rise by the same percentage
to $10.2 billion.
A hefty chunk of its resources will go into
upgrading Windows NT, which Mr. Gates predicts
will become powerful enough in two years to take
on any computing job. "If we don't add these
capabilities," he says, "other operating systems
that do will over take our position." |
