Don't cry for me, Janet Reno
The antitrust action filed by the Justice Department is not likely to slow Microsoft. The real threat to Bill Gates comes from the marketplace, not the government
Russ Mitchell; Marianne Lavelle; William J. Cook; Susan Gregory Thomas
Business & Technology; Cover Story
06/01/98 U.S. News & World Report Page 40-45 (Copyright 1998)
Most people don't associate Bill Gates with Baywatch, the cheeky TV hit that favors developed bodies over character development. Yet, as Justice Department lawyers worked to prepare their antitrust lawsuit against Microsoft, Baywatch fans across the country were clicking icons on their TV sets for a Web-enhanced experience of the show's three-part season finale, courtesy of Gates. Anyone with a WebTV set - top box could call up Mitch and Neely's wedding album or check out new swimsuit shots in the corner of the screen while watching the drama unfold. WebTV is 100 percent owned and operated by Microsoft, the same company that provides the essential software for over 90 percent of the PCs sold today. Although it's perceived as just a maker of desktop software, Microsoft is embarking on an aggressive strategic expansion that is taking the company places that would have been hard to imagine just a few years ago-- places like Baywatch. Besides TV, Microsoft is continuing its all-out push into the Internet. It is also trying to plant its operating system in an array of new consumer devices, while simultaneously attempting to knock down IBM as the kingpin of corporate computing with its Windows NT. Last week, the federal government and attorneys general from 20 states sued Microsoft, charging it with predatory business practices. The suits are narrowly drawn: Trustbusters seek to have Microsoft unbundle its Internet Explorer browser from its Windows 98 operating system or offer Netscape Communications' browser alongside its own product; cease exclusionary licensing practices that favor Microsoft's products above others; and allow computer makers to do whatever they want with the initial user interface--the screen that users see when their computers boot up. But forcing Microsoft to change any of those practices is unlikely to slow the company much. The real threat to Microsoft's future growth comes instead from its own ever increasing size (nearly $14 billion in revenue, 25,000 employees), which could hamper the company's ability to respond rapidly to new challenges; its inexperience in the industries it aims to conquer; its struggle to adapt Windows to proliferating new formats; and the sheer determination of established players to resist Microsoft's forays into their markets. WebTV, for example, has so far managed to sell only 325,000 machines, and the entire cable TV industry is on guard against intrusion by the likes of Microsoft. Big computer companies that had suffered defeats at the hands of Microsoft, like Sun Microsystems and IBM, are standing strong, with a renewed commitment to keep Microsoft in check.
Microsoft has no choice but to expand. It is driven by the rules of Wall Street, and those rules require that the company's profits continue to grow by at least 20 percent a year. Investors who have been snapping up Microsoft shares are literally buying into a growth rate even higher than that. There is only one way Microsoft can continue to meet that target--by moving well beyond the desktop PC and into new businesses.
Tough competitor. The company's strengths, of course, are formidable. Microsoft boasts a practically inexhaustible cash hoard and an impressive army of talent. Millions of users are locked, voluntarily or not, into its Windows technology, an "installed base" that can be channeled into new products and markets. Microsoft has built a brand name that is recognized around the world, and both Gates and his company still enjoy extraordinarily positive ratings in public opinion polls.
But that doesn't mean Microsoft is omnipotent. Consider the PalmPilot, one of the most successful consumer electronics products in recent years. An electronic datebook replacement that recognizes handwriting and communicates with any PC, the $200 to $400 PalmPilot has grabbed $300 million in revenues in 18 months--without a single bit of Microsoft software inside. The PalmPilot's success shows that "it is very possible to beat Microsoft," says Ken Dulaney, an industry analyst at the Gartner Group. "You can't have a company as big as Microsoft and not make mistakes." To challenge the PalmPilot, several hardware makers have licensed Microsoft's Windows CE software for use on competing hand-held computers, but Dulaney expects these devices to reach only 15 percent of the market in the next couple of years. Windows CE, he says, is a shrunken-down version of Windows, and it's slow and cumbersome compared with the sleek operating system of the PalmPilot. Jeff Hawkins, the PalmPilot's creator, is "an autocratic manager" with a "singular vision"--much like Gates in Microsoft's early days--who produced a streamlined operating system from scratch, says Dulaney. CE, by contrast, is the love child of a bureaucracy. Of course, the PalmPilot's current market is chump change when viewed against Microsoft's total annual revenues. But as chips get cheaper and smaller, an endless variety of electronic appliances will proliferate: digital wallets, smart cards, wrist radios, monitoring chips installed in your child's shoes or sewn into your dog's ear. The PalmPilot's owner, 3Com Corp., plans to go up against Windows CE by using its sleek operating system to control such "embedded devices." This market is worth some $400 million and growing fast--and that's just the software. Television represents another tough challenge for Microsoft. The TV will gradually become more computerlike as digital and interactive programming proliferates. Movies-on-demand, an overpriced fantasy just a few years ago, will be made available on cable systems over the next few years. High-speed Internet links will allow people to access Web sites through their television and receive not just text- based Web pages but also full-motion video clips, music, and video mail. With 250 million TV sets in the country available for upgrade or replacement, the market for software and hardware is huge. Microsoft's initial foray into TV land was its purchase of WebTV a year ago for $425 million. The service lets viewers tap into the Web over their TV sets, with special add-ons like an electronic programming guide and the ability to download Web sites and TV shows overnight. In addition, Windows CE was chosen as the operating system for the first 5 million set - top cable boxes from cable giant Telecommunications Inc., and the maker of those boxes, General Instrument, has agreed to fit them with WebTV technology as well. Not so fast. Sound like another Microsoft juggernaut? It isn't. WebTV sales have been disappointing, and it's unclear how interested TV watchers are in the Web. Meanwhile, America Online has recently purchased a WebTV competitor, NetChannel. And most other cable companies have so far not committed to Windows CE on the set - top box. Time-Warner Cable, for instance, is using an operating system called Power TV. "The last thing I'd want on my TV is Windows," says Larry Marcus, vice president at the BT Alex Brown investment banking firm. "I'm afraid my TV would crash." Some TV industry execs doubt Microsoft's ability to compete in their arena at all. "In a fight between a shark and a puppy dog, the dog wins if it's on land," says cable-industry vet Hal Krisbergh, CEO at Worldgate Communications Inc., a company going up against WebTV for interactive services on the set - top box. "Gates doesn't know the TV platform. It's not his business." In fact, the cable industry is creating "open standards," which include Sun's Java computer language, to make sure it doesn't get locked into Windows. Even TCI chairman John Malone, who inked the CE deal with Gates, told stockholders at his company's annual meeting that "Bill Gates would like to be the only technology supplier to the cable industry. We would be very foolish to allow that to happen."
TV is an old-line industry that doesn't want to be upstaged by upstarts like Microsoft. The Internet is a brand-new endeavor populated mostly by brash young entrepreneurs; they are willing to work in a Microsoft-dominated environment but have little interest in ceding control of their future to Gates. This is an arena in which Microsoft's potential rivals are numerous.
The story of how Microsoft almost missed the Internet is legend. And although its effort to play catch-up has been extraordinary, it has hardly set the Web afire. Its one big Internet success, the Explorer browser, is given away for free.
Initially, Microsoft tried to create a proprietary service called the Microsoft Network, which flopped (although millions of Windows users find it impossible to remove the MSN icon from their screens). Its Web travel service, Expedia, has drawn good reviews but profit margins are slim and it faces several strong rivals. Microsoft has laid off workers at its Sidewalk city guides, and paid subscribers to its online magazine, Slate, are scant.
Microsoft is also very late in creating a "portal" to the Web, a new buzzword for the products put together by two of the companies boasting high rates of Internet traffic and astronomical stock prices--Yahoo! and Excite. These portals, based on search engines and indexes, provide first-screen gateways into the World Wide Web, with customizeable screens that bring enough personal information to ensure that users don't stray far from the portal site--making the sites appealing to advertisers. Netscape is belatedly assembling a competitive portal, and Microsoft is late to the party as well: Its Start portal won't open until later this year. Arguably, Microsoft's real portal is Windows, complete with integrated browser. Through devices like the "channel bar," which highlight a limited number of Web sites--selected by Microsoft--the company can, to some degree, direct traffic on the Web. Microsoft insists that anybody can customize the channel bar, but Windows customization has never been easy and most computer users tend to live with what's provided for them--the majority of Netscape users have never customized their browsers, even though Netscape's portal is widely considered to be subpar. The channel bar "is like the blinking 12:00 on a VCR," said one wag in an anti-Microsoft chat room. A lot of people just won't change it. Justice is zeroing in on Microsoft's strict rules limiting how computer makers customize the opening screen on the Windows machines they sell, and on the demands Microsoft places on Internet service providers and on Web sites that want to be on the channel bar. These demands include ordering them not to use or advertise Microsoft competitors. Microsoft says it must control the screen to create a "consistent customer experience."
View from Congress. U.S. Rep. Dick Armey complains that Justice is out of line with this demand. "Consumers make the best decisions for themselves." But Armey may be confused about who the consumer is. Computer makers license Windows from Microsoft and sell their machines to end users. The end users can customize the machine any way they want--if they can figure out how to do it. The original customers--the computer makers--can customize only by Microsoft's rules. Says Dave Winer, president of UserLand Software, "Are Compaq, Dell, and IBM and the rest franchisees {of Microsoft}, or are they truly independent?" Even the Internet, though, is a sideshow for Microsoft compared with its strategic centerpiece, Windows NT. This hyperpowered version of Windows, built for corporate networks, could make or break Microsoft over the next few years. The company aims to replace networked Unix servers and workstations made by the likes of Sun and IBM, as well as IBM's minicomputers and mainframes, with networked PCs. Microsoft's ambition is nothing short of ruling the computing world, from the biggest cross-border corporate transactional processing jobs to the tiniest wrist radio. Already, NT version 4.0 is showing up at small businesses and at the department level in big companies. But so far it is incapable of handling the biggest corporate tasks. Microsoft intends to change that with the much-delayed Windows 5.0, due out sometime in 1999.
But the company has to prove that NT is robust enough and dependable enough for huge computing jobs, such as airline flight scheduling or corporate payroll. Says Novell marketing executive Stewart Nelson: "You can reboot a PC three or four times a day, but do you want to have to reboot an entire system?" And Microsoft will have to provide a lot of customer handholding, never one of its greatest strengths.
Sun, Oracle, and others will try to take advantage of NT's long delay by cementing their own strategies, partly by using the Java "write once, run anywhere" language that they claim can tie together disparate computer systems. (Microsoft is developing its own, proprietary version of Java.) Sun chief Scott McNealy and Oracle CEO Larry Ellison have demonstrated deep personal animosity toward Microsoft and Gates. Their companies won't go down without a tough fight. Microsoft, however, has a powerful ally in SAP, the German software company whose R3 system is being installed widely to keep the books for major corporations (including Microsoft). A growing share of R3 installations are running on NT. IBM's services division is a vendor of both NT and SAP. And despite Ellison's animosity, Oracle products are being offered for NT, because the market is demanding it. Perhaps Microsoft has abused its monopoly power. But that doesn't mean its competitors have not made huge mistakes of their own. IBM's bureaucracy was slow to react to the personal computer, permitting Gates to take all the glory. Apple couldn't muster the management skills to beat Microsoft with what many considered to be a superior product. Sun has allowed the hype about its Java software language--billed as a Microsoft killer--to far outpace its abilities to deliver on its claims. Netscape, which promised to turn its browser into an operating system alternative to Microsoft, failed to create a product that could possibly fulfill that ambition. "You can't blame Microsoft for Netscape's failure," says software exec Winer. "Netscape had money, people, acquisition opportunities, great press. They just didn't execute." Business history is replete with examples of companies that got big and successful, only to lose their way; the scrappiness that made them successful is stifled by the bloat that results from size and bureaucracy. Antitrust action might slow Microsoft down a bit and put a stop to its most aggressive business tactics. But the company's ability to grow into an even bigger Goliath without losing touch with the David within may be the toughest challenge Microsoft ever will face.
Picture: A bad day for Bill Gates (Robert Sorbo--Sygma for USN&WR); Picture: IBM. Bruised by Microsoft, a resurgent IBM is aiming to reclaim its top-dog status in the worldwide computer industry. CEO Lou Gerstner has turned IBM around. (Brian Smith-- Outline for USN&WR); Picture: TCI. As TV goes digital, the cable industry is growing wary of Microsoft. John Malone sees Gates as a partner--and a threat. (David Strick--Outline); Picture: JAVA. In a grudge match with Microsoft, Sun--the Unix champ--won't pull any punches. Sun CEO Scott McNealy has overhyped Java. (Louis Psihoyos-- Matrix)
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