The Microsoft Century

If you think the world's biggest software company is powerful now, you haven't seen anything yet. Bill Gates and his legions of overachievers are headed for your house, your car and your wallet.

THE RICHEST MAN IN AMERICA IS IN a very good mood. And why not? It's not quite a year since William Henry Gates III addressed a crowd on Pearl Harbor Day, 1995, and vowed to remake a company that many thought was a digital has-been. He has transformed Microsoft, the globe's biggest software company--""turning a battleship around as if it were a PT boat,'' says one of his awed crewmen --and though his foes in the theater of operations known as the Internet are still afloat, the outcome of that futuristic conflagration is now as clear as the rare November sunshine pouring through his window in Microsoft's arboreal Redmond, Wash., campus: his company has prevailed. ""We came through on the things we said we'd do,'' he reports. And now Microsoft stands alone.

Far from hampering Microsoft's progress, the Internet has turbocharged it. Revitalized by its cyberspace initiative, the company is ready to gobble up the limitless opportunities that will come from the Net's restructuring of commerce itself. Just as U.S. Steel and General Motors had their time, this moment belongs to the 41-year-old multi- billionaire rocking back and forth on a couch in his office. Welcome to the Microsoft Century.

Some think he's an evil emperor, the digital king of darkness. There are entire Web sites devoted to his demonization. But Bill Gates will tell you his goals straight out. Microsoft is butting against the limits of how much it can grow in the desktop-computer field; its answer is to make software for more kinds of computers--for the house, the car and even the pocket. And it's going to piggyback on the Internet to enter new businesses. You can bank with Microsoft, you can book travel with Microsoft, you can buy music from Microsoft, you can read book reviews from Microsoft. Watch cable TV on the Microsoft (and NBC) channel. You'll find out who's playing at the local nightclub and book a ticket on a pocket-size wallet computer running a variant of Microsoft's flagship Windows software. People may find themselves brushing against Microsoft often, as they work, shop and entertain themselves. And at the end of the day, a Windows-based home-control system may even shut off the bedroom light.

Critics of its power may not want to hear this, but only now is the 21-year-old company led by the $20 billion man poised to really take off. Some of its executives privately believe Microsoft could double both its size and its market valuation within the next five years. This would make it the most valuable firm on the planet. But even that would not begin to address the strength and breadth of an entity that sits at the hub of the information revolution.

""It's difficult to think of a company in the history of the world that's positioned to influence so many aspects of life as Microsoft is at the end of the 20th century,'' says Michael Moritz, a venture capitalist at Sequoia Capital in Menlo Park, Calif. ""In terms of a civilized world, you'd have to go back to the Roman Empire to find any organization that had as great a reach as Microsoft has today.''

For a look at Microsoft's status in high tech, check out its spread at last week's Comdex. Pilgrims flocking to the Las Vegas Uber-computer event entered the main hall to be swallowed by Microsoft's 40,000-square-foot display. As a dozen giant video displays beamed screen shots, people jammed 30-deep to watch a demo of a new software product, Office 97. All you could see was Microsoft.

And all people could talk about was how Microsoft had answered the doubters who claimed it was insufficiently nimble to maintain its strength in an Internet world. Upstart Netscape had claimed it would break Microsoft's chokehold (its boy wonder Marc Andreessen was saying just months ago that one day people would be asking what that Windows thing was all about), and as proof it held a near-total share of the market for software to browse the exciting World Wide Web. ""That was a bullet with our name on it,'' says Microsoft vice president Paul Maritz.

But Microsoft had some not-so-secret weapons. Chief among them was its megamotivated CEO. Once Gates recognized the gravity of the threat, he spun off a series of memos that turned the company around. And then there was Microsoft's work force, a Kingdome-full of mini-Bills. ""We have 20,000 overachievers,'' says Mike Murray, VP of human resources, who goes through 15,000 rEsumEs to hire about 200 nerd kamikazes every month.

But Microsoft's biggest advantage was the one that many Internet observers considered irrelevant: the fact that almost every computer used a Microsoft operating system and most people used Microsoft applications. So while it was essential for Microsoft to ramp up its own Explorer browser and spiff up its applications for the Net, the masterstroke came when Microsoft leveraged its pre-existing leadership by integrating the browser into the operating system. This meant that new computer buyers (and old ones who upgraded) would automatically get the Internet, Microsoft style. What's more, the extension of this idea into something called the Active Desktop, due next year, actually puts Microsoft ahead in presenting a new approach to computing, where one handles information as if cruising on the Web. It's a gambit for which its competitors have no sure response.

Now the new Microsoft has what might be a more formidable task: extending throughout the world the type of ubiquity that Comdex-goers saw. The post- Browser War Microsoft has several businesses:

Platforms and applications. More than 90 percent of all PCs have a Microsoft operating system--the software that allows the computer to perform its life functions--most commonly a form of Windows. Microsoft also rules in applications: word processing, spreadsheets and the like. Its position is so secure in the microcomputer universe that it thinks about its sales in terms of how many dollars it gets for every computer sold (about a hundred bucks).

Problem: there are only so many desktops in the world. Solution: make systems for whole new kinds of computers. ""Take the handheld PC,'' says Steve Ballmer, Bill's key lieutenant, himself a multibillionaire. Ballmer is referring to palm-size devices that run on Windows CE, just rolled out at Comdex. ""We're going to make a royalty, let's say between five and 25 bucks. A few million units a year--that's not a bad business. If the number is 20 or 30 million . . .''

Ballmer is just warming up ""AutoPC!'' he says. It's yet another version of Windows that will run dashboard-based computers with maps, global positioning and Internet connectivity. ""If we could figure out a way to get 10 or 20 bucks a car, that would be a pretty good business.''

Next? Home PC! Picture the family homestead as a computer net, with a server (a computer that runs a network) in the basement, connected to perhaps dozens of computing devices throughout the house. Kitchen PCs, phone PCs, a den PC connected to the television and even devices running the heating system and the lights. All linked to the In- ternet. And all running Windows.

Getting this close to the customer could lead to an ""intimate and on- going'' relationship, says Gates. ""The easy way to do that is the concept of membership. We ask you to register, and if you're willing we'll upload [from your hard disk] a few profile bits about how you're using the applications and what your hardware is. In a sense, we'll go from a mass production-type world to where we're using the Internet to customize our communication.'' And every month you'll pay the Bill.

Servers. The fastest-growing field in software is the corporate-network, or intranet, market. Even though this is where Microsoft's most voracious challengers have staked their claims--Netscape and Sun in the server market and Oracle as the database king--most observers think that it has a chance to grab the lion's share. Its key advantage is that virtually every large company already uses Microsoft software, and the least disruptive option for corporations is to adopt Microsoft's Windows NT business systems. ""By 2000 or 2001, this part of the business will be equal to Microsoft's entire current business,'' says Scott Winkler, a Gartner Group analyst. That's 8 billion smackers. Netscape and Sun both have sound plans to get pieces of that market, but they are wrestling with a gorilla.

Content. Pete Higgins, Microsoft's media czar, claims this unit--which ranges from the online service Microsoft Network (MSN) to CD-ROM games to electronic publications like Sidewalk (an interactive equivalent of the local entertainment weekly)--will become a billion-dollar business. But Gates has higher expectations for the division. ""It could be our biggest,'' he says. This would make Microsoft a media company as big as Gannett, but, Gates warns, first the company will have to absorb some huge losses. Since the company has $7 billion in cash, this is not a huge problem.

Microsoft now has an entire campus devoted to interactive media, a cluster of buildings centered on an artificial waterfall. Encarta, the world's most popular encyclopedia, is produced there, as well as flashy games (Microsoft Monster Trucks!) and magazines including Michael Kinsley's Slate, a Gen-X thing called Mint and a hip women's Web site called UnderWire. Skeptics say that a techie company can't compete against Disney, but the creative types in Redmond aren't buying that. ""We talk about it being the studio of the 21st century,'' says MSN content chief Bob Bejan.

Microsoft understands that magazines are not as profitable as operating systems, but there are other benefits. These ventures will provide Microsoft a constant connection with its users. And with the Active Desktop approach, Microsoft content could merge into the experience of using any of the various devices powered by Microsoft. You could get a Kinsley column from the kitchen, a stock ticker running in the car or Tom Brokaw in your wallet. At every step the Microsoft juggernaut, with your permission, could be retaining certain of your habits, the better to serve you information geared to your needs. Did you just buy a Nancy Griffith CD from Music Central? Sidewalk has learned she's performing in your town next week! Been perusing the skinny on Bali vacations on the Microsoft's Mungo Park electronic 'zine? Guess what--the Expedia travel service offers discounts on flights there!

Currently, the greatest competitive challenge to Microsoft comes from Sun Microsystems, Netscape and Oracle. Their vision is centered on the Java computer language and so-called network computers--low-cost diskless machines connected to the Net. But so far the market for these seems limited, at least until people can count on reliable, high-speed connections that will zip information to these machines from big servers.

One selling point is that these products are worth using simply to stop Microsoft. ""The person who spends serious money for software wants choices and realizes it's in his advantage to spread the money around--this benefits us,'' says Jim Barksdale, Netscape's CEO. Sun's Scott McNealy casts it in near-apocalyptic terms. ""There's two camps,'' he says, ""those in Redmond, who live on the Death Star, and the rest of us, the rebel forces.'' Oracle's CEO, Larry Ellison, says flatly, ""Everybody hates Microsoft.'' But the fact is that plenty of people don't hate Microsoft. The business community generally accepts it as a fact of life, albeit one with sometimes bloated, hard-to-use applications. The general public, charmed in part by Gates's tousled high-tech Horatio Alger role, figures that Microsoft is part of the future, to be viewed as a mix of scary inevitability and ""Jetsons''-style frisson.

So Microsoft's competitors are playing another card: antitrust. In part, the arguments deal with Microsoft's bigness. ""They're going to have the computer, the car, the telephone and the television--all in one day,'' says Gary Reback, the lawyer who filed a complaint on Netscape's behalf. ""You may as well send your paycheck to Bill Gates! Did you ever vote for this guy?''

The arguments also deal with the fact that Microsoft rules operating systems while also developing applications. It's as if someone owned all the train rails while com- peting with others in producing the locomotives that run on the rails. Who's best informed on what gauge the next generation of rails might be?

So you have a company like Corel, Microsoft's main competitor in applications, forced to deal with Microsoft to get information on the equivalent of rail information. Corel's CEO, Mike Cowpland, claims, ""They became very uncooperative on the engineering side'' once Corel took on a product that competed with Microsoft Office. ""We can still develop the software, but it's slightly more inconvenient because we have to do more work ourselves.'' Netscape founder Jim Clark says his company has the same problem. ""Imagine a foot race where your opponent can put a little pebble in your path and give you a slight cause to stumble,'' he says. ""They win, and no one ever knows.'' (Microsoft says it doesn't intentionally freeze out competitors.) Netscape's Clark thinks the solution to the problem is obvious: ""You have to break Microsoft into two parts.''

Yet Microsoft professes confidence that government scrutiny will yield as little result as previous forays, including a major effort from former antitrust head Ann Bingaman that led to a virtual hand slap. ""We're extremely careful in how we do business,'' says Gates. Indeed, antitrust law does not prohibit bigness. But Microsoft also realizes that its ambitious plans will guarantee that the government will continue its close scrutiny. ""Microsoft is the most successful company in the most dazzling new industry of the century,'' says Charles Rule, Ronald Reagan's antitrust czar. ""This made Microsoft into Ann Bingaman's white whale, and it will continue to attract her successors.'' Will any of this hobble Microsoft? ""That's not going to happen,'' Gates promises.

At least one charge that Microsoft's detractors make--that if allowed to maintain its grip on the industry the company will skimp on innovation--seems unfounded. In the past Microsoft was indeed vulnerable to the charge that its products generally broke little ground. But more recently, Microsoft has moved to become as aggressive an innovator as it is a competitor.

The heart of this initiative is its five-year-old research group. It was the brainstorm of Nathan Myhrvold, a physicist turned Microsoft VP who was once Stephen Hawking's assistant. ""In terms of research, people weren't focusing on the personal computer,'' he says. One reason was the bottom line: the history of high-tech think tanks reads like Custer's war record. The most famous example was Xerox, whose research group did pioneering work that was ignored by the company and exploited elsewhere.

Yet Microsoft believed it could succeed. It hired the very best in every field. At first this was not easy. ""I asked myself, "Why would I work for a DOS company?' '' says former professor Rick Rashid, who now heads the lab. (Would Giorgio Armani sign up for a full-time gig at Wal-Mart?) But Rashid discovered that the product groups were not clogged with code-producing drudges but filled with smart, resource- ful people who could deal with the researchers as peers. The executives were even smarter. ""You'll go to Bill, and he will have read the latest research in your area,'' says Rashid. ""It's really startling. This guy is the CEO of the company--and he gets it.''

Perhaps the best example of how Microsoft research may improve the state of computing while widening its competitive advantage is the lab's work in computer graphics. Microsoft hired a wizard dream team--in the subculture that worships polygons and rasters the names Jim Kajiya, Alvy Ray Smith and Jim Blinn resonate like Cruise, Brando and Madonna. They set about rethinking the basic way that computers process images at high speed and came up with Talisman, a new system that delivers, Myhrvold claims, a 100-fold improvement in speed. ""It will totally revolutionize PC graphics,'' he gushes.

Microsoft will fully exploit this breakthrough. In about a year, a new graphics card (a circuit board inside computers) will begin to replace the standard one now found inside all Windows machines, visually supercharging the desktop and the Net. You can be sure that a new version of Windows and a future upgrade of Office will be redesigned around Talisman. Side-by-side comparison with competitors' software will look like the difference betweeen spreadsheets and ""Space Jam.'' Now imagine the same process with other research breakthroughs, like speech recognition and talking computers.

In other words, Microsoft now intends to add radical innovation to its basic weaponry, backed up by a $2 billion annual budget for R&D. What grim news for competitors. But to Microsoft this outcome is the very definition of fairness. ""If people who don't have research criticize us for getting an edge by way of our research, that's ridiculous,'' says Myhrvold.

Is the Microsoft Century inevitable? Even as they draw up blueprints for ubiquity, the Microsoft people themselves insist that their position is not ensured. Their ideology insists that there will always be another huge competitor, even if their most formidable nemesis, as Myhrvold says, is ""apathy or disorder.'' ""In 1981 it looked like IBM would rule the world, and then IBM fell apart. Stories like this abound,'' says Robert Sobel, a Hofstra University economist. Those stories haunt Bill Gates, and he is determined not to become one of them. ""The IBM lesson is cautionary to us,'' he says. ""Almost every day we say, "Have we become them?' ''

No, Microsoft is not them. Not as far as getting complacent. But as its power grows and its digital fingers encircle us all, it might be Microsoft's greatest challenge not to become a them as far as its users are concerned. Gates says he'd like Microsoft to be remembered as an agent of the empowering force of computers, ""a company that was driving that forward.'' But the flagship companies of former eras are often recalled less for their innovations than for their distance from, or even hostility toward, the common citizen. Will the Microsoft Century be different? Or will our lasting impression be of a company that made us pay the Bill?

As early as next year, your computer will be more 'active,' bringing you the information you want automatically.

Movie--quality graphics will let you create memos, spreadsheets and e-mail that look more like 'Space Jam' than work.

Computers everywhere--from the kitchen to your pocket. They listen. They speak. And they all run Windows.

Bill Gates started Microsoft in 1975. It developed the DOS operating system in 1981; back then the company had 60 employees.

Today, there are 20,00 "Microserfs" around the world and the company is poised to play a role in almost every aspect of our lives.

THE HOME: Microsoft plans to spread PC technology around your house, from your car to the appliances in your kitchen.

Home PC: The core business, operating systems for the PC: Windows 95, 3.x, DOS.

Household systems: Developing software to control appliances like the stove, lights.

Broadcast PC: Computers will be able to carry satellite, cable and network television.

Web TV: Competing with the likes of Samsung to allow TVs to surf the Web.

Auto: "Smart cars" will tell you where you are and how to get where you are going.

Handheld PC: Windows CE will vie to run the new generation of palm-top computers.

Telephone: Software will connect your phone directly to the Internet without a PC.

MULTIMEDIA CONTENT: Microsoft sells one third of all reference software. But its fledgling games division has less than 5 percent of the market.

Games: Golf, basketball and Monster Truck Madness compete for crowded shelf space.

Banking: Money competes with Quicken to let you pay bills and balance your accounts.

Music: Music Central lets you search through album clips and reviews, purchase albums.

Educational: Magic School Bus series tackles difficult science topics with cartoons.

Reference: Encarta is leading CD-ROM encyclopedia. Bookshelf packs several tools.

Maps: Automap Road Atlas challenges AAA with travel info for North America.

Movies: Cinemania includes reviews of 20,000 movies, with actor bios and video clips.

Alliances: Owns half of Dream-Works interactive; will produce multimedia products.

THE WORKPLACE: Over the years, Microsoft has been chiseling away at the market share of companies like Lotus, which got there first.

Office Suite: Office 97, a package of business software, competes with others like Corel.

Spreadsheet: Excel lets users build tables and databases, design business graphics. Competitor: Lotus.

Word processing: Word has unseated Corel's ex-champ WordPerfect, dominating the market.

Presentation graphics: Powerpoint lets users create transparencies, slides and overheads.

Publishing: Publisher 97 enables document design on the PC; FrontPage creates Web pages.

Office PC: Back-Office works on company servers to regulate traffic, e-mail and electronic storefronts.

Intranet: Windows NT runs corporate networks. Other programs, like databases, run on top of it.

Shopping: Merchant Server competes against the likes of IBM to allow safe commerce on the Web.

Databases: SQL Server takes on the leading Oracle database products that run things like billing systems.

Net PC: Rivals like Sun are touting the bare-bones "Net computer." Microsoft plans a fatter version.

COMMUNICATIONS: Last week Microsoft said it would probably lose $1 billion over the next three years on online ventures.

Web browser: Explorer is challenging Netscape Navigator for dominance in the browser war.

Online service: MSN began as a proprietary service, like AOL. Members now access it on the Web.

Internet provider: MSN offers dialup access to the Net, competing with companies like AT&T.

Cities: Sidewalk will debut by '98 with Web guides to major cities in the U.S. Could challenge local papers.

E-zines: Among several: Slate, punditry by Michael Kinsley and Co., and UnderWire for women.

Investing: The Investor Web site lets you track stocks and trade online via Charles Schwab service.

Travel: Expedia, a Web-based travel agency, lets you reserve plane tickets and peruse guidebooks.

Cable: With NBC, launched MSNBC and a Web site this summer. Competes with CNN, Fox.