It is a curiously revealing moment. All the more so when a company spokesman concedes a few days later that this particular charge -- that Microsoft required potential competitors to tell the company their product plans before they would be allowed to participate in a Microsoft developers' conference-is well documented.
Up until now, Gates has largely controlled the unfolding of his remarkable story. At 39, he seems to have achieved the information age's equivalent of the American Dream. Through intelligence, ruthlessness and hard work he dominates a technology so central to modern life that it touches nearly every office, school and desktop. He is very, very rich and so powerful that even his enemies are eager to cut deals with him. Now he wants more, a piece of all the action-the bills people pay, the phone calls they make, the news they read, the TV they watch. But he may have reached that point in the arc of his success where the very qualities that raised him high could start to drag him down.
If Gates is feeling a little cranky these days, he has good reason. The Justice Department just derailed his $2 billion bid to acquire Intuit and its popular Quicken electronic-checkbook program, a deal that would have helped realize Microsoft's ambition to make money from almost every commercial transaction in cyberspace. Another team of government lawyers is snooping around asking questions about Microsoft Network, the new online service he plans to launch in August. And an antitrust suit that has been hanging over his head for nearly five years -- and which he thought he had settled last summer -- is in legal limbo, held hostage by an ornery federal judge.
Despite the company's reputation as a juggernaut, Microsoft is running into some unexpected snags in the marketplace as well. Gates wants desperately to seize control of the so-called local area networks, where more and more corporate business is done. But the company is having trouble developing a product that can compete with Lotus Notes, which dominates the market for "groupware" (the software that helps people brainstorm over these networks). Novell's NetWare still controls two-thirds of the market for the software that runs the office systems, despite Microsoft's best efforts with Windows NT. And Microsoft's sql Server is still struggling to win customers from Oracle, which owns almost half the market for the critical database software that stores the corporate world's most important information. Microsoft could even have difficulties in desktop computing -- a business that Gates helped nurture from a hobbyist's amusement into a $100 billion industry and that is running out of room for growth. Windows 95, a product Gates is counting on to lead his charge into online services and electronic commerce, has run into one delay after another. And now, less than three months before the program is scheduled to hit the stores, just when Gates was supposed to ride the tide of industry support behind what could very well be the next personal-computer software standard, he finds himself under attack on all sides:
-- From users, who complain that some of Microsoft's mainstay products, like the latest version of Word for the Mac, have become bloated and sluggish, and that the company's first attempt to create a more "social" kind of software (the much ballyhooed Bob) was too condescending.
-- From the computer press, which has long acted as Gates' head cheerleader (even more so since he became rich and famous) but now seems to delight in reporting Microsoft's every delay, every bug and every legal setback.
-- From newly emboldened competitors, who have quietly complained for years about Microsoft's strong-arm business tactics and only in the past few months have begun putting those complaints on the record.
-- From government officials, who are concerned that Microsoft has developed a choke hold on a critical industry and who view with alarm the prospect of Microsoft's moving into banking, telecommunications, publishing and entertainment.
These issues came to a head in February, when the antitrust settlement Gates reached last July with Assistant Attorney General Anne Bingaman ran into a roadblock in the person of federal judge Stanley Sporkin. In a widely quoted decision, Judge Sporkin rejected the deal, agreeing with most observers, who believe it was too favorable to Microsoft. "It is clear to this court," he wrote, "that if it signs the decree presented to it, the message will be that Microsoft is so powerful that neither the market nor the government is capable of dealing with all of its monopolistic practices."
After Sporkin's ruling, things seemed to turn sour for Microsoft. In late April the Justice Department's antitrust division sued to prevent the company from consummating the merger with Intuit, a deal that would have been the biggest acquisition in software history. Microsoft was scheduled to fight the suit in court on June 26, but two weeks ago, the company announced that it was dropping the merger, perhaps hoping it would get the government off its back. It may be too late for that. Bingaman says her department has become a kind of "Microsoft complaint center," and her staff says it doesn't have the resources to pursue the leads it is getting. In one closely watched investigation, the Justice Department is reported to have assigned a team to look into Gates' plan to bundle software for Microsoft Network in every copy of Windows 95-a brilliant marketing ploy that could instantly make the company a key player, if not the key player, on the information highway. Fueling the debate-and industry gossip mills-are fresh details of Microsoft's hard-nosed business dealings. In a new book called Startup (Houghton Mifflin; $22.95), for example, GO Corp. founder Jerry Kaplan tells how in 1989 his company, hoping to persuade Microsoft to write some software for GO's pen-based computer system, gave Gates and his developers a demonstration of how it worked. Microsoft said it wasn't interested. But two years later, the company unveiled a competing system called Pen Windows that bore an uncanny resemblance to GO's design, even using the same "gestures" to insert and delete characters. Microsoft calls the account "factually inaccurate."
More recently, according to court papers submitted last February by Apple Computer, Gates personally threatened to stop developing application software for the Macintosh if Apple continued working on a programming tool that would compete with Microsoft's. "Since Microsoft is the largest supplier of software applications for the Macintosh," wrote Apple general counsel Edward Stead, "this threat was a serious one." Gates denies saying any such thing.
But such a thing would not be out of character. In a complaint filed in April as part of the Intuit suit, the Justice Department quoted a memo, directed to Gates, in which a Microsoft vice president told how he had tried to pressure Intuit chairman Scott Cook into accepting a $1 billion buyout offer by hinting that Microsoft might spend the money attacking Intuit in the marketplace. "I tried to tell him how much we could do with $1 billion," the V.P. wrote. "I tried to be nonthreatening, but let him know we would do something aggressively."
American capitalism likes entrepreneurs to have a gleam in their eye, and even tolerates some clawing and scratching as long as the playing field is level and the fight is fair. But it does not take kindly to bullies. When a company gets to be big enough, it either curbs its youthful ways or it invites the kind of scrutiny Microsoft is now getting.
How big is Microsoft? Measured by the standards of the computer makers, it seems relatively small. Its annual revenue is half that of Apple and one-fourteenth that of IBM. But software is vastly more profitable than hardware. Apple makes 3.3% profit on every dollar of sales, compared with nearly 25% for Microsoft. In some respects, the power Microsoft wields over the computer industry may exceed IBM's in its heyday.
Eight out of 10 of the world's personal computers could not boot up (that is to say, start) if it were not for Microsoft's operating-system software-programs like MS-DOS, Windows and Windows NT. What is even more impressive (not to mention profitable) is that the company also dominates the market for almost every big-ticket application program, like word processing (Microsoft Word), electronic spreadsheets (Excel), filing (Access), scheduling (Project) and the new all-in-one program "suites" (Office). Microsoft's Flight Simulator is one of the best-selling PC games of all time. Microsoft's electronic encyclopedia (Encarta) outsells the Encyclopaedia Britannica. Financially, the company couldn't be more secure. Microsoft's revenues for 1994 were nearly $5 billion, more than all its competitors' in the PC-software business combined. Its market value tops $40 billion, more than that of companies 10 times its size. It employs 16,400 people-one-third of them women-in 49 countries. Thousands of current and former Microsoft employees have become millionaires, at least on paper, and three are billionaires.
Gates has amassed a net worth of more than $10 billion, making him either the richest or the second richest man in America, depending on the closing price of his 141 million shares. He was married last year on the Hawaiian island of Lanai; the wedding was attended by publisher Katharine Graham and fellow billionaire Warren Buffett. He is building a $40 million-plus home on suburban Seattle's Lake Washington, with video "walls" to display an ever changing collection of electronic art, a trampoline room with a 25-ft. vaulted ceiling where he can burn off steam, a 20-car underground garage and a trout stream. The Road Ahead, a book on which Gates is collaborating with Nathan Myhrvold, a Microsoft group V.P., and journalist Peter Rinearson (publication date: Oct. 16), received a $2.5 million advance from Penguin, a record for a book by a few computer geeks.
None of which gives anyone at the Microsoft "campus" in Redmond, Washington, an excuse to relax. One of the most remarkable traits of Microsoft's corporate personality -- inherited directly from its restless chairman -- is its inability to sit still. What other companies see as wind at their back, Microsoft sees as turbulence from competitors catching up. "A revenue-generating franchise is the most fragile thing in the world," says Myhrvold, who, like Gates, is something of a professional worrier. "No matter how good your product, you are only 18 months away from failure."
A touch of paranoia is not a bad thing to bring to the computer-software business, where shifting alliances, rapid technological changes and intricate co-dependencies make plotting long-term strategies hazardous. For example, Software Arts, which invented the electronic spreadsheet, lost its market to Lotus because it failed to anticipate the impact of the IBM PC. Lotus, in turn, failed to recognize the importance of Windows and the Mac, and was overtaken by Microsoft.
Nobody navigates this chaos more deftly than Gates, who not only understands the technology (he wrote the company's first product, Microsoft Basic) but also meets regularly with the ceos of all the major hardware and software firms. This enables him to spot trends and anticipate developments as clearly as anyone in the industry. It is as if he were playing three-dimensional tic-tac-toe in a world where everyone else is playing in 2-D.
"You get Bill Gates in a room with his peers, and he will know more than anybody else in the room," says J. Paul Grayson, chairman of Micrografx, who has worked with Microsoft's chairman for more than a decade. This gives the company a big edge, says Myhrvold, who likes to talk about riding the "wave" of technology. "If you want to surf it, you put someone on the board who knows how to surf," he says. "Most companies have to put people on the beach shouting 'Go left!' and 'Go right!' Next thing you know, the company is underwater."
-- Gates' hands-on management style (and his company's deep pockets) gives Microsoft another attribute rare in any industry: the strength of its convictions. When a new product bombs, other firms tend to cut their losses. Not Microsoft. If Gates decides a market is strategically important-as he did with Windows and he says he has done with Bob-the company never gives up. "It doesn't matter if we bang our heads and fail," says Steve Ballmer, Microsoft's executive V.P. for sales and service. "We keep right on banging and banging and banging and banging and banging."
Inside room 1091 of building 5 (of 26) on the Microsoft campus, the air is filled with the faint ozone smell of burning circuits and the sound of hard drives whirring and rattling like old jalopies. This is the Engine Room, where 150 computers, loaded with all manner of monitors, microprocessors and plug-in cards, are putting Microsoft's newest product through last-minute stress tests. "It's like certifying the Boeing 777," says Rich Waddel, a Microsoft test manager. "There are about 15 million lines of code in this thing."
The "thing" is Windows 95, the latest update of a 10-year-old product that Microsoft is scheduled to release on Aug. 24. Windows 95 is Microsoft's bid to rid itself once and for all of its twin albatrosses: the legacy of dos (a primordial system that is starting to annoy even its most loyal users) and the competition from the Macintosh operating system (which continues to make Windows seem clunky by comparison).
Windows 95 has not only caught up with Macintosh but in some areas even outshines it. For example, to select a command from one of the Mac's "pull-down" menus requires users to press the mouse button, hold it down while dragging the cursor over the command and then release the button. It is an awkward sequence that new users find difficult to master and that can put a strain on the wrist. In Windows 95, the menus pop open with just one click and stay open until a second click launches a command.
Windows 95 has also straightened out some of the most annoying aspects of everyday computer use, from plugging in a new printer to communicating over a tangled corporate network. On Windows 95, you can instantly see the whole network just by clicking twice on an icon labeled Network Neighborhood. That brings up a map of all the computers in the "neighborhood,'' which you can get into simply by clicking on them (provided you have the necessary passwords). This may not sound like much, but when corporate network administrators see it, they will think they have died and gone to computer heaven.
Gates has suggested that Microsoft may sell 40 million copies of the $100 program in its first year. Conservative analysts put the figure at half that. Either way, its impact on the industry is likely to be huge. "Windows 95 will create the largest wave of hardware and software purchases the world has ever seen," says Micrografx's Grayson.
But many software developers are also uneasy about Microsoft's next big moment, for as Gates' influence steadily grows, their own role inevitably shrinks. They are reduced to writing second-string software, while Microsoft reserves the big programs for itself. Microsoft, as former WordPerfect executive Pete Peterson once put it, "is the fox that takes you across the river and then eats you."
So is Microsoft a classic monopoly? Not exactly. For one thing, it fosters competition, at least within some well-defined boundaries. As Gates likes to point out, nearly 70,000 independent vendors produced software in 1993, more than three times as many as did five years earlier. Nor has Microsoft lowered prices to drive competitors out of business and then raised them to gouge consumers. "Microsoft cut prices when it didn't have to," says Jesse Berst, publisher of the industry newsletter Windows Watcher. "It's something that Apple could have done if they'd had the courage, and IBM too."
What Gates understands better than anyone else is that control over the standards that others must adhere to is the great lever of wealth and power in the digital age. Just as the value of a telephone network increases with each new phone added to the system (because it gives everyone on the network one more person to call), so does the value of a computer system increase with each program that runs on it. This is what Stanford economist Brian Arthur calls the law of increasing returns-a twist on the classic law of diminishing returns.
Diminishing returns, for those who slept through Economics 101, is the rule that explains why the second candy bar never tastes quite as good as the first and why doubling the amount of fertilizer on a crop field doesn't necessarily double the yield. But in the software industry, the second candy bar often tastes better than the first, and the third tastes even better.
So desperate are programmers for a stable computer standard that they will latch on to the first one that works-whether or not it is the best. A case in point, says Arthur, is ms-dos. "Microsoft dos for any serious user is a crummy operating system," he says. "But Microsoft got there first and played its market advantages extremely intelligently."
Using a strategy Arthur calls "target, leverage, link and lock," Microsoft proceeded to convert dos users to Windows users, Windows users to Word users and so on down the product line. Microsoft's customers, of course, were free to switch to WordPerfect for Windows or Lotus 1-2-3 for Windows or any other competing products. But by the time those programs were ready, Microsoft already owned the markets. "You could argue," says Arthur, "that Microsoft is the product of clever strategy, mediocre technology and a hell of a lot of increasing returns."
The links that bind users to Microsoft software run deep-down to the level of "plumbing" invisible to the user but of critical importance to the programmer. For example, Microsoft has for several years been using a tool called ole (for object linking and embedding) that makes it easier for users to move information from one Windows application to another-to shuttle an expense report from a spreadsheet to a word-processing document, for example. Apple is developing a competing system, called OpenDoc, that is supposed to run equally well on Windows, Mac and IBM's OS/2. But if a programmer uses OpenDoc instead of ole, he runs the risk that Microsoft will at some future point make a subtle change in Windows that would render his programs useless. "Everything Microsoft is building is linked to ole," says Jerry Michalski, editor of the newsletter Release 1.0. "Everywhere you look there are these dependencies."
Dependencies and increasing returns are no guarantee of long-term survival, however, and nobody knows that better than Gates. He and his lieutenants are always on the lookout for the technological breakthrough that could permit some smaller, scrappier competitor to do to Microsoft what Microsoft has done to everyone else. In the past the company was content to let others lead the way-into online services, for example-waiting until there was a clear market opportunity before swooping in. Now Microsoft is starting to do its own basic research, spending $600 million a year trying to build computer systems that can see, hear and understand ordinary English and anticipate a user's needs.
In the nearer term, the company is moving aggressively in markets that are closely linked to its existing business. Its new Microsoft Home division, for example, is an attempt to leverage its position in the market for business desktops, which is becoming saturated, and move into the so-called SOHO (small office, home office) market, which is growing at an estimated 20% a year. Microsoft has begun advancing on Lotus by adding Notes-like groupware features to Windows 95 and Windows NT. And pursuing what may be its most important source of revenue in the next few years, Microsoft continues to work relentlessly on Novell's and Oracle's biggest customers, arguing that it would simplify their lives to have Microsoft software run all their operations, from the back-office file server to the desktop.
Gates has invested in a variety of speculative alliances: with Hollywood's DreamWorks troika (Spielberg, Katzenberg, Geffen) to make interactive entertainment products; with cable giant Tele-Communications Inc., to build interactive TV systems; with cellular-telephone pioneer Craig McCaw's Teledesic Corp., to build a network of low-flying telecommunications satellites.
But Microsoft's primary focus right now is the Internet. Gates in April 1994 called an off-site meeting of his top staff to talk about a technology that had been around for 20 years but had suddenly exploded. Gates confessed that the Internet "mania," as he called it, had taken him by surprise. Millions of people were communicating via computers using software standards and application programs that Microsoft had no hand in developing. Gates could even foresee a day when Microsoft's bread-and-butter programs would be cut out of the market because they didn't work well on the Internet.
"Microsoft got religion about the Internet in a big way that day," says Release 1.0's Michalski. Product managers went back to Redmond determined to make their programs Internet-compatible. The Microsoft Network, originally intended as a straightforward commercial online service, was redesigned to embrace the Internet and eventually steer it in a profitable direction. Microsoft crafted a strategy by which the company could make it easier for people using Microsoft software to do everyday transactions over the networks-pay bills, order from catalogs, check bank balances. "Our plan," says Myhrvold, "is to make the pie really big and take a little slice out of each transaction."
Will Microsoft succeed? There are no guarantees. The company faces stiff competition in each of its target markets, and even some hostility. Gates, who used to brag that Microsoft "doesn't talk to users," is now trying to make it in the ultimate user's market-the home. There the company must contend not only with some pretty savvy computer-software companies, such as Electronic Arts (John Madden Football) and Broderbund (Carmen Sandiego), but eventually with the real heavyweights of home-software marketing, Sega and Nintendo, as well.
When it ventures outside the computer industry, Microsoft could find itself competing with some very big players. When the Intuit deal was announced, banking and credit-card firms began shoring up their positions in the financial-transaction business; just last week Citibank announced it would eliminate almost all charges for banking by computer in the New York City area. In telecommunications, Microsoft is up against the Baby Bells and giants like AT&T, which is developing its own online service.
Meanwhile, on the computer networks themselves, especially on the rough-and-tumble Internet, Microsoft is not exactly adored. In Usenet newsgroups like alt.destroy.microsoft, the company is routinely excoriated as the great Satan of software. "Microsoft is about to become a climax ecosystem," says John Perry Barlow, co-founder of the Electronic Frontier Foundation, expressing the conventional wisdom of the digerati. "Neither the company nor its software can grow any larger without collapse."
That may be wishful thinking. Microsoft is a formidable competitor, and in computer networking in particular it is playing from a position of considerable strength. By bundling Microsoft Network with Windows 95, Gates will get instant access to tens of millions of potential online customers. Although such bundling is standard practice for online-service providers, competitors like America Online's Steve Case are crying foul. "Windows is the dial tone of the digital age. They shouldn't be allowed to do this," says Case. If the Justice Department's antitrust division doesn't sue to force Microsoft to separate msn software from Windows 95, America Online may take legal action on its own.
They may have to stand in line. A lot of folks, it seems, want to see Microsoft in court. According to the chairman, there are dozens of suits pending against the company. Most are minor disputes. The biggest-the original antitrust case-could be resolved in the next few weeks, when a federal appeals court rules on whether Judge Sporkin was out of line when he rejected the controversial settlement.
Microsoft could still prevail, in court and in the market, but it will not escape unscathed. The business climate in which the company operates has changed. The Sporkin ruling and the Intuit setback have emboldened its competitors. Its business partners are warier, and the customers in the new lines of business Microsoft is pursuing could be equally skittish. "The last person I want to have looking into my checking account is Bill Gates," wrote Ravi Krishna Swamy, a student from North Carolina State University, in a message posted on the Internet. Gates claims not to understand such talk. Why, he asks in mock frustration, do people complain that he sells so much software? Is there something wrong with that? Should Microsoft just sit back and not make its products any better so that more people will buy from its competitors? Is that what it's all about?
Even some Microsofties-parodied as slavishly loyal worker bees in Douglas Coupland's new novel Microserfs (HarperCollins; $21)-think Gates goes too far. Privately, they regret that the company has sailed so close to the wind, especially when it might have won the race simply on the strength of its technology. "Sometimes I think it's unfortunate that we compete the way we do," says a Microsoft middle manager, in a rare expression of doubt.
In fact, Microsoft's business practices are not that far out of line with most of Silicon Valley's. "I don't think they have done things we wouldn't do ourselves, or that the people who have complained the most wouldn't do either," says Gordon Eubanks, chairman of the Symantec software company, based in Cupertino, California. Even companies that have submitted evidence against Microsoft are deeply ambivalent about inviting the Justice Department to police the industry.
"Microsoft represents the best of ourselves or the worst," says Mitch Kapor, founder of Lotus and a longtime Gates watcher. According to G. Pascal Zachary, author of Showstopper! (Free Press; $22.95), a book about the making of Windows NT, the company is the model of a new, postmodern corporate culture, perfectly suited to survive in an era of rapid technological change. The Microsoft way, says Zachary, writing in Upside magazine, is neither purely individualistic (the American approach) nor consensus driven (the Japanese style) but a third way he calls "armed truce," in which employees are encouraged to challenge everybody, even the chairman. "Conflict is at the heart of every significant Microsoft decision," he writes. "This is a company constantly at war, not only with outsiders but also with itself."
Gates and Microsoft have demonstrated what the armed-truce approach can achieve. The company is a national treasure, the undisputed leader in a business now crucial to everybody's life. What Microsoft has yet to discover-and what the world is waiting to learn-is whether the qualities that brought about its triumphs will somehow make it falter.
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