Microsoft Unites PC Industry--to Throw Rocks : Technology: IBM and Apple take aim at former ally and its popular new software, Windows.

Being No. 1, as Microsoft founder and Chairman William H. Gates III can readily attest, can definitely have its downside.

Sure, Gates has built the world’s largest personal computer software publishing house and is widely considered to be the single most influential voice in setting the tone and thrust of the personal computer industry. And, with a net worth pegged at $4 billion, the 35-year-old Harvard dropout can hardly complain that he hasn’t been amply rewarded.

But today, some 10 years after International Business Machines selected Microsoft’s software to power its personal computer--thus giving the company a legitimacy and position shared by no other software publisher--Gates finds himself uniting the personal computer industry in a new way: as its common enemy.

IBM and Apple Computer, once strong business allies, have recently combined forces against him. Other software powerhouses, such as Borland International, Lotus Development and Novell, are scurrying to assert their independence through a series of cooperative alliances. That was demonstrated last week with Borland’s acquisition of software pioneer Ashton-Tate. Even the government has got into the act; earlier this year the FTC launched a wide-ranging and industry-applauded investigation into Microsoft’s potential anti-competitive practices.

“No one wants to work with Microsoft anymore. We certainly won’t,” said Philippe Kahn, chairman of Borland and one of Microsoft’s most outspoken critics. “They don’t have any more friends left, and finally people won’t have to work with them anymore because there will be some viable alternatives very soon.”

If so much weren’t at stake, such animosity probably wouldn’t amount to much more than what Microsoft considers it: rampant professional jealousy. But the rancor poses a far more serious threat.

Although Microsoft has clearly set the software agenda for the PC’s first 10 years, that role is far from assured as the personal computer enters its second decade and the software industry scrambles to provide it with enhanced powers and new capabilities.

The contested high ground of this software war is the operating system standard for the personal computer of the 1990s. Although the average user rarely knows or thinks much about the set of commands governing the internal operations of his computer, the issue is literally worth billions of dollars to hundreds of PC makers and software publishers around the world.

No wonder Microsoft, whose MS-DOS operating system is installed in about 85% of the 75 million personal computers now in use throughout the world, is fighting to retain its enviable position. Equally unsurprising is that competitors would want to wrest some of that power and profit away from the Redmond, Wash., software publisher.

“Microsoft owns the personal computer market today. They are the dominant force and they are the leader in operating systems,” said Richard Shaffer, publisher of a high-technology newsletter. “But all that could change in five years . . . Microsoft should be worried.”

Added Tim Bajarin of Creative Strategies, a Silicon Valley market research firm: “Microsoft could lose 30% of the market in five years” if its foes are successful.

At issue is the successor to MS-DOS, Microsoft’s personal computer operating system that has united and dominated the industry since its introduction in the IBM personal computer in 1981. Although apparently as popular as ever among everyday users, DOS is widely considered throughout the industry to be technologically ancient and ready for retirement.

While improving the PC is certainly one important goal, equally important for many software publishers and computer makers is diminishing the clout Microsoft, which is expected to post sales of about $1.8 billion in the fiscal year ended June 30, exerts over the entire industry as well as their individual business strategies.

Because it competes in virtually every segment of the software industry--including computer languages that programmers use to build their products, operating and networking systems that control and link PCs, and application programs such as word processors and spreadsheets--Microsoft has an unrivaled grip on computer manufacturers and other software publishers.

But that could change.

Computer makers such as IBM and Apple, which have seen their profits plunge because Microsoft has allowed cheap clone makers to prosper at their expense, want to regain control over their fortunes. Software publishers say they want greater freedom from Microsoft because they suspect the company’s operating system unit gives preferential treatment to its in-house application programs at their expense. (This is one of the issues the FTC is said to be investigating, though the agency has declined comment on the matter.)

“Ultimately we want to be in control of our own destiny and not have some one set it for us,” said one IBM insider. “We want to be more involved in the software running on our machines and we want to make more money.”

Meanwhile, Microsoft, under Gates’ determined and competitive direction, steadfastly pursues its course for the next decade.

Microsoft’s substitute candidate for DOS--Windows--is already a marketplace hit. More than 4 million copies of Windows, which gives the PC new, easy-to-use powers, have been sold since the latest version was introduced 14 months ago. In fact, the program has proven so popular--far exceeding even what Microsoft says it had hoped for--that the company is now betting its entire business strategy for the 1990s on the program.

“If you want to be successful, you have to take risks and bet on something,” Gates said in a recent interview. “We’re betting on Windows.”

But other bets have been placed as well.

IBM, once Microsoft’s development partner for the the DOS successor but now its arch-rival, has weighed in with OS/2, and will release its latest version before the end of the year. For the future, IBM has agreed to work with Apple Computer, another former Microsoft ally, to develop a new and more advanced operating system for release in the mid-1990s.

At this point, Windows clearly has the market presence, mass and momentum that its rivals lack. And that may be enough for Microsoft.

“Microsoft doesn’t have to do anything but wait out the rivals,” said Vern Raburn, chairman of Slate Corp. and a close friend of Gates. “Technical marriages like the one between IBM and Apple had traditionally produced very little.”

Notes James Weil, a technology analyst at SoundView Financial: “Microsoft will be able to dig out from this mess because IBM will fumble just like it always has. But if IBM can deliver--then Microsoft has significant competition.”

But there may be other reasons for Microsoft to worry about its looming competition.

Stuart Alsop, publisher of a PC industry newsletter, says Microsoft’s Windows strategy requires it to bet on evolving its existing decade-old DOS technology to hold on to its customer base rather than making a clean break with its past and introducing new, state-of-the-art technology, as its rivals have proposed.

It could be a fundamental flaw in the Microsoft strategy--and Gates’ first big mistake, Alsop said.

“Microsoft is misreading the need for a whole new operating system . . . The problem is that Gates has too much invested in the current (technology) to recognize this need,” Alsop said. “Microsoft is always going to have to pay homage to the past. But in technology, there are times when you just have to make a clean break.”

Microsoft remains convinced that it is pursuing a course that will be more appealing to customers with huge investments in its earlier technology because Microsoft is promising that all its current and future Windows products will work with the old DOS software.

The goal, explained Microsoft President Michael Hallman, is to protect a customer’s existing investment and to minimize the confusion and disruption in buying patterns that often accompanies the introduction of new technology.

In a recent memo to his executive staff, Gates outlined the “evolutionary proposition” that Microsoft should deliver in unison to customers. “Our software run today’s software on all (almost) hardware and both today’s and tomorrow’s software on all (almost) of tomorrow’s hardware,” Gates wrote.

That’s the message that Microsoft is hammering away at to anyone who will listen.

“When 4 million (buyers) say they want Windows, I say we ought to concentrate on that,” Hallman said. “If there’s confusion in the market, we could lose.” Besides, Hallman quipped, “I don’t see anyone clamoring for a new operating system platform except the hardware makers. The customers aren’t.”

Some analysts see unbridled hubris in Microsoft’s position, noting that it fails to take into account the strong and essential role IBM played in establishing Microsoft’s DOS as the original standard.

“Microsoft cannot duke it out with IBM and the rest of the PC industry at once and expect to win,” said Wil Zachman, a technology analyst near Boston. “Microsoft has over-reached itself in a way that will ultimately be extremely damaging.”

Still, even detractors aren’t discounting Gates’ ability to win his latest bet. “Even though he’s patching wildly to keep Windows up to date,” Alsop said, “he’s got the technical savvy and chutzpah to get up in front of people and tell people that it’s the right way to go.”

But will the folks believe it this time? Perhaps not.

“As an industry we don’t believe that any one person should be directing the industry,” said Bajarin, the Silicon Valley analyst. “But Gates is now in the position to direct the entire industry and no one company or person should have that dominance. It’s not a personality thing. In fact, the majority of the people like Bill Gates. But they believe that what happens in the market should be the result of competition--not market dominance.”