Microsoft’s New Frontiers : Opportunity--and Obstacles--Abound in Wake of Probe
While Saturday’s settlement of a government antitrust case against Microsoft Corp. will do little to alter the balance of power in the mainstream PC software business, the competitive battles have only just begun in markets ranging from corporate computing to interactive television.
Millions of personal computer users see the bright-blue Windows logo every day when they boot up their PCs, but it is unclear how big an advantage that will be as Microsoft moves off the desktop and into the living room on the one hand and the climate-controlled corporate computer room on the other.
“As what were separate businesses around consumer electronics and PCs come together in the intelligent communication area that is sometimes called the ‘superhighway,’ we see competition intensifying,” Microsoft Chairman Bill Gates said in a telephone news conference Monday.
The stakes in these new markets are high indeed. Just 33% of U.S. households have computers, after all, while more than 60% have cable television and 95% have telephones. Microsoft is spending more than $100 million a year in the hope of becoming a central player in multimedia, and many competitors fear it is only a matter of time before it monopolizes these emerging markets.
Indeed, investors Monday signaled confidence in Microsoft’s future. With the cloud of the antitrust investigation lifted, Microsoft’s shares rose $1.875 to $50.50 in heavy Nasdaq trading.
Microsoft is confident it can take advantage of its strength in the PC world to gain ground in new consumer and corporate markets.
“Technically these are very, very, very, very closely tied,” said Steve Ballmer, Microsoft’s No. 2 man. “People who don’t take an approach to leverage their technology will have a hard time succeeding.”
Ballmer said the research Microsoft is undertaking in areas such as television set-top boxes and servers for interactive video is research the company would have to do anyway to deliver video to the desktop.
As for corporate networking, where Microsoft has been viewed as a laggard, Ballmer said the company has already turned the corner. “Soon it will become obvious how much progress we have made, and then everybody will be talking about the turnaround. I’ve never been more upbeat,” he said.
But it is by no means assured that Microsoft will do as well in its new ventures as it has in its old. The company, in fact, faces many obstacles--not the least of which is its own reputation.
“What they bring to the table is that they probably know more about the widest variety of software than anyone in the world,” said Denise Caruso, editor of the newsletter Technology & Media. “But there is a palpable distrust factor. They have to partner with all of these people who have been reading the business pages of the newspaper for the last 10 years--so they have a big obstacle to overcome.”
An alliance between Microsoft and the nation’s two largest cable television operators that could have assured the company a key role in the world of interactive television reportedly broke down earlier this year over Microsoft’s demands for large royalties. AT&T; was also in discussions with the software giant, but it opted in the end to experiment with Microsoft competitors Novell and Lotus on a souped-up electronic-mail system for businesses.
And there is always a problem when a high-tech company tries to switch from one technology to another. “A lot of this money could end up in a black hole,” said George Smaby, head of a Minneapolis-based research group. But he said Microsoft has no choice but to pursue interactive television and multimedia. “They have a lot of ‘Skunk Works’ going, and one of them may prove to be the killer” application.
Similarly, Microsoft has little choice but to continue its drive in mainstream corporate computing--the traditional province of IBM--where reliability and service are more important than price.
“It’s been an uphill battle for them to gain credibility in the corporate computing business,” said Michael Goulde, consultant at Patricia Seybold Group, an industry research group.
But Goulde said Microsoft will emerge as a power in the long term by continuing to improve its products. He points out that it took five years for Windows to win acceptance. “If you can’t beat them, change the rules” is the Microsoft credo, Goulde said.
“Everyone needs to consider Microsoft a powerful competitor,” said Jerry Held, senior vice president for interactive multimedia at Oracle Corp. The firm is Microsoft’s key competitor in software for “video servers,” which will sort and distribute digitized movies and other forms of information over the high-speed phone and cable lines of the information highway.
“But the scale of the problem is just so far removed from anything they’ve had experience in. Dealing with that size problem is something I believe is beyond the expertise of a company like Microsoft.”
Still, Microsoft retains some major advantages in attacking these new businesses--not the least being the enormous profits that will continue to flow from its desktop computer business. The general consensus around the software industry Monday was that the settlement with the Justice Department--under which Microsoft agreed to change the way it licenses DOS and Windows and free other software developers from restrictive non-disclosure agreements--will do little to dent Microsoft’s position in PCs.
Microsoft dominates in operating systems, which control the basic functions of the PC, and it is set to enhance that position with a new release of Windows, dubbed Chicago. More and more functions--everything from networking to data compression--are being integrated into the operating system and thus do not need to be purchased as separate programs.
And Microsoft has been steadily building its position in applications software, the computer programs that perform specific tasks. To the disappointment of many competitors, the Justice Department did nothing to undermine the advantage in developing application software that Microsoft gains by virtue of its control over the operating system.
“We do get benefits from being a single company with a unified technology strategy,” Gates said. “Our applications division developers have a close relationship with our operating systems division. We have never said we are trying to create some type of wall.”
Microsoft’s chief competitors were circumspect in their responses to the settlement. Novell, which competes in operating systems, was delighted, but others were all but mute.
“The agreement between Microsoft and the Department of Justice has no impact on our business,” said Philippe Kahn, chairman of Borland International and one of the most outspoken critics of Microsoft.
“We don’t have anything good to say, so we’re not saying anything,” said an executive at another Microsoft rival, who declined to be named.
A key battleground for the immediate future will be in applications aimed at consumers, especially the new breed of multimedia education and game programs that use CD-ROM technology. While the smaller multimedia firms say they have an advantage in creativity, Microsoft has the cash flow from other businesses to drive down prices--and the clout with retailers to demand much-coveted shelf space for its multimedia titles.
Carlsbad, Calif.-based Compton’s New Media, for example, has been engaged in a price war with Microsoft over the two firms’ electronic encyclopedias. “We clash with them at the retail level all the time,” said Compton’s Executive Vice President Norman Bastin. “We tell them it’s unfair, but the retailers are all scared of Microsoft.”
Bastin hopes the settlement will force Microsoft to pay more attention to its core business and spend less money on getting a piece of his. “These other businesses have funded (Microsoft’s) forays into multimedia,” he said. “Now they’re going to have to re-look at their main business and might take more care with them.”
