Free Enterprise?
Employing the same aggressive pricing and product-bundling tactics it used to take command of the personal computer software business, Microsoft is laying siege to the less visible but far more lucrative market for large government and corporate computer systems.
Windows NT, the business computing operating system that Microsoft launched five years ago, has already seized a 40% market share of new sales of servers that handle such critical tasks as managing PC networks, e-mail systems and huge databases.
San Jose-based market researcher Dataquest predicts Microsoft’s share of the server market will rise to 59% of new shipments by 2000, putting the company in position to eventually dominate the $30-billion market for enterprise computing software.
Although NT still has less than one-third of the installed user base, Microsoft’s competitors complain that the software giant is unfairly using its size and control over computing standards to undercut them in its quest to conquer the enterprise computing market.
“Our members are saying that their future is in the enterprise and they’re scared to death of what is happening,” says Lauren Hall, chief technologist at the Software Publishers Assn., an industry trade group. Hall wrote a lengthy report denouncing Microsoft’s tactics and calling for an expansion of the Justice Department’s antitrust case against Microsoft, which goes to trial Sept. 8.
Microsoft’s tactics in the enterprise arena were in the spotlight recently during a Senate Judiciary Committee hearing. But antitrust lawyers say that while the tactics may be unwise, they probably are not illegal.
“Microsoft is playing a risky game with its hardball tactics,” says Hillard Sterling, an antitrust attorney with the Chicago-based firm Gordon Glickson. But Sterling says regulators would have a tough time proving that Microsoft’s actions have resulted in higher prices or have otherwise hurt consumers.
Microsoft says that Windows NT is succeeding because it’s good, it’s cheap and it runs on a wide variety of low-cost PC hardware.
Price is clearly a powerful weapon for Microsoft. Robert Dorin, senior analyst at Boston-based market researcher Aberdeen Group, recently calculated that an NT Windows system running a popular business application from SAP Corp. costs one-third to one-eighth the price of a similar system running on rival Unix systems.
Software developers are flocking to write applications for Windows NT because such applications can run on millions of machines without alteration. By contrast, software written for Unix machines must be customized to match the various flavors offered by leading vendors such as IBM and Sun Microsystems.
Customers who use Windows both on the desktop and on the server, Microsoft argues, will also have lower support costs and a better integrated computer system.
“The trend is to create better synergy,” says Yusuf Mehdi, head of marketing for Windows NT Workstation.
Information managers like that. “Right now we have two sets of passwords [for each user]: one for e-mail and one for access to the Unix boxes [used for Internet access],” says Jim Nathlich, a technical analyst at Chevron Information Technology Co. in San Ramon. “If we went to a complete NT shop, we would have only one set of passwords.”
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As Microsoft controls more of the business computing environment, the company will also be better positioned to impose software standards on the industry that favor its own products.
Sun Microsystems’ Java language, for example, offered the promise of allowing software developers to write a program once and have it run on all computer systems. Critics say Microsoft has undermined that vision with its own approach to writing and running Java applications that is incompatible with Sun’s.
Microsoft also exploits its market dominance by offering volume discounts that encourage heavy use of its products.
Pennsylvania recently agreed to put Windows NT and Exchange on all of the state government’s 40,000 computers in exchange for a steep discount and a Microsoft promise to give out $12.7 million in grants for economic development and education projects in the state over three years.
Such advantages have helped Microsoft score big gains against once entrenched players.
Provo, Utah-based Novell, whose NetWare software was once used in most computer networks to connect PCs to printers and shared files, has seen its market share slide in recent years.
Microsoft has also made major gains in the market for e-mail systems. Lotus Notes, which once so dominated the landscape that IBM paid $3.2 billion for Lotus in 1995 primarily to get Notes, has now fallen behind Microsoft’s Exchange in terms of new sales.
Corporate giants such as Boeing and General Electric and government agencies are connecting hundreds of thousands of desktops using Exchange.
Lockheed Martin installed hundreds of NT servers running Exchange on 90,000 desktops around the world to replace the 23 different, often incompatible e-mail systems it acquired in the course of its various mergers.
Now Microsoft is assaulting one of the last major fortress in enterprise computing, the $5.7-billion market for database software used to store and keep track of large storehouses of information.
Oracle is still the overwhelming leader in the database market, but it’s vulnerable.
Microsoft will soon come out with a new version of its SQL Server database, which the company says will be powerful enough for most corporate applications and will cost far less than competing Oracle systems.
Information managers say NT still falls short of the capabilities of the best Unix systems.
Marsha Hopwood, an information manager at TRW’s Space Electronics Group, says the engineering design applications she needs are available only on Windows NT in a “hobbled” form. And she says the Intel chips on which NT runs don’t have the horsepower she needs.
Windows NT 5.0, a new version that is supposed to solve many of NT’s shortcomings, and Intel’s Merced chip, a next-generation processor that was supposed to supply the power required to run large computer applications, probably won’t be available in the near future.
John Parkinson, chief technologist at consulting giant Ernst & Young, says the inability to update Windows NT while keeping it running makes it inappropriate for applications that must run 24 hours a day, seven days a week. Rivals like Novell and Sun say the delays are winning them important new business.
“The Microsoft philosophy is homogeneity. They would like the whole world to be Windows,” says Brian Faustyn, a Novell executive. “But people understand it’s impossible to be all Windows.”
Says Ed Zander, Sun’s chief operating officer: “Before you bet your business on a computer system, you want to make sure you have quality.”
As part of a larger plan to standardize its computer systems, for example, the U.S. Navy chose Windows NT software as the basis for a “smart ship” system on the cruiser Yorktown capable of automatically controlling various operations, including the ship’s engine.
Last September, the cruiser’s engine stalled after a computer operator entered the wrong data and the ship drifted for more than two hours. At least two Navy computer experts have blamed the ship’s problems on the decision to use Windows NT rather than Unix.
“Using Windows NT, which is known to have some failure modes, on a warship is similar to hoping that luck will be in our favor,” Anthony DiGiorgio, a computer engineer with the Atlantic Fleet Technical Support Center, wrote in a June article in Naval Institute Proceedings, a journal associated with the private U.S. Naval Institute.
The Navy insists it is still happy with its choice of Windows NT for the smart ship project and says it is proceeding with plans to use NT as the basis for control systems in as many as 85 other warships.
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Microsoft rejects the notion that the smart-ship problems had anything to do with Windows NT and says that whatever shortcomings there are in Windows NT can be dealt with by helping customers use the product properly.
“As the product gets into large enterprises,” says Michael Nash, marketing director for NT Server, “a lot depends on how the product is used. We have to make sure our partners and customers put the right processes in place.”
Critics complain that when Microsoft can’t compete on the merits of its products, it turns to the same bag of tricks it used to dominate the desktop market.
Microsoft sells a heavily discounted suite of business applications called BackOffice, for example, that uses strong selling products like NT Server to prop up sales of weaker products like SQL Server, competitors argue. The software giant used the same tactic to capture the market for office productivity programs such as spreadsheets and word processors by packaging them together in its highly successful Office suite.
And if SQL Server can’t dislodge rival Oracle by being a part of BackOffice, competitors fear, the company could simply choose to offer the database free to Windows NT buyers, just as it bundled its Internet Explorer with Windows to battle rival Netscape Communications.
For small and medium-sized companies, Microsoft says its practice of bundling products offers an easy-to-use system appropriate for most business needs.
“Think of BackOffice and NT as a well-engineered automobile,” says Ed Muth, head of marketing for Microsoft’s enterprise computing unit. “There is an advantage to BMW in doing both the transmission and the engine.”
Corporate information managers seem to relish Microsoft’s emerging role as the final assembler for computer systems, a role once held by IBM.
“You sort of don’t care what Bill Gates says you should do, as long as it works,” says Ernst & Young chief technologist Parkinson.
J.B. King, vice president of information services at Hughes Space & Communications Co. agrees. While King thinks Novell’s products are still superior to Windows NT, he says he’s standardizing on NT because there is “concern about Novell’s viability over the long term. There isn’t a lot of concern about the viability of Microsoft.”
If Windows NT still has plenty of shortcomings, most information managers believe Microsoft will eventually get it right, says Chris Le Tocq, an analyst at Dataquest. “That’s the Microsoft magic dust.”
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Smooth Operator
Microsoft’s Windows NT is emerging as the operating system of choice for many corporations, government institutions and universities. Although the Redmond, Wash.-based software giant is expected to capture about 50% of new operating system shipments in 1998, it currently holds only about 20% of the installed base of operating systems. Market share for new shipments of operating systems and the installed base of operating systems in 1995, 1998 and 2000:
Sales of Server Operating Systems
1995
Mac OS: 3.2%OS/2: 6.1%
Windows NT: 20%Unix: 22%Novell NetWare: 34%
Other: 15%
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1998
Mac OS: 1.5%
OS/2: 3.5%
Other: 5.7%
Novell NetWare: 19%
Unix: 21%
Windows NT: 49%
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2000
Other: 3.7%
Mac OS: 1.3%
Windows NT: 59%
Novell NetWare: 17%
Unix: 18%
Windows NT: 59%
Server Operating Systems In Use
1995
Windows NT: 5.1%
Other: 26%
OS /2: 9.1%
Novell NetWare: 37%
Unix: 22%
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1998
Other: 18%
Windows NT: 20%
OS /2: 8.3%
Unix: 23%
Novell NetWare: 30%
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2000
OS /2: 6.3%
Other: 16%
Windows NT: 28%
Novell NetWare: 28%
Unix: 22%
Note: Numbers may not total 100% because of rounding. 1998 and 2000 figures are estimates.
Sources: Dataquest, International Data Researched by JENNIFER OLDHAM/Los Angeles Times
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The Top 10 Hot ROMs
Microsoft’s Windows 98 tops a list of the best-selling CD-ROM titles for June:
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Rank Title Publisher Average price 1 MS Windows 98 Microsoft $87 2 MS Plus 98 Microsoft 33 3 Starcraft Blizzard 42 4 Unreal MMX GT Interactive 39 5 Point and Speak Dragon Systems 50 6 Deer Hunter WizardWorks 20 7 Cabela’s Big Game Hunter Head Games 20 8 X-Files Fox Interactive 36 9 Rocky Mountain Trophy Hunter WizardWorks 20 10 Final Fantasy VII Eidos Interactive 44
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Note: Ranked on unit sales from more than 8,500 stores and mail-order retailers.
Source: Softrends, NPD Group
