New Market, not Antitrust, Is Story at Microsoft Today

If you think Microsoft is dominant in the computer world now, “you ain’t seen nothin’ yet.” That’s the sentiment of scores of computer experts, entrepreneurs and technology consultants, who see the software company gaining a new market in servers for online commerce and big-company computing needs.

While the Justice Department and 21 states’ attorneys general charge Microsoft with antitrust actions in the market for personal computer access to the Internet, the real action lies elsewhere, say computer experts--many of whom ask not to be quoted for fear of angering Microsoft.

What insiders in the computer industry are talking about is Microsoft’s NT (New Technology) operating system for servers. Those are the larger-than-PC computers that companies use for daily interactions with suppliers, customers and their own personnel. It’s the rapidly growing business called the intranet.

Individuals increasingly encounter servers, without realizing it, when they buy books, flowers or travel tickets on the Internet--one server processes their name and address, another processes their billing information.

Potentially that is a huge market. Importantly for Microsoft, its NT operating system for servers gives it entree to large corporate customers whose critical computing needs are handled by massive servers--computers that control all corporate functions and data.

NT doesn’t yet have the capability to provide the operating instructions for massive servers, but Microsoft will be bringing out improved versions that do--beginning with the expected introduction of NT5 next year.

“NT is the real threat. It gives Microsoft the potential for account control of IBM’s main corporate customers. It spells trouble for many companies,” says Bob Djurdjevic, head of Annex Research in Phoenix, a computer consulting firm.

The word “threat” is a tacit tribute to Microsoft’s skills at improving its products and attacking markets. The Redmond, Wash.-based company is the developer of operating systems that control 97% of the world’s personal computers. (Apple Computer, now reduced to 3% of the market, is scarcely a factor anymore.)

Microsoft provided the disk operating system (DOS) for IBM’s first PCs, and later developed Windows 95--which it upgraded last week with Windows 98. In the process of attaining 97% market share, Microsoft played hardball with developers of software applications.

It played hardball again to win preference for its Internet Explorer Web browser over Netscape’s Navigator, the program that pioneered personal computer access to the Internet. The antitrust suits charge that it played unfair hardball.

The company that arouses such controversy is deceptively small--it has 22,230 employees and had roughly $14 billion in sales and about $4.4 billion in net income in its fiscal 1998, which ends June 30.

But because of its position at the crossroads of computer development and its competitive abilities, investors have given Microsoft the second-highest value of any U.S. company, after General Electric. Microsoft closed last week at just over $104 a share, for a total value of $256 billion.

And the growth of NT, which now provides Microsoft with more than $2 billion in annual sales, has computer industry people thinking higher. “Maybe it’s a $200 stock, who knows?” exclaims an Internet entrepreneur.

But it’s wise not to get carried away. “NT grew rapidly last year, but so did Unix,” the traditional operating system for complex computers, reports Jean Bozman, a software analyst at International Data Corp., a Mountain View, Calif., research firm.

What is really happening is that the computing world is being transformed by the Internet and predictions are chancy. Demands by companies and residential customers for easier and faster access to the Internet are driving the development of larger servers, new applications and even giant mergers such as AT&T;’s agreement last week to acquire the cable company Tele-Communications Inc.

The idea behind that merger is that cables can be used as a large two-way communications highway, enhancing Internet availability. But which computer systems or providers will ultimately prevail remains to be seen.

Microsoft is feared because it is an opportunistic company, taking advantage of every trend it can. Its attitude is “better to ask forgiveness than to ask permission.” It won the initial contract to supply the DOS operating system for IBM’s PC because it cobbled together a product from borrowed technology, then improved it later.

It developed NT out of work it did in partnership with IBM, but has improved and developed its system and left IBM in the dust.

Furthermore, Microsoft makes no bones about wanting its systems on every computer possible. “Windows Everywhere” is Microsoft’s concept, Chairman Bill Gates says in the annual report. It’s a strategy he defines as helping computer users through compatibility and by setting standards for the industry.

So far the strategy has worked. It has made Gates the richest man in the universe at $57 billion in the value of his Microsoft stock. It has made numerous Microsoft employees millionaires.

So why is the Justice Department arguing with such success? Because it has received complaints from Microsoft competitors and suppliers that the company’s tactics in pressuring software developers have gone beyond the bounds of legal competition.

Gates naturally disagrees. He charges that the government is meddling in technology. And last week he won a victory when a federal appeals court said courts should not make rulings about technological matters.

But Gates and the appeals court are wrong. The Microsoft case is about anti-competitive tactics, not technology. When a company has such a dominant share of a critical industry, there is a public interest in seeing that it does not stifle newcomers.

That has been the American way going back to 1807 when steamship inventor Robert Fulton was told he could not keep competing ships from doing business in New York Harbor.

So the Justice Department suit will go on. How it will conclude and with what effect on the company can’t be predicted.

But Microsoft is unlikely to be slowed significantly. Right now, while denouncing the lawsuit, Microsoft is moving on to new areas of the computer business, where the real future of technology and of competition will be worked out in the next decade.

Can anything slow or stall the company? Sure, if Microsoft stock should falter, that could lead to disaffection among Microsoft employees, whose income relies heavily on stock option gains.

But with the world moving to the Internet, and Microsoft’s focus moving to Internet servers, no slowing seems likely any time soon.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.

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Once and Future King

A new variety of larger-than-PC computers, called servers, are becoming increasingly important as companies and consumers do business on line. The company competing most successfully to supply the operating system in this critical new market is Microsoft.

Sales of new server operating systems, in thousands:

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Operating system 1997 1998* 1999* Microsoft Windows NT 1,436.9 1,925.4 2,583.6 Unix 725.6 808.9 881.8 Novell Netware 456.1 504.2 590.5 Proprietary and others 229.4 220.9 212.5 IBM OS/2 212.5 135.6 91.9 Apple Mac OS 59.2 58.2 63.2 Total 3,119.8 3,653.1 4,423.6

*--*

How Microsoft’s market share is projected to grow:

1997

Microsoft: 46%

Others: 54%

*

1998

Microsoft: 53%

Others: 47%

*

1999

Microsoft: 58%

Others: 42%

*Estimates

Source: Dataquest