Today the Desktop, Tomorrow All Those Other Places

Bruce Johnson is on stage with a gleaming silver Jaguar convertible loaded with his Microsoft development team’s latest product. “E-mail. Read,” says the executive, and a small computer built into the dashboard reads his mail in a robotized voice. At another voice command, the computer looks up a telephone number in its directory and dials it on the car’s cell phone.

“I don’t know about you,” Johnson says afterward, exuding confidence as he addresses his audience of 2,000 software developers, “but each time I see a car, I see 100 million potential customers.”

Hyperbole perhaps. This auto PC, a CD player/radio/computer that plugs in where the cassette stereo usually goes, will be available by year-end from Clarion, a Japanese maker of car stereos. But for roughly $1,300, it’s not likely to be one of the more popular auto accessories.

Still, Johnson has achieved his goal. His audience seems convinced that the auto PC will emerge as the global standard for automobiles.

“It’s incredible how Microsoft can come up with a standard like this so quickly,” says Kamal Ahluwalia, a software engineer and one among the masses of people in the high-tech sector whose livelihoods are tied to the success of various Microsoft standards. “It’s frightening.”

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While the Justice Department and the attorneys general of 20 states sued Microsoft last week for allegedly using its market dominance in personal computers to try to monopolize the Web browser market, Microsoft is moving on to a new, tougher battleground: setting the standards for a new generation of products, from consumer electronics devices such as televisions and telephones to the large machines that control the computer systems of entire corporations.

“The war is over on the desktop,” says Sean Liming, engineering manager at Annasoft Systems, a San Diego-based software company. “Now Microsoft is going after the rest of the world--phones, toasters, poker machines, Web terminals in airports, even washing machines.”

As more intelligence is packed into a broad range of devices, says Microsoft President Bob Herbold, “we want to play the role of providing them with great software.”

Succeeding in the new markets is critical if the Redmond, Wash.-based company is to maintain the rapid growth that lures investors as the personal computer business slows down.

With Windows NT (for “new technology”), a product that has gained respectability among computer experts over the last year, Microsoft is tackling a market for corporate computer systems worth tens of billions of dollars.

With Windows CE (“consumer electronics”), Microsoft wants to tackle a market for so-called smart consumer devices. Framingham, Mass.-based market researcher International Data Corp. predicts the “information appliance” business will grow to $13 billion by 2001--up from less than $1 billion last year.

To penetrate these new markets, Microsoft will use tricks of the trade it learned during its decade-and-a-half march to PC dominance.

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The key strategy is deceptively simple: Microsoft takes the latest technology, often copied or acquired from others, packages it into a software system that is relatively easy to use, then taps its $12-billion cash hoard or leverages its enormous marketing clout to persuade manufacturers and software developers to build products that enhance the system.

Microsoft Chairman Bill Gates likes to call the process a “positive feedback loop” or a “virtuous cycle.” The more widely a product is used, the more useful it becomes to consumers, which leads to further growth in market share.

For example, Microsoft Word’s market share keeps growing because consumers know they can easily exchange Word documents with the large population of other users of the same word-processor.

The danger, experts believe, is that by extending its power from the desktop into other fields, Microsoft will be able to reinforce its market position to where it will be virtually unassailable.

As its various Windows systems become more pervasive and start to reinforce one another--people using a Microsoft scheduling program on their computers may want the same program on their TVs and hand-held devices--it will begin to look like an “essential utility.”

In antitrust terms, that’s an enduring monopoly of the kind local telephone companies have. It gives Microsoft huge power to set prices as well as control businesses that depend on its software.

“You don’t want [Microsoft] to be the only pipe through which information passes,” says Sam Miller, the antitrust attorney who led the Justice Department case against Microsoft that resulted in a 1995 consent decree that placed controls on Microsoft’s licensing agreements involving its operating system.

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Already Microsoft has shown itself adept at using its market power to undermine those who challenge its Windows franchise.

The Justice Department, in its current antitrust suit against Microsoft, offers evidence that Microsoft chose to build its Explorer Internet browser into its Windows operating system primarily as a way of locking out the rival browser Navigator, made by Netscape Communications. Still, Microsoft’s ability to make life easier for consumers and software developers by setting common standards puts regulators in a quandary.

“Microsoft has been a bully and they should be reined in,” says Michael Cusumano, a business professor at the Massachusetts Institute of Technology who is writing a book about the competition between Netscape and Microsoft. “On the other hand, a browser is a nice feature to have in an operating system, and it’s going too far for the government to decide what Microsoft can or can’t put into its software.”

But the true power of Microsoft’s strategy comes from its ability to draw on the vast capabilities of software and hardware companies around the world in support of its standards.

Take the palm-sized PCs running Windows CE that began selling this month. The product looks almost identical to a popular product made by Santa Clara, Calif.-based 3Com called the PalmPilot. The Windows CE-based products do offer a few extra features. And Microsoft will throw in a free Windows 98 upgrade worth $90 if you buy one of the devices.

But given PalmPilot’s big lead--it has already sold millions--these advantages are minor. Microsoft’s real advantage is that while the Pilot is available primarily from 3Com, Windows CE products are available from a range of manufacturers, including Casio of Japan, Philips of the Netherlands and Samsung of South Korea.

Analysts expect the widespread availability of devices from numerous manufacturers to eventually lead to Windows CE systems with less expensive and better designed hardware.

“We’re counting on the Sharps and the Casios to do the innovation,” says Jonathan Roberts, Microsoft’s director of marketing for Windows CE. “We’re the enabler of that innovation.”

Each Windows CE device benefits from being part of a much larger family. Already, hundreds of software companies are developing applications for Windows CE devices, from patient monitors in hospitals to systems that allow supermarket shoppers to scan and pay for their groceries.

Japanese video game maker Sega plans to put Windows CE on its next-generation game machine due out later this year as it tries to outdo rivals Sony and Nintendo.

Microsoft isn’t the only company capable of setting standards. Intuit has succeeded with personal finance software, Adobe Systems is the standards-setter in publishing, and Oracle dominates corporate database software. But Microsoft has done a better job of refining the process for setting a standard and transplanting it to new markets.

“We’re good evangelists,” says Craig Mundie, senior vice president of Microsoft’s consumer platforms division. “We provide a good rallying point.”

A key element in Microsoft’s success has been its ability to develop a huge community of software engineers and businesses whose very success depends on writing software for Microsoft systems. An estimated 2 million people develop software that ties in with various Microsoft products.

Since Microsoft’s newer Windows NT and CE lines are based on the same core technology as Windows for the desktop, Microsoft can exploit the same army of developers using the same sophisticated Microsoft tools to develop products for all the systems.

Moss Micro, an Irvine-based company that sells software for traveling salesmen, says its product could be customized for Windows CE with minor adjustments by virtue of CE’s common technology base with Windows 95. But the company had to “start over” when it moved its product to the Palm Pilot.

As an added bonus, says Chief Executive Ken Moss, “Microsoft will fly developers down to work with us.”

Nobody believes Microsoft will dominate these new markets the way it does the PC industry. Skeptics wonder if Windows NT running on PCs will ever be powerful enough to handle the huge processing needs of airlines, for example.

And Microsoft is notorious for forcing customers to continually upgrade their software. Banks that run huge computer systems don’t want to be bothered with upgrades. Consumers don’t want to upgrade their telephones or have to call support to work their televisions.

But the company is already making important inroads in resolving many of those issues.

John Malone, chief executive of cable TV giant Tele-Communications, has long insisted he wouldn’t let Microsoft set standards in the cable industry. However, he took a major step in that direction when he agreed to put Windows CE on at least 5 million of the set-top boxes that will provide such new features to customers as the ability to browse the Web via their TVs. That isn’t a complete victory, Mundie says, but the standard is “ours to lose.”

While Microsoft likes to insist that its strength comes from innovation, longtime observers say the giant’s real power comes from incorporating other companies’ technology into its software systems, then developing broad support for its standards.

Consider the auto PC. People have dreamed of putting intelligent devices in cars for years. But with each auto maker bent on setting its own standard, parts makers couldn’t make devices in enough volume to bring down prices, and programmers would have little incentive to write applications.

Intel and IBM both have concept cars that are trotted out at computer and auto shows to demonstrate the potential for on-board computers. But it took Microsoft to put out a product with detailed specifications that auto makers, parts makers and software developers could work with.

“It’s taken the industry by storm,” says Paul Hansen, publisher of an auto electronics newsletter that bears his name. “We in autos have always marveled at the openness in PCs. It’s like herding cats to establish standards [in autos], but Microsoft has done it.”

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Among the toughest decisions, Mundie says, was deciding how the driver would control the PC without increasing the risk of an accident. Although the technology is still unfamiliar to most consumers, Microsoft decided to develop a system that recognizes simple speech and can also turn written text into voice. Since Microsoft’s own voice-recognition technology wasn’t up to the task, Microsoft licensed technology from Lernout & Haspie, a Belgian company with that expertise.

Now, Mundie says, “a company can design a system that works on the Toyota to tell the driver that tire pressure is low. He doesn’t have to know anything about speech recognition.”

Microsoft still hasn’t persuaded the major auto makers to incorporate its technology. But few doubt that many companies will eventually flock to develop products around the auto PC standard.

“It will evolve slowly,” says Herb Shukman, an executive at Motorola, which is a major supplier of electronic components to auto companies. “But Microsoft is going to be a major player.”

With Microsoft holding all the cards as the standards-setter, however, software companies are increasingly concerned that their latest products will be crushed as Microsoft decides to develop similar applications.

At the auto PC demonstration in San Jose, one developer in the audience put a question to Johnson that defined the delicate dance every developer working with Microsoft must do to avoid being trampled.

“What,” he asked Johnson, “are you not working on?”