Internet Applications Challenge Microsoft’s Rule
Four years ago America Online had to plead with Microsoft for a spot on computerdom’s most valuable real estate, the desktop screen of the Windows software that ships with virtually every personal computer. In a role reversal of sorts, Microsoft today is battling to give users of its new instant messaging software access to AOL’s huge community of users.
As applications move increasingly from the world of personal computers--where Microsoft sets the standards and writes the rules--to the World Wide Web, the company faces what may become the fight of its life.
At a glance, Microsoft seems to have made dramatic strides since Chairman Bill Gates launched a major corporate overhaul in 1995 to reshape the company for the age of the Internet. Its Internet Explorer browser has overtaken the rival offering from Netscape, Internet standards have been built into virtually every one of its key products and it has purchased major Web-based e-mail and TV products. Microsoft’s Internet portal, MSN.com, has become the third most popular Web destination.
But so far these moves haven’t blunted a surging trend that may prove Microsoft’s biggest challenge: More and more developers are making games, productivity applications and other products that are or will soon be accessible from the Web via set-top boxes and palm-sized computers rather than simply personal computers. Some experts think these developments will rapidly erode the power of Microsoft’s Windows monopoly and its primacy in business software.
“When you have a variety of appliances accessing Web applications, you’re no longer dependent on Microsoft,” said analyst Chris LeToq of Dataquest. “When you look back five years from now, we may well argue that this is the period when Microsoft’s control peaked.”
To be sure, today Windows-based applications dominate the landscape. Most people continue to use Office for word processing and spreadsheets. A new version of Office was largely responsible for a 45% increase in sales for Microsoft’s productivity division in the last quarter, to $2.25 billion.
Microsoft has also been a primary beneficiary of the Internet boom as millions of people have bought personal computers running Windows to connect to the Web.
And analysts say it could be years before most businesses are comfortable relying on Web-based companies to manage critical applications and corporate data.
But Microsoft is heavily dependent on growth and a rising stock price to keep attracting talent. And the fastest-growing markets exploit completely new approaches to doing business.
Portals such as Yahoo and Internet service providers such as AOL serve tens of millions of consumers with free applications such as e-mail and instant messaging, covering much of their costs by selling advertising on their Web sites and steering customers to e-commerce services. Microsoft has its own competing services, but they mostly lose money, a poor substitute for its mega-profitable desktop businesses.
Meanwhile, small and medium-sized businesses--the fastest-growing market for computer systems--are showing reluctance to saddle themselves with maintaining complex, costly applications and are beginning to turn to a new class of companies called “application service providers” that use the Internet to rent applications over high-speed communications lines.
The shift also puts Microsoft at a disadvantage because the larger Internet service providers usually build their networks using more powerful Unix software from Microsoft rivals such as Sun Microsystems.
Software developers, harbingers of new technology trends, are moving rapidly toward Web-based applications.
“Five years ago at a developers’ conference you would see lots of people talking about [Windows standards] and you knew there would be lots of Windows applications coming out,” said Mike DeVries, vice president of marketing and business development for Vision Software, an Oakland-based company that provides tools for building e-commerce applications.
“Today nobody talks about [Windows]. When you write software you write to HTML or Java,” said DeVries, describing two programming languages popular with developers for building Internet applications.
DeVries, of course, is exaggerating. Windows remains the overwhelming choice for most developers. But his comments reflect widely shared sentiments. The excitement in the software world has shifted.
Microsoft President Steve Ballmer pointed out at a recent analysts meeting that while only 21% of the developers in a survey commissioned by Microsoft in March were writing applications for the Web, 38% said that they expected to be writing such software within the next 12 months. He said that persuading developers to write for Windows had become a major competitive challenge.
Jeff Tarter, editor of Soft-Letter, a Watertown, Mass.-based industry newsletter, points out that while venture funds flow freely to Web application start-ups, almost no money goes into new Windows applications.
In e-commerce, perhaps the hottest market today, a recent Information Week survey found only 12% of the information technology managers surveyed considered Microsoft a leading player.
Employing Several Strategies
Microsoft executives are acutely aware of what some insiders have referred to as their “Innovator’s Dilemma.” The term, coined by Harvard Business School professor Clayton Christensen, describes how dominant companies tend to underestimate the opportunities a new technology offers for providing cheaper and better products.
Microsoft is determined to avoid the trap. Through a series of acquisitions, it is building a strong position in Web applications. Microsoft now owns Hotmail, the leading Web-based free e-mail product, and Jump, a Web-based calendaring program. The company’s successful travel, investment and auto sites all involve the heavy use of Web-based applications.
Another strategy is to attack the revenue base of its chief rivals. Just as Microsoft stymied Netscape by giving away its browser free, Microsoft is now attacking Netscape’s parent, AOL, by slashing the prices of its Internet access service in an effort to steal customers.
Microsoft also plans to improve Web services to small companies, those most likely to shift to Web-based applications.
“The Internet will be at the center of the way businesses re-engineer themselves in our lifetime,” Brad Chase and John DeVaan, who jointly head Microsoft’s consumer division, said in an internal memo. “If we are not in the center of this . . . then we are not in the center of how software can change things for the better.”
And Ballmer has been touting “Web-top” computing to industry groups. “Packaged software will disappear entirely in the next 10 years,” Ballmer told members of the Internet Professionals Network recently in Marina del Rey.
Though Microsoft is still committed to the personal computer, Ballmer said, the company recently expanded its focus to creating software that works “any time, any place, and on any device.”
Microsoft also hopes a new industrial-strength version of Windows called Windows 2000, due out early next year, will operate many of the new generation of Web applications. And Windows CE is being targeted at the range of set-top boxes and portable devices that will be used to access the Internet in the future.
But as Microsoft moves beyond the PC, many of its huge advantages evaporate. For an illustration, consider e-mail.
Microsoft’s e-mail and scheduling product, Exchange, costs $500 for the server software and an additional $56 for each “client” connected to the server. That comes to about $85,000 for a system covering 1,500 users. About 34 million people now use the product, most in large companies.
Future Growth in Smaller Businesses
But much of the future growth in the field will be among small and medium-sized businesses. And for them there are viable free alternatives.
Hardly anyone has heard of Santa Barbara-based Software.com. Yet, by selling e-mail services through large Internet service providers, the small company has quickly built up a customer base of more than 40 million users.
While companies using Exchange must physically change the software on every computer each time the software is upgraded--an often complex and costly process that many companies take on only with great reluctance--Web-based products only require upgrading the server.
Developers of Web-based applications are also more likely to add new features on a regular basis. Portals such as Yahoo--and even MSN--now offer instant messaging, the ability to see who among a select group of friends or contacts is online and to chat with them by mail or voice. Exchange has no such features.
Meanwhile, Web-based products are beginning to match many of Exchange’s strongest features. In the PC world, software companies have frequently accused Microsoft of giving itself an edge by making changes in its Windows software to benefit Microsoft’s Windows-based applications. Since Web applications are typically accessed from a browser built on industry standards, it’s harder for Microsoft to stack the deck, said Software.com President Valdur Koha.
Microsoft also plans to pack new features into Exchange that the company believes will continue to make it attractive to corporations. A new version due out next year will take advantage of new features in Windows 2000, and make it more appropriate for application service providers who want to rent the product over the Web.
But analysts question whether the new version of Exchange will offer sufficiently compelling advantages over free alternatives.
The challenge to Microsoft in the e-mail arena could be replicated in many other areas. In consumer appliances, Microsoft is still being outmaneuvered by 3Com’s Palm hand-held computer. In wireless, a consortium of companies, including most of the major cellular phone manufacturers, is backing a rival non-Windows software standard.
Microsoft executives are reportedly working on a strategy designed to make Windows the best environment for Web applications, but it’s unclear when those details will be revealed.
Meanwhile, Microsoft is liable to find, as it has in the instant messaging business, that it is increasingly one player among many as the Web reigns supreme.
*
Times staff writer Karen Kaplan contributed to this report.
