Swimming With Microsoft ‘Shark’ Can Be Beneficial

Antitrust prosecutors want to bust up Bill Gates’ Microsoft to curtail its software monopoly. Yet hundreds of software companies, large and small, profit handsomely from mutually beneficial partnerships with Microsoft and they want to keep it that way.

Consider Crystal Graphics, a tiny Santa Clara, Calif., software firm. Last year it rolled out a series of products that add animation and 3-D graphics to Microsoft’s popular PowerPoint program used for creating business-presentation slides.

“The fact that Microsoft has 90% of the market helps a company like ours,” said Robert J. Courtney Jr., Crystal Graphics’ chief executive. Microsoft’s Windows operating system is so widely used that it offers independent developers such as Crystal Graphics a software lingua franca, saving them the expense of rewriting computer programs for competing software platforms.

“We will more than double our revenues [in 1999] compared to 1998, and we’re on track to double [them] again in 2000,” Courtney said.

Of course, software publishers and PC users grouse about the thousands of bugs in the Windows operating system, its cost and its exasperating complexity. Many companies also recognize the key role Windows has played in making the PC a mass-market device, so they bite their tongues about Microsoft’s arrogance and its strong-arm approach to enforcing its will.

And with Microsoft’s antitrust trial nearing conclusion, the last thing many software executives want is to face the uncertainty of Microsoft being split into competing companies, or “Baby Bills,” as this one breakup scenario is dubbed.

“The picture is painted that competition of any kind is better, but sometimes it’s just confusing,” said Roger Lanctot, a software analyst with PC Data in Reston, Va. “Most [software] publishers choose to swim alongside the Microsoft shark and will never face the risk of being swallowed.”

That’s because Microsoft’s empire is based partly on a system of mutual dependence in which the Redmond, Wash., titan and its partners push customers to buy the latest versions of each other’s products.

Microsoft not only permits these software pilot fish to feed off its huge empire, it budgets $100 million annually for training, events and free technical support, because even the largest software company on Earth cannot do everything. Microsoft needs others to provide specialized software to enhance its basic programs.

“Microsoft has always talked, somewhat facetiously, about an industry standard--them,” said Roger Kay, an analyst with research firm International Data Corp. in Framingham, Mass.

But, he added, “the industry doesn’t like change, and Microsoft has provided a stable environment that works, more or less.”

In one sign of that stability, among 6 million professional software developers worldwide, 5.5 million write programs targeted to Microsoft’s Windows.

Such popularity also pads Microsoft’s bottom line. In the last four quarters, Microsoft earned $8.3 billion--a jaw-dropping 77.3% of the profits for the 411 largest publicly traded software firms, according to Standard & Poor’s. For its Windows products alone, Microsoft has earned more than $3.3 billion, topping the combined net profits of all the other software firms, analysts estimate.

But few of Microsoft’s junior partners complain. “[Most] large software companies have seen huge growth in their business on the Windows platform in the last five years,” said Nigel Burton, an executive in Microsoft’s developer support organization. “By huge, I mean more than double.”

Few executives demonstrate this love-hate relationship better than Edward Iacobucci, now a 46-year-old industry graybeard. In the early 1980s Iacobucci was a Wunderkind at IBM when it was the “bully,” he recalls, and Microsoft the software pipsqueak it hired. Today, Iacobucci runs a thriving company that has made him rich by selling software that runs on Microsoft systems.

Iacobucci left IBM in 1989 to found Citrix Systems in Fort Lauderdale, Fla. Citrix builds software for powerful server computers that manage networks; its products allow many PC users to simultaneously access spreadsheet or database programs that reside on a server.

Initially, Citrix designed software for IBM’s OS/2 operating system. Realizing that his company had to diversify, Iacobucci began making software that also worked on Microsoft’s Windows NT operating system. But in February 1997, Microsoft announced plans to develop its own multi-user versions of Windows NT that worked just like Citrix products.

Citrix shares immediately plummeted. Only after Microsoft changed its plan, instead agreeing to license Citrix’s technology, did Citrix rebound. Since then Citrix’s stock has surged from $11 to $111.63 on Nasdaq, and its projected $120-million profit for 1999 makes it one of the nation’s most successful software makers. Iacobucci’s stake in Citrix is worth about $130 million--about 35 times the value it held just before Microsoft licensed Citrix technology.

Since that “near-death experience,” Iacobucci has tried to position Citrix as independent and adaptable, “the Switzerland of the software wars,” he said. Citrix sells products for Microsoft programs, but also for IBM’s OS/2, Novell’s Netware and Sun Microsystems’ Solaris operating system.

Despite this, any breakup of Microsoft would seriously complicate Citrix’s future. In the quarter ending in September, 85% of Citrix revenue derived directly from its Windows-compatible software and licensing royalties paid by Microsoft. (Microsoft also owns 6% of Citrix.) “Our success is substantially dependent upon our strategic relationship with Microsoft,” the company reported to the Securities and Exchange Commission.

And for every large partner such as Citrix, many smaller companies also flourish due to Microsoft’s dominance.

For 11 years Crystal Graphics occupied a tiny, modestly profitable niche providing fancy 3-D graphics and other tools for software designers. Then Microsoft decided to publish a key interface code to stimulate add-ons to its PowerPoint program. Crystal Graphics promptly created Microsoft-friendly 3-D graphics software. “The market we are tapping now is all PowerPoint users--tens of millions,” said Courtney, Crystal Graphics’ CEO.

But if Windows were one of several equally successful systems, Courtney’s tiny company would face staggering development and marketing costs to come up with programs for each one.

Unfortunately, loyalty to Microsoft is no guarantor of success, as Citrix’s near-death experience showed. The software landscape is littered with the remains of former members of the Microsoft “community” whose software products were wiped out when Microsoft incorporated them into Windows--such as software for faxing, speeding up PC hardware and of course the famous Web browser.

“There are not always coattails for Windows,” said Jeffrey Tarter, editor of the industry newsletter Soft-Letter.

Yet as the antitrust case has demonstrated, many Microsoft customers and partners--even the world’s major makers of PCs and microprocessors--rarely risk alienating so powerful a supplier.

So it’s hardly surprising that most software makers concentrate on Windows. For example, there are about four commercial Windows titles for every Apple Macintosh title on the market, according to PC Data. The costs to develop two or more versions often outweigh demand.

One exception to this rule is San Jose-based Adobe Systems, a leading publisher of graphic design and desktop publishing software.

Once dedicated only to Apple Computer’s loyal graphic-arts customers, Adobe was among the few Macintosh-based firms that occupied the top ranks of the software industry. But in the mid-’90s it followed the market as the Macintosh sank and Windows surged.

By early 1997, Adobe began to earn a majority of its revenue from Windows products. Today a stable 60% of Adobe sales--about $600 million a year--come from Windows products. Investors applauded the change, doubling Adobe’s stock price since its embrace of Windows. John Warnock, Adobe’s chief executive, has seen the value of his personal holdings nearly double to some $47 million in that time.

Yet Warnock views his company’s strategy as impossible for most software firms to duplicate.

So Warnock and many other software executives favor an antitrust remedy far short of breaking up Microsoft. Instead, they want to force Microsoft to publish its Windows code--the millions of arcane computer commands that constitute a kind of software DNA--to ensure that competitors will be able to compete more effectively.

As the sole owner of Windows, Microsoft often uses its inside knowledge of the code to special advantage--adjusting applications to exploit new elements of Windows ahead of competitors. And although Microsoft is notorious for allegedly embedding features within Windows that hamper the effectiveness or performance of competing products, such allegations can be hard to prove without seeing the actual Windows code.

If Microsoft were forced to publish that code, it might enhance the timeliness, compatibility and performance of many rival software programs, analysts suggest. Software companies could then tune their applications to avoid Windows’ quirks or even suggest ways for Microsoft to exterminate the system’s swarms of bugs.

The value of Windows as an industry standard would rise even as Microsoft’s unique competitive advantage fell.

No matter what happens in the antitrust trial, Courtney is betting most of his company’s future on software that enhances Microsoft applications. Still, he’s hedging the bet by creating generic products for improving images on Web sites that have nothing to do with Microsoft.

Courtney added: “I don’t see any predatory problems with Microsoft, but they’re so big that they can roll over and we could be dead.”