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Where is Microsoft going tomorrow?

Oct 13, 2000, 15:20 (22 Talkback[s])

By Sally Whittle, VNU Net

The audience of 6500 Microsoft sales executives were on their feet as Steve Ballmer, sweating under the auditorium lights, led the rallying cry: "I love this company! I love this company! I love this company!"

His display of passion at Microsoft's annual sales meeting in July wasn't a one-off - Ballmer has undergone throat surgery in the past as a result of his tendency to become over-excited when talking about his employer.

And if ever the world's largest software company needed a rallying cry, it's now. Facing falling sales in the operating systems and server software sectors, and increasingly sidelined in the internet space, Microsoft's rapid growth has stifled much of the entrepreneurial spirit that propelled its heady growth in the 1970s and 1980s.

From the outside, the 25-year-old company's performance looks miraculous. Revenues and profits are rising at 30 per cent a year. It has invested in or acquired 92 companies in the past five years, but still has a market capitalisation of $400bn and $22bn in the bank - more than any other US corporation.

Does that cash pile equal price gouging? Microsoft believes its pricing policy is exemplary, despite recent criticism on that front from analyst Gartner. "We have led the way in pricing," claims Charles Fitzgerald, director of business development in the platforms division. "Gartner always whines about everything - it's their job."

Compared with companies such as IBM and Oracle, Fitzgerald believes Microsoft is extremely cost effective. "Those companies make half their revenue through services," he says. "They are charging for the software, then the customer has to pay for a rocket scientist to get it up and running."

Full marks
More encouraging words come from Marks & Spencer, which uses Microsoft everywhere apart from on the mainframe.

"I see Microsoft as a trusted advisor," says Mike Yorwerth, the retailer's development manager. "The products give us massive competitive advantage through their breadth and depth, ease of integration and cost-effectiveness."

Nevertheless, cracks are appearing in Microsoft's armour. While the company enjoys 88 per cent market share in the desktop operating systems market, Apple and Linux increasingly threaten that position. The open source upstart has gone from zero to three per cent of global shipments in less than three years, according to researcher IDC.

After 15 years of dominance, sales of server software shrunk for the first time last year, slipping from 36 per cent in 1998 to 33 per cent in 1999. Here, particularly, the influence of Linux is being felt, with open source software's global market share jumping from seven per cent in 1998 to 17 per cent in 1999.

Indeed, the Halifax only adopted Microsoft NT technology because the software company offered its technology free, in return for publicity.

"It was very much a marketing-led initiative," says Simon Brook, senior business analyst at the bank. Although the Halifax has no regrets about selecting Microsoft as a supplier, had another company made the same offer, Brook is under no illusions about what would have happened. "We would have taken it," he says.

Customers, meanwhile, had begun to be overwhelmed by the Microsoft marketing machine, and felt that the company was more interested in the bottom line than meeting their needs. When Halifax rolled out its pilot ecommerce solution two years ago, Microsoft gave the company its own dedicated in-house team of developers and a product manager. While the technical staff were pragmatic and realistic, the marketing team were prone to oversell, says Brook.

But open source is only part of the problem: the real issue is disquiet about Microsoft's dominance. Even at Marks & Spencer, some felt that Microsoft had become overbearing.

"They were a bit arrogant in thinking that they could dominate the whole server space," says Yorwerth. "I would like to see more interoperability, such as being able to run NT on an IBM mainframe, but I suspect that's just a pipe-dream."

Within Microsoft itself, things aren't what they used to be. Staff turnover has risen to 7.4 per cent - still half the industry average, but a significant increase for a company where churn had remained static at six per cent for more than 10 years. With almost 40,000 employees, 183 products and five layers of management, developers have become increasingly frustrated by Microsoft's red tape. When one manager suggested a small improvement to the company's Hotmail service, approval for the 30-minute task took 10 meetings and three months.

Staff and nonsense
"It's not only the number of people who have left, but who those people are," says Rob Enderle, vice president of research at Giga. The loss of Brad Silverman, who left Microsoft last year to join internet incubator Ignition, is a blow to the company's internet ambitions.

Silverman masterminded the development of both Windows 95 and Internet Explorer. Ignition has also recruited seven former Microsoft managers from Silverman's team, including Jonathon Roberts, former head of Microsoft's Windows CE division, and chief technology officer Nathan Myrhvold.

Other significant losses to fast-moving competitors include Peter Neupert (vice president of Microsoft's internet group), Steve Perlman (founder of the Web TV division), and Ben Slivka (internet developer); the latter left last year to join Amazon.com. Now even co-founder Paul Allen has left the board.

"Microsoft has become autocratic, and as a result has lost some of the best thinkers," believes Enderle.

The Microsoft culture remains unique within the industry, characterised by unstinting loyalty and hard work. Greg Rankich, a project manager in the infrastructure division, typically works 60-hour weeks or 90 hours in the months before a product launch. "It's the hardest thing, but nobody complains," he says.

This work ethic is lampooned by a company-wide email headed 'Burnout Prevention: Health tips for the 90s and their Microsoft equivalents'. Under the health tip, 'Refuse additional demands on your time or emotions' comes the Microsoft equivalent: 'Never say no to anything. It shows weakness and lowers the stock price. Never put off till tomorrow what you can do at midnight.'

Today, some customers find Microsoft employees worryingly homogeneous. "A lot of these guys look the same, sound the same, and even eat the same thing in the company canteen," says Marks & Spencer's Yorwerth. "It's as though there's a Microsoft cloning machine in one of those corner cubicles."

While the changing culture has certainly driven out staff, Microsoft's stock performance is another key factor, according to Enderle. "They can often make a lot more money, more quickly, at a startup," he says. Employee stock options had been one of the company's most effective staff retention tools, but with Microsoft's stock taking a battering courtesy of the US Department of Justice (DoJ), their appeal is waning.

If one becomes two
The Department of Justice's campaign against Microsoft, which could take two years to resolve in the appeals court, has created an air of uncertainty among employees.

"It's certainly harder to keep people focused on the task in hand with all this stuff going on outside the company," says Steve Guggenheimer, director of consumer strategy at Microsoft.

If the US government does succeed in splitting Microsoft into two separate entities, it will certainly throw a spanner into the works. The operating system would be part of one company, and the web browser and applications development part of another. The proposal would not allow the two companies to do business with one another.

The impact on Microsoft .Net would also be huge as it rests on the integration of Windows servers and applications to web-based and mobile appliances.

Regardless of what the DoJ eventually orders, .Net shows just how far the company has come in five years. In 1995, analysts claimed it had missed the internet boat and had lost too much ground to competitors to recover.

Looking at those years, it's easy to see how Microsoft missed the warning signs. Between 1990 and 1993, the company saw sales grow threefold to $4bn, and headcount mushroom from 5600 to 14,400 on the back of Windows. The internet was still the preserve of techno-geeks, and didn't register on the Microsoft radar. "If you'd told me then that most ads would one day have URLs on them, I'd have laughed," Bill Gates was to comment later.

Like many other Silicon Valley giants, Microsoft wasn't initially convinced of the internet's potential. When Gates' technical assistant Steven Sinofsky returned from a visit to Cornell University in February 1994 with tales of students using email and downloading lecture notes from the web, he was virtually ignored.

He was eventually dispatched to work with Jay Allard, at that time the only Microsoft employee with the word 'internet' in his job title.

The two men worked on Microsoft's first web server, and urged Microsoft to invest in companies such as AOL and Mosaic - which developed the world's first web browser and was soon snapped up by Jim Clark to form the basis of Netscape Navigator. The work of Allard and Sinofsky was overshadowed by Windows, however, as the company worked to ship Windows 95 on deadline.

While Microsoft dragged its heels, Sun Microsystems, Netscape, Oracle, IBM, AOL and a thousand other startups rushed into the space where Microsoft wasn't. The response in Redmond remained muted until late 1995, when the internet population had reached 20 million - or, in other words, 20 million people using the internet without using Microsoft software.

Gates issued a company-wide memo entitled 'The Internet Tidal Wave'. He wrote that the internet was the single most important development in technology since the PC, and would be assigned the highest possible priority.

The company knew that it had a lot of ground to make up, says Fitzgerald. "That time was known internally as the oh-shit phase," he says. "We were by no means a power in the internet space, and we had to do a lot of work in a space that was moving incredibly fast."

IP, IP, hooray
In December 1995, Gates presented his vision of an internet-savvy Microsoft to 3000 customers in a mammoth presentation.

"It was five hours long," notes Guggenheimer. "And it took a lot of work to get it down to that length." Gates' vision encompassed Microsoft web browsers, web servers and internet connected software. In early 1996, Gates ordered a reorganisation of the company around the internet, creating a new 3000 strong division dedicated to the internet platform and tools.

Between 1996 and 1999, the company released the promised web servers, web server software and included internet protocol (IP) into most of its products. Internet Explorer became the leading web browser, while Hotmail and MSN also led the market in their own sectors. "This was known as the go-grind-it-out phase," says Fitzgerald.

But in the middle of all the grinding, Microsoft was missing the point, he believes. "We put out a lot of products, but we were too server-centric. Basically, we allowed the internet to be defined by other people," he says.

Among those defining the internet was Larry Ellison, chairman of rival software company Oracle.

At the height of his powers Ellison, never one to miss an opportunity to rubbish his rivals in the Redmond camp, said: "The company's biggest problem is that it missed the internet and has all the wrong products. As the PC recedes in importance, Microsoft recedes in importance."

Microsoft's .Net is designed to stop that process. It is a complex strategy, and one that the company is still struggling to fully articulate, admits Fitzgerald.

"Historically, we have focused on a single application, and it's pretty hard to make that rickety software work with something else," Fitzgerald says. "But when you're constantly connected to the customer, throwing the CD over the wall and washing your hands of it becomes less of an option."

Confidence in Microsoft is running at record levels, reports Fitzgerald. He doesn't see a way that the company can lose. "We think of it as having the best of both worlds," he says. "Sort of like running downhill with the wind on your back."

It's certainly a nice idea, says Laura DiDio, research analyst at Giga Information Group. "But Microsoft is hardly a pioneer in this respect. Other firms, notably Oracle, are already forging ahead with this approach."

Over the next four weeks Microsoft will launch its biggest ever family of servers, all incorporating .Net technology. This follows the launch of .Net Enterprise Server, an XML-enabled product that includes everything from SQL Server to Commerce Server.

ASP gamble
Business customers will probably gain more immediate value from Microsoft's moves into the ASP market. Responding to the growing interest for many businesses in applications that are offered over the web as services, the company has begun offering desktop, server and Exchange messaging software for rent. It's quite a gamble - the applications division accounts for more than 40 per cent of Microsoft's annual revenues, and isn't a market it can afford to cannibalise.

"We have been a little cautious entering this market," admits Donna Bullock, ASP marketing manager at Microsoft UK. "But we saw that companies were forming ASP offerings regardless of whether we would help them or not, so we would have lost the market," she says.

Microsoft is negotiating with 22 ASPs in the UK to offer monthly licensing deals based on subscriber numbers to support rental services in place of traditional client licence fees, which were shown to be unworkable during a nine-month pilot project.

"Microsoft realises that there will be more and more hosted Exchange services that will have to compete with Microsoft's internal pricing," says Dana Gardner, research director at Aberdeen Group. "The old licensing model just wouldn't have been competitive."

While ASP might be at the heart of .Net, the division with most to gain is the Stockholm-based wireless and mobility division. This is perhaps Microsoft's weakest spot, says Enderle. "Microsoft knows that much of the work currently done by PCs will be done by mobile devices in a few years, and it has absolutely zero presence in that sector."

Microsoft's repeated attempts to break into the wireless market with Windows CE have been disappointing, with the first two major releases of the mobile operating system being universally panned. The criticism was fair, admits Richard Lind, director of marketing for the mobility division, but Microsoft was under pressure to release products before Palm took a permanent hold on the market.

"If you stay in the lab and hone a perfect product, you jump out a year later to find that the market has moved on without you," he says.

Microsoft is quick to minimise the significance of the drubbing it received at the hands of Palm, but analysts aren't so sure. "A small division of a tiny networking company kicked them into touch," says Enderle. "I'd say that's a problem."

Wireless has now become central to Microsoft's aims; much of .Net is geared to any time, any place computing. This will give the group a higher profile in Redmond, believes Lind.

"In the past, there was a level of ignorance within Microsoft about the importance of the mobile market," he says. "A lot of the progress on mobile internet was in Europe, and wasn't really visible on the company's radar."

The focus is now evenly split between server software, aimed at ISPs and corporate customers, services that reside on both the server and client and the original devices themselves. "We don't need buy-in on devices to succeed in this market," says Lind. "The cash is generated on the server side."

Consequently, the technology currently being developed in Stockholm is platform-independent, and will run on Palm, Epoc and other mobile devices.

That doesn't mean Microsoft is giving up on Windows CE. The company's third generation of the software, PocketPC, has all the hallmarks of a workable operating system, says Kuznetsky.

The company is also investing heavily in a new version of Windows CE for the smart phone market, code-named Stinger. This will offer smart phones, wireless internet access with HTML support and the personal information management software of Windows CE. The company has signed a deal with Ericsson to bring the devices to market next year.

Windows takes centre stage
There are other new products in the pipeline. Most important of these is Windows 2000 and the imminent launch of Windows 2000 Data Centre, in particular. Data Centre represents the company's first foray into the high-end business space.

"This is a new market for us, and one where we will have to work very hard," concedes Greg Rankich, a project manager in Microsoft's IT infrastructure and hosting group.

Data Centre is aimed at users of high-end servers running mission-critical applications, particularly in the finance and government sectors. Mindful of its inexperience in this Unix-dominated space, Microsoft is using the channel as a buffer, and will sell Data Centre through partnerships with Unisys and Compaq, among others.

"The challenge for us is how to sell this stuff," says Rankich. "We think that the resellers will help convince customers that Windows is ready for high-end, mission-critical deployment."

The number of new releases is very much down to Gates, who stepped down as president to become chief software architect earlier this year. Many within Microsoft were relieved by the move, seeing it as evidence that the company would discover a renewed focus. "They thought it was a great thing because he could get back to thinking really big thoughts," Yorwerth says.

That promise hasn't quite been fulfilled, according to Enderle. "I think Gates hasn't really delivered in terms of new technologies, and the company is still a long way from being a technology leader," he says. "A lot of that is down to being distracted by the DoJ."

However, Microsoft has occupied itself with the technology that will replace the PC. According to IDC, 12 million consumer devices will be sold this year - close to the number of consumer PCs sold - making this a key market for Microsoft. Top of the priorities is a simplified version of the PC, says Guggenheimer.

"We are working on things such as the universal frame, which gives the user one place where all of their information lives," he explains. "It basically means creating smart software that knows who you are, and can prioritise what you see accordingly."

The universal frame is part of a new Windows interface, codenamed Neptune. This will replace the icons and file menus of Windows with activities, such as communicating or managing finance. Within Office, the company will offer 'smart tags' - hyperlinks to web resources and other applications that dynamically address content. For example, you might click on a product name within a document to go to the product on the web, or to email the marketing manager responsible for the product, and all without launching new applications.

In Europe, where Microsoft's research and development is based, the company is also working on usability. "We are focused on technologies that will make it easier for people to use computers," says Oliver Roll, director of the enterprise customer unit at Microsoft UK. "The labs are doing a lot of work understanding speech and incorporating natural language."

Further into the future, the company is looking to integrate biometrics into PCs and is testing iris recognition as a way of increasing PC access for people with disabilities.

Got it red-taped
Now Gates occupies himself thinking big thoughts, the running of the business is left to president Steve Ballmer. Since becoming president last year, Ballmer has moved fast to put his stamp on Microsoft. A businessman first and technologist second, his first action on taking office was to conduct a series of interviews with product managers. The results showed that Microsoft was seen as increasingly bureaucratic, with communication and innovation suffering as a result.

Employees found it hard to maintain links with colleagues in the face of rapid growth and almost constant reorganisation. "The culture has changed a lot as the company has grown," says Guggenheimer. "You do still see the same people, but they are working all over the company. It makes communication harder."

Ballmer's response to such perceptions was to launch a comprehensive reorganisation of the company into five customer-focused divisions, supplementing existing product divisions.

The reshuffle resulted in business units serving four groups of customers: business users, consumers, knowledge workers and developers. Customer satisfaction surveys are underway to gauge their progress, and Microsoft is taking action to fix the problems it identifies. For example, the company is hiring hundreds of new account reps to address a support problem in large business accounts.

The move has revived the company's entrepreneurial flair, says Bruce Burns, director of the business services group. "It feels like having my own small company without the hassle of ordering staples and looking after finances," he says. "They give you everything to succeed here, and it removes the excuses for failure."

Ballmer's reorganisation is only one illustration of his commitment to the customer. Take the experience of Marks & Spencer. When M&S was experiencing teething problems with its Biztalk implementation, Yorwerth emailed Ballmer. The two had an email dialogue over several days, and the problem was quickly solved.

"I see it as a very responsive company," says Yorwerth. "I was impressed, and a bit scared, because I had only met Ballmer for 10 minutes, months before at a conference in San Francisco."

Ballmer's business strategy and Gates' technical outlook are the best chance that Microsoft has of make a difference in the 21st century, says DiDio. "They are many things - stupid isn't one of them," she says. The company's support of XML as the cornerstone of .Net is a key step in the company being more open, and in its survival. Let's just hope that Gates and Co really mean it when they say they want to spearhead innovation through openness."

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