You wouldn't exactly say he's panicking, but William H. Gates III is concerned about the future. Sure, his net worth is approaching $8 billion. Sure, Microsoft Corp. is at the height of its powers and this month will close out its fiscal year with revenues of $4.5 billion, aftertax margins of 25%, and $3 billion in cash. And at around $54, Microsoft stock is at an all-time high. But Gates has spent a lot of time peering into the future lately.
What he sees is that in a world of powerful, high-speed networks--both within companies and across the so-called Information Superhighway--it won't do to just be the king of desktop computers. Eventually, these networks will shift the computer industry's center of gravity away from the desktop. Over time, the nets--both wired and wireless--will take computing everywhere, making what happens on conventional PCs less
important. The powerhouse companies may be the ones who own the network or the content delivered over it.
Gates has also taken a look at the past and seen that in general, the companies that were great powers in one era of computer technology could not extend their dominance into the next. Fixated on the technology that made them great, companies such as IBM or Digital Equipment Corp. underestimated the potential of newer developments. And Gates is determined to make sure that that doesn't happen to Microsoft. "Companies in this business have often lost their way," says Gates. "We will fot fall short for not having an expansive view of how technology can be used."
The 38-year-old Gates has no problem painting an expansive vision of the coming era. The Information Superhighway, he says, is the first exciting new opportunity since the invention of the personal computer. Just as the PC's cheap and abundant processing powers revolutionized computing in the 1980s, he says, an explosion of low-cost, high-capacity networks will radically alter how we use technology in the coming decade. "Personal computing was qualitatively a very, very different thing than the computing that came before," says Gates. "The advances in communication likewise will create new ways of using communication for learning, education, and commerce that go far beyond anything done to date."
NO ESCAPE. To make sure Microsoft catches that next technology wave, Gates is pushing the software giant into every corner of the Info Highway business. That includes programs to control the computers and other gadgets we'll use to tap into the network, the software to run the net, and the content and services that flow across it. Gates envisions all sorts of devices--PCs, personal digital assistants (PDAs), digital televisions, and as-yet-uninvented products--tapping into the same high-bandwidth networks, scooping up multimedia information, and connecting with dozens of on-line services. "Our software will be used in business, in the home, in the pocket, and in the car," he says. "We're making a big bet on that."
Indeed, if Gates's plan succeeds, you won't be able to escape Microsoft's software. It will accompany you on vacation, sitting in a pocket device that pays your bar tab. It will ride in your car, mapping out the best route to your destination. It will control your appliances and feed programs and information to an entire city's television sets. It will let you browse through a world of merchandise and services from your home and business, with a royalty going to Microsoft each time you do so.
The vision will also take Microsoft into completely new businesses, such as on-line services. Gates isn't talking publicly about the first such project, code-named Marvel, but it's expected to start up by the end of the year. Initially, it may be little more than a glorified help line for Microsoft customers with a few entertainment services thrown in. Eventually, according to analysts who have been briefed by Microsoft, Marvel will be a full-blown service akin to America Online Inc.--with news, chat lines, and shopping. They say that it will resemble Apple Computer Inc.'s on-line service, eWorld, which uses a shopping-mall format.
The new businesses, in turn, will pit Microsoft against a whole new array of competitors. Many, especially cable-TV and telephone companies, will be far more powerful than any software rivals. Instead of IBM, Gates's biggest worry could become AT&T, which also wants to be a kingpin in the Superhighway era. And as of now, it's allied with Microsoft's bitterest rivals: Novell Inc. and Lotus Development Corp. "AT&T and Microsoft will be significant competitors as computers and communications converge," says Rick G. Sherlund, an analyst at Goldman, Sachs & Co.
Meanwhile, as he pushes Microsoft into new areas, Gates is also opening up opportunities for himself. In a series of investments, the billionaire has been diversifying his personal portfolio beyond computers and software. Over the past few years, he has plowed $23 million into biotechnology startups and into research, and he recently put up $5 million to help Craig O. McCaw plant the seeds of Teledesic, a hugely ambitious 21st century satellite venture. Gates stresses that his private dealings are no big distraction. "I invest in things, but that's on my own time,"
MIDNIGHT OIL. To be sure, Gates is hardly turning his attention from his original brainchild. He is still intimately involved in daily operations as well as long-range planning. And his marriage, on New Year's Day, to Microsoft Marketing Manager Melinda French, has done little to slow his pace. "I go home by midnight almost every night now," Gates says. Before, it was common to see his Lexus at the company's Redmond (Wash.) headquarters at 2 or 3 a.m.
The late nights are more than habit. With 14,773 employees, dozens of product lines, and marketing subsidiaries in 42 countries, Microsoft has become a complex enterprise to manage. It's also struggling with the cost of its own success: There are 55 million Windows customers and thousands of software developers selling Windows applications, and Microsoft can't abruptly jump to new technology that would make the old software incompatible. That complicates the difficult task of bringing out upgrades. Last year's big product, Windows NT, arrived months late and missing some key components. This year's No.1 project, Chicago (also known as Windows 4.0), has also slipped. It was due in the first half of 1994, and now Microsoft is scrambling to meet a new yearend deadline. Chicago is supposed to boost performance by merging Windows with a new version of the MS-DOS operating system and will have lots of built-in communications features such as electronic mail.
This is not to say that Microsoft is in any real danger--yet. Analysts, for example, expect upgrade revenues from Chicago to rack up a cool $1 billion in the first year. But a slowdown in desktop software is inevitable. Microsoft's revenue-growth rate has already fallen from 50% in 1992 to around 20% for fiscal 1994. And growth in some categories, such as word processing programs and spreadsheets, could slow to single-digit rates. "For the next three to four years, Microsoft is fine," says analyst Betty J. Lyter of Montgomery Securities Inc. "But further out, it absolutely has to work for new markets."
So far, reaching new markets beyond the desktop hasn't been easy for Microsoft. Its first big move--up the wire from the desk to the server computers that manage PC networks--has been halting. LAN Manager, a network operating system introduced in 1989, has never caught on as more than a niche product. And Windows NT, a server operating system, has made little headway against programs such as Unix or Novell's NetWare.
Microsoft hasn't had any better luck with software for non-PC equipment. Winpad, a special version of the Windows operating system for PDAs that has been under development for six years, is still not ready. That's one reason Compaq Computer Corp. recently shelved plans for a new line gf tiny machines called Windows Companions designed around Winpad, analysts say. Winpad is part of a larger project, called Microsoft At Work, that imbeds Microsoft software in office equipment, such as phones, fax machines, and copiers that then can be controlled by PCs. But a year after introduction, only a few machines with At Work are out. That may be just as well, since the PC software to run them won't arrive until Chicago ships.
SUCKER BET. Those setbacks don't bode well for Microsoft's prospects on the incredibly complex Info Highway. One key technology it is trying to supply, so-called video servers to store and distribute digitized movies, will require sophisticated database software to funnel the signal to thousands of homes and to keep track of who saw what for billing purposes. But Microsoft has little experience in databases that run on anything but desktop systems. A database of digitized video "pushes the limits of even a company like Oracle, which has been in the business for years," says Gerald D. Held, senior vice-president of Oracle Corp., the leading supplier of database software for minicomputers and servers. "It would be a gigantic leap for a company that's only been on the desktop."
But Held and other software executives also know it's a sucker bet to write off Microsoft. Even when the first versions of its products are so-so, Microsoft keeps plugging away until they work. Windows is a case in point: It wasn't until Windows 3.0 was introduced in 1990--five years and hundreds of programmer-years after the widely derided Windows 1.0--that the graphical program really took off. The company also overcame slow starts with its spreadsheet and word processing product lines, which now jockey for first place in their respective markets with Lotus and WordPerfect Corp.
Gates is famous for his Japanese-style tenacity. "He follows somebody's taillights for a while, then zooms past," Intel Chief Executive Officer Andrew S. Grove pointed out to a Microsoft executive recently. But that modus operandi won't serve in the uncharted territories of the digital future. "Soon, there will be no taillights left," Grove predicted.
That's why Gates is putting so much into research and hiring lots of new talent. The company's research and development budget has grown to more than $600 million, and the budget for the Advanced Research group, where the most leading-edge work is done, is approaching $150 million a year. For the past several years, Gates has been hiring people whose expertise extends far beyond the PC--including sociologists, linguists, and at least one ethnomusicologist. He is also recruiting seasoned executives from outside the PC business, ranging from supercomputer engineers to movie special-effects experts. The company is also said to have an open checkbook ready for recruiting big-name multimedia and Hollywood talent.
TWO-WAY WRISTWATCHES. The most important recruit, perhaps, is Nathan P. Myhrvold, Microsoft's senior vice-president for advanced technology. Myhrvold, a PhD in theoretical physics and a software entrepreneur, is Gates's chief technology guru and the head of the Advanced Technology operation. Among other assignments, he is overseeing efforts to build chunks of the Information Superhighway.
In May, Myhrvold unveiled one of Microsoft's most ambitious projects, video server software called Tiger. The setup, networking potentially thousands of "motherboards" and disk drives, is designed to serve up digitized movies and television shows across cable or phone networks. Tiger is just "the first piece" of an end-to-end interactive video system, says Myhrvold. "We were struck by how comprehensive their approach to the problem was," says Bruce W. Ravenel, vice-president for technology at cable giant Tele-Communications Inc. TCI plans to use Tiger servers in interactive TV tests, including in a joint trial with Microsoft in Seattle. Microsoft also has landed a Tiger test with Rogers Communications Inc., Canada's largest cable operator.
Microsoft is also interested in the receiving end. It is writing software for navigating through hundreds of program choices. And it is writing software for set-top boxes being developed jointly by Intel Corp. and General Instrument Corp.
Advanced Technology's charter does not stop with high-tech TV. Researchers are cooking up a series of gizmos they refer to as "hardwear"--computing and communications devices to be carried or worn at all times. One team is working on the idea of a portable computer that fits in your pocket or clips to your belt, sending wireless messages to and from your home or office computer so you can keep your office--and important data--with you at all times. And, shades of Dick Tracy, another effort is aimed at computers as easy to wear and ubiquitous as wristwatches. Myhrvold's gang has even tossed around the notion of a chip embedded in the heel of your running shoe to automatically clock your speed and distance and count how many calories you burn.
Gates's favorite idea is the "wallet PC," which would hold an electronic version of everything you might keep in a wallet or purse--telephone lists, appointment calendar, credit cards, maps, even money. How? Microsoft has licensed data-encryption technology from a Silicon Valley company called RSA Data Security Inc., which it hopes to use to design electronic money: secure, coded messages transmitted between your wallet PC and your bank, so that you can make purchases without paper or plastic. Such electronic money will be key to doing business across the net.
MAJOR MARKETING. Many of these projects may never see the light of day. And those that do won't be manufactured by Microsoft. The company is tinkering with the designs to discover what kind of software they'll need. It's also making some investments to get a jump on new technology. Microsoft has pumped $35 million into Metricom Inc. and Mobile Telecommunication Technologies Corp., for example, to get a grasp of data-communications technology for handheld devices.
With computers taking on new shapes and reaching millions of new consumers, Microsoft researchers are busy looking for ways to make them far easier to use. That's a big thrust of the company's basic-research effort, headed by Richard Rashid, a former computer-science researcher at Carnegie Mellon University who joined Microsoft in 1991. One of his teams, which is exploring "natural language" programming, arrived en masse from IBM when Karen Jensen, an 11-year veteran of IBM's famed Thomas J. Watson Research Center grew frustrated. Her natural-language project there, aimed at getting computers to understand written English, never really made it to the product stage. "IBM just didn't seem to understand how to commercialize software," she says.
At Microsoft, the former IBMers have developed a new system that tries to get computers to understand words by creating elaborate links to every related word in the dictionary. Then, the system compares those links with other words that appear in the sentence or paragraph that it is reading. That helps it interpret what's meant when you type in "Find my expense report," for example. Jensen expects programs that use these techniques to appear within a year. But that won't make Microsoft the first: Oracle recently introduced a program called ConText that also uses natural-language techniques.
While Myhrvold and Rashid focus on long-term research, Microsoft's year-old Consumer Software Div. is paving a more immediate path to the Information Superhighway. Headed by Vice-President Patricia Q. Stonesifer, the division is fielding Microsoft's first products for the home, mostly multi-
media "edutainment" CD-ROM disks. Consumer Software's sales are running at $300 million per year, triple the rate a year ago, says Stonesifer. That makes the 550-employee division the company's fastest-growing unit. Gates says he is considering upping the marketing budget tenfold, to a staggering $100 million--more than the sales of most software companies. "What the heck, our profitability looks good," shrugs Gates. Meanwhile, Microsoft is scouring the market for additional multimedia "content." On June 13, for example, it signed a deal to co-develop kiddie fare with Scholastic Corp.
LEAGUE OF THEIR OWN. More important, the consumer programs--loaded with sound, video, animation, and graphics--are designed to get consumers warmed up for the interactive services that Microsoft is planning. The Complete Baseball disk, for example, includes trivia about every major-league team and player who has ever been in the game--including clips of famous plays. Using a modem, PC owners can download a daily newsletter from Microsoft that, for $1.25 per issue, supplies daily highlights and automatic updates of season statistics. Eventually, Microsoft believes the product will evolve into an on-line, interactive video-information service about baseball.
The on-line push is expected to begin by the end of the year with the introduction of Chicago, which includes an icon that, when clicked, will launch users into Microsoft's Marvel service. If just a fraction of the millions of Chicago customers click on that icon, Microsoft could become an overnight giant in on-line services. In the future, the company's on-line network will also be accessible from mobile devices and TV set-top boxes that run Microsoft software. That could make interactive services, according to Goldman Sachs's Rick Sherlund, "a whole new driver for Microsoft's business."
Futuristic software, multimedia, interactive TV, on-line services. It's a plateful, even for a company with the resources of Microsoft. That's why alliances may be critical to the company's plans for branching beyond the desktop. However, Microsoft has earned a reputation as an exceedingly tough negotiator. True, Gates has signed deals with TCI and with Rogers Communications and Pacific Gas & Electric Co., the San Francisco-based utility.
But what may be more significant are the deals that Microsoft couldn't nail down. Despite a several-week courtship, including personal visits by Gates, Microsoft was unable to persuade Alex Mandl, CEO of AT&T's Communications Services Group, to use Microsoft software on a network for businesses. The network, which will be offered on an experimental basis this year, will rely on Novell's NetWare and Lotus Notes to let AT&T customers exchange information electronically with branch offices, suppliers, or customers. To add insult to injury, Microsoft's closest PC partner, Compaq, plans to be one of the first companies to use the AT&T Notes network in a pilot application.
Another deal that collapsed was a proposed three-way venture among Microsoft, TCI, and Time Warner Inc. The pact would have created a powerful troika and would have secured a leading software role for Microsoft in interactive television. But executives close to the negotiations say Time Warner balked at Microsoft's demands, which included hefty royalties and limiting or excluding the use of non-Microsoft software. More recently, one telecommunications company says it walked away from a deal to use Tiger technology because of what it regarded as Microsoft's unreasonable terms.
NEW SUITS. Such hardball tactics will continue to inspire fear and loathing among potential Microsoft partners, says William M. Bluestein, an analyst with Forrester Research Inc. The feeling among many companies is that "when you do business with Microsoft, you want to keep your hand on your wallet," he says. "No one is going to bless Microsoft in this new market."
At the same time, Microsoft's aggressive ways have led to some legal tangles. The company recently lost a copyright-infringement suit brought by software maker Stac Electronics Inc. Not only did Microsoft wind up paying Stac $120 million in damages, in early June a judge issued an order prohibiting further sales of a version of MS-DOS that contains the infringing code.
Meanwhile, after the Federal Trade Commission abandoned a two-year antitrust probe of Microsoft, the Justice Dept. has recently expanded its year-old investigation and could bring a lawsuit as early as late summer. A key issue: allegations by competitors that Microsoft uses its dominant position in personal computer operating systems
to gain unfair advantage in other PC markets.
But the wheels of justice grind slowly. By the time a major antitrust suit could be litigated--or dismissed or settled--Microsoft may not resemble the PC powerhouse it is today. If Bill Gates can make his vision a reality, he and his company will have found new worlds to conquer.