Microsoft Hits The Gas

William H. Gates III has a lot of ideas about how the Information Highway should be built and operated. So many ideas, in fact, that he and his No.1 technology guru, Nathan Myhrvold, are hoping to write a best-seller on the topic. The book could be out by late this year.

But you don't have to wait to learn what Gates has in mind: After a year of watching other companies take high profile positions in the race into the digital future, Microsoft Corp. is finally showing its hand. In early March, the software giant announced its first major Information Highway deals: two projects with cable-TV titan Tele-Communications Inc. The first is a joint venture to set up and test an interactive cable system, which will initially be offered to Microsoft and TCI employees late this year. The second is a cable-TV channel for computer owners.

These deals are only the first signs of a more ambitious agenda--not only to develop the Information Highway but to transport Microsoft into new markets beyond its personal-computer empire. The key is a massive research effort that Gates quietly launched three years ago. Called Advanced Technology group (ATG), the R&D lab has grown to 500 employees and has an annual budget of $100 million. ATG is, says Myhrvold, Microsoft's version of Bell Laboratories or Xerox Corp.'s famed Palo Alto Research Center (PARC).

If it delivers on Myhrvold's promises, ATG will put Microsoft firmly on the leading edge--and once and for all quiet critics who say that the company is mainly an adroit exploiter of existing technology. After all, Microsoft's fortune is founded on MS-DOS, a product it acquired. And it thrives today on Windows, a program that draws heavily from Apple Computer Inc. and Xerox technologies. "With Nathan's group, Microsoft is trying to show themselves as a creative force in the industry," says William Bluestein, an analyst at Forrester Research.

"WE'RE THE LEADER." It's not just a matter of pride. The age of double-digit sales growth in personal computers is coming to a close, and Gates has been warning investors that Microsoft's growth rate is bound to slow--a big reason the company's stock now trades at around 81, well off its 12-month high of 98. New growth will come from new uses of microprocessors--in everything from cars to fax machines to the hardware for the Info Highway. The most critical path may be into the home--via interactive cable TV, using PC-like converter boxes. "The next DOS will be the set-top box and its software," says W. Russell Neuman, a fellow at Massachusetts Institute of Technology's Media Lab. "The guys who own that will be the next Bill Gates."

Naturally, the current Bill Gates thinks that should be him. Gates predicts that many of the earlier projects--announced with fanfare by such companies as Oracle, Bell Atlantic, Time Warner, and US West "will prove to be dead ends." Already, he asserts: "We're the leader on the Information Highway."

Maybe someday--it's too early to anoint any company. Still, as the world's largest and wealthiest software developer, Microsoft has a huge edge. The company had revenues of $3.8 billion in its fiscal year ended June 30, and analysts expect it to make a $1.3 billion profit on $4.5 billion revenues for the current fiscal year. Microsoft, meanwhile, is sitting on $2.5 billion in cash.

But Microsoft may not prove to be much of a player outside the PC market. "Being dominant may be difficult," says Richard Sherlund, an analyst at Goldman, Sachs & Co. "People have their guard up." That may be why Microsoft's deals with TCI are more limited than had been expected. Another factor: teaming up the intense personalities of Gates and TCI Chairman John C. Malone, says Forrester's Bluestein, "might be like having two scorpions in a bottle."

There's no question that Microsoft's deals with TCI are less far-ranging than Cablesoft, a venture that Microsoft tried to put together with TCI and Time Warner Inc. last year. Had it clicked, it might have been enough to make Microsoft the software standard-bearer in interactive TV. Sources close to the talks say one reason Cablesoft never got off the ground was the cable companies' concerns over Microsoft's demands. Especially worrisome: The software giant wanted to limit the use of competing set-top software, the sources say.

Today, with ATG, Microsoft is betting it can develop the software that manages the Info Highway. So far, the promise has proved elusive. Among the earliest projects to emerge from the research unit, none has yet scored in the market. Nobody is more aware of the odds than Gates. He says the typical ATG project will take more than three years and has "less than a 50% chance of working."

FIVE DEGREES. The real goal may be transforming Microsoft into more of a techno-pioneer. That's Myhrvold's job. The 34-year-old Microsoft senior vice-president has degrees in math, geophysics, space physics, mathematical economics, and a PhD in theoretical physics from Princeton University. He did postgraduate work under famed Cambridge University astrophysicist Stephen W. Hawking. At Cambridge in 1983, he began writing mathematics software and the following year started his own software company to create windowing systems for PCs. Microsoft bought his company, Dynamical Systems Research, in 1986, and he began working on Windows.

Myhrvold's basic-research group, Microsoft Research, focuses on technology to make software "smarter"--easier to use and more capable of acting independently to help humans work more effectively. It's headed by Rick Rashid, a computer-science professor at Carnegie Mellon University for 12 years, who wrote Mach, a version of the Unix operating system.

The biggest group in Advanced Technology, though, is working on the Information Highway. Called Advanced Consumer Technology (ACT), it is headed by Craig Mundie, the former chief executive of Alliant Computer Systems Corp., a failed supercomputer company. Mundie says supercomputers, designed for the defense industry, are obsolete. That includes, he says, the "big iron" approach of Microsoft rival Oracle Corp., which is betting on supercomputers from nCube Corp., a company that is owned in part by Oracle Chairman Lawrence E. Ellison. Oracle is testing nCubes for video on demand with Bell

Atlantic and British Telecommunications.

Microsoft's approach is a system that is code-named Tiger. Running on a complicated network of PC microprocessors and storage devices, the Tiger file server fetches sequences of video on the different drives and sends them to homes. Tiger is set to emerge from the lab in the fourth quarter, when limited tests with Microsoft and TCI employees are scheduled. A large-scale trial won't begin for at least another year. Then, Gates's boast of Information Highway leadership can be put to the test.

NEW TERRAIN. For now, the company will pursue simpler paths to the digital future. The first project is a test with Pacific Gas & Electric Co. to use TCI's cable system to link the utility and its customers to manage energy consumption and billing. Next up is Microsoft's proposed cable-TV channel.

Microsoft's most important work continues in secret in Myhrvold's laboratory. And there's no guarantee it will ever pay off: Neither Bell Labs nor PARC made their parent companies leaders in computers. The reason, says Myhrvold, is that the companies were getting themselves into unknown territory. By contrast, all of Microsoft's research is focused on software.

Besides, Gates and Myhrvold know that if they don't forge ahead, they'll be overtaken by companies that do. "Anyone who says you should stick to your knitting is wrong," says Myhrvold. "And anyone who says do or die, create something for the sake of being different, is wrong, too." Striking a balance will be key to putting Microsoft in the Information Highway's fast lane.


Microsoft's 500-person Advanced Technology group has a $100 million budget. Among its units are:


Conducts long-range research into areas such as natural language, speech recognition, decision-making programs, new user interfaces, and operating systems.


Explores technology for new markets, including video programming tools, interactive TV interfaces, pocket computers, set-top boxes, and interactive TV services.


Microsoft's software blueprint for the office of the future. The pro-ducts support copiers, faxes, and phones and make it easier for them to talk to PCs.


An operating system designed for handheld computers. The latest version was expected to appear in new products from Compaq and others by midyear. Now, yearend is more likely.


A conventional model is being developed with General Instrument and Intel. Cable companies will have to wait until 1995 for a more powerful digital box from Microsoft.

Before it's here, it's on the Bloomberg Terminal.