Next Stop, Chicago

When Microsoft Corp. agreed on July 15 to sign off on a consent decree negotiated with the Justice Dept., Chairman William H. Gates III got out from under an antitrust cloud that has followed his software maker for more than four years--without casting much of a shadow. The deal ends a U.S. investigation into Microsoft's allegedly anticompetitive practices and closes a monopoly probe by the European Commission. And because it focuses on just three narrow issues, the settlement will do little if anything to cramp Gates's style.

So, having wrapped up his business in Washington and Brussels, Gates is focusing on Chicago. Not the Windy City. Chicago is the code name for a hugely ambitious, simultaneous upgrade of the two products that give Microsoft its extraordinary powers--the MS-DOS operating system and the Windows "user interface." The new package, also known as Windows 4.0, melds MS-DOS with Windows into a single program that will do far more to shape the destiny of Microsoft and the computer industry than anything the trustbusters could cook up.

Even now, six months or possibly a year before it ships, Chicago is making its presence felt. Both hardware and software makers say the program, which boosts Windows' "user friendliness" and for the first time takes full advantage of the powers of speedy microprocessors, will spur new demand. "We're very bullish on Chicago," says Gian Carlo Bisone, Compaq Computer Corp.'s vice-president for marketing for North America.

Not so fast. Because Chicago is such a major leap, potentially affecting 120 million MS-DOS customers (including 55 million Windows users), the initial effect is bound to be confusion. Buyers may pause to weigh Chicago's benefits vs. the costs of new hardware, applications software, and training. "We have an entire year where the marketplace will be stalled," predicts Steven Hochschild, director of developer relations at Lotus Development Corp.

Who gets hurt? Potentially, the entire computer industry--including Microsoft. If Chicago's shipment date slips into 1995, a possibility Gates acknowledges, Microsoft could feel an earnings slowdown. On the eve of Microsoft's July 20 announcement of $1.15 billion in 1994 profits and $4.65 billion in revenues, analysts were busy paring back projections for 1995. Their worry: some $1 billion in Chicago revenue could be postponed until fiscal 1996.

COMPLICATIONS. That's nothing next to the havoc Chicago could wreak on Lotus and Novell Inc., Microsoft's chief rivals in applications software. Microsoft got a jump on the competition with word-processing and spreadsheet packages for Windows and has been devouring market share ever since. In suites--bundles of office applications--it has roughly 80% of the Windows market. Indeed, Lotus' stock fell 15% on July 19, to close at $33.12, after it reported a 36% decline in operating profits to $9.7 million--thanks to tough competition from Microsoft.

Having lost out in the first Windows boom, Lotus and Novell are eager to do better with Chicago. But Chicago's postponement from its original target of early 1994 complicates their plans: Instead of creating Chicago products this year, both have had to create interim upgrades of Windows applications to keep up. Lotus' SmartSuite hits the stores in August. Novell's new offering--mainly programs from newly acquired WordPerfect Corp.--isn't due until yearend.

That could be bad timing. If Chicago arrives by the end of 1994 as promised, sales of those programs could fizzle as buyers start looking for packages that take advantage of Chicago's powers. The switch will favor Microsoft, which is bound to have applications ready sooner than rivals. On the other hand, if Chicago slips to mid-1995--the Novell and Lotus releases have a better chance.

At least one hardware maker--Apple Computer Inc.--is praying for delays in Microsoft's blockbuster. Windows clearly aped the Macintosh (or so Apple claims in a patent-infringement suit) but never really matched its ease of use. Chicago comes closer. So close that Apple is rushing an update of the Mac software. "Microsoft is getting closer, but we can make the next leap," says Guerrino De Luca, an Apple vice-president.

HIGH-END MACHINES. Most PC makers would prefer to see Chicago now. While they say their business remains strong--despite worries of a summer slowdown--delays in Chicago could hurt. Microsoft's new program will work best on high-end PCs such as models using Intel Corp.'s Pentium chips and large amounts of memory, and buyers are likely to trade up for Chicago--the way they bought faster PCs to run Windows. "The Windows upgrade cycle is petering out," says Eugene G. Glazer, a Dean Witter Reynolds Inc. analyst. "What you really need is the next generation--Chicago."

The combination of the consent decree and a late--or buggy--Chicago gives competing operating systems a shot. The main issue addressed in the consent decree was Microsoft's "per processor" licenses, which rivals said shut them out. Under that plan, forbidden under the Justice Dept. settlement, high-volume PC makers paid Microsoft an MS-DOS royalty for every machine they shipped, whether it had the software or not. The consent decree also outlaws Microsoft's practice of locking up customers with lengthy contracts.

In theory, life just became easier for Windows wannabes--IBM's OS/2, Sun Microsystems' Solaris, and Novell DOS. In reality, nothing has changed. Some 80% of all PCs come with Windows, and buyers aren't complaining. "If customers ask for alternatives, we'll make them available," says Sue L. King, director of software market development at Dell Computer Corp. "But I don't anticipate big change."

Gates, however, predicts a change--accelerated Windows sales. "My forecast is that sales of OS/2 will decline," he says, because of competition from Chicago. IBM won't comment on the consent decree, but Robert O'Malley, a marketing vice-president for IBM PC Co., says Chicago could "fuel renewed interest in OS/2" because it highlights the need for a high-performance operating system.

If makers of operating systems have only a glimmer of hope, other software makers have next to none. With Chicago, Microsoft steps up its effort to build in more features that used to be sold separately--such as electronic-mail software. When Gates described Chicago's features to the Electronic Mail Assn., the mood was somber. "It was like a wake," says Hochschild of Lotus, which sells cc:Mail. "A lot of people believe that when Chicago ships, the messaging industry as we know it is gone."

The only thing that can halt the Microsoft juggernaut now, it seems, is the company's own missteps. Don't count on many of those. Prerelease "beta" versions are getting raves. "When the dust settles, Microsoft will have a higher percentage of systems than in the past," says Gordon E. Eubanks Jr., CEO of software maker Symantec Corp. And a lighter legal bill, to boot.

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