After Win95, What Do You Do For An Encore?

Patty Stonesifer has just moved into her digs at "Redmond West," the new campus for Microsoft Corp.'s ballooning consumer group, located a mile and a half from the software giant's headquarters sprawl. The walls are still bare. A clock sits conspicuously on the windowsill--a reminder of her breakneck schedule. Only a vase of long-stemmed red roses hints at another side to Stonesifer's manifestly Type A personality. Or maybe not. The roses bear a recurring message from her husband: "Stop and smell the roses."

Maybe later. Now is the eve of the all-important Christmas selling season, when 60% of consumer software is sold. Stonesifer, senior vice-president of Microsoft's consumer division, is about to unleash the software maker's second big campaign to capture the minds and dollars of home-PC owners. Just as the hubbub over Windows 95 is dying down, Stonesifer's division is preparing nearly 20 new consumer software programs to give PC owners something to play on those Win95 systems--everything from 3D Movie Maker, which lets kids play director, to Microsoft's first shoot-em-up game, Fury3. The group also has new hardware, including a big, egg-like trackball for kids, called EasyBall, and a precision joystick, Side Winder.

"SO MUCH UPSIDE." Stonesifer's division is also diving deeper into cyberspace. It just launched CarSource, an online buyers' guide, on the Microsoft Network and the Internet, and three of its new software titles will have online links to fetch updates. Says analyst John Girton of Van Kasper & Co.: "Microsoft is a force to be reckoned with in consumer multimedia."

No argument there. In just three years, the consumer div. has swelled to more than 800 employees and is expected to end the year with revenues of $800 million, nearly double those of last year. While that's less than 10% of Microsoft's overall business today, the consumer market is a key growth engine. Why? The corporate PC market--Microsoft's traditional stronghold--is slowing to 10% annual growth, while the home market is surging by 30% a year. Says Chairman William H. Gates III: "The consumer business just has so much upside."

Until Gates tapped Stonesifer to exploit that opportunity, Microsoft was a success, albeit a minor one, in consumer software without really trying. Microsoft Works and Publisher sold well to the home-office crowd, and Flight Simulator, introduced in 1982, has been a perennial favorite--now owned by 2 million cyber-aces. But in 1993, a year after the consumer div. was formed, sales of home software and games amounted to only $251 million a year, says market researcher Dataquest Inc. In 1995, it predicts the consumer div. will be the largest multimedia software outfit in the U.S., leapfrogging Acclaim Entertainment Inc. and Electronic Arts Inc. (table). With its hardware sales thrown in--revenue from keyboards, mice, and joysticks are expected to hit nearly $250 million--the division is on its way to becoming a billion-dollar baby.

Stonesifer, 39, is not your typical Microsoftie, and that may have a lot to do with the division's success. A former editor-in-chief of Que, a computer book publisher, she spent most of her career in publishing until joining Microsoft in 1988 as senior manager of Microsoft Press. In 1990, she impressed Gates at a management meeting and her big break came. Within three weeks she was the head of Microsoft Canada.

In 1991, Gates summoned her again--this time to fix Microsoft's support center, where customers were waiting on help lines for up to 20 minutes. Two years later, under Stonesifer's watchful eye, the wait was under 60 seconds--at least, until Windows 95 arrived in August and blew the averages. "Patty is a strong leader," says Gates. "She's very crisp in how she figures things out."

Take the consumer div. She took over the unit in the summer of 1993 when it had but 25 products and was a distant No.4 in consumer software. Today, there are nearly three times that many products and she is closing in on No.1. Stonesifer quickly realized she would have to do things differently. "Bill really encouraged me to make sure we didn't just replicate Microsoft," she says. That helped shape her conception of the new Redmond West facility, where there's lots of shared space for a more free-form atmosphere. Without opportunities for casual collaboration, says Stonesifer, "It's not always easy to find that next great idea." Stonesifer also established a unique brand--Microsoft Home--and restructured around markets (Kids, Productivity, Entertainment, and Information), replacing units organized around technologies, such as multimedia.

A top objective was to move beyond the traditional Microsoft mindset so the unit could match other software companies--particularly makers of computer games--in creativity and entertainment value. To this day, the division's top sellers remain productivity programs such as Works and reference titles such as Cinemania. The sole Microsoft CD on software tracker PC Data's top 20 for the first half of this year was Encarta, a stylish electronic encyclopedia.

That's why rivals aren't too worried. By virtue of its size, Microsoft is a major competitor, says Kenneth F. Goldstein, publisher of education and entertainment products for Broderbund Software Inc., which publishes hits such as Where in the World Is Carmen Sandiego? and Myst. But when it comes to creativity, he says, "Our titles are better, more inspiring, fresher."

MISFIRES. Rivals are also happy to note Microsoft's consumer software setbacks. Bob, a heavily promoted whimsical interface to help newbies navigate their PCs, has not been a hot seller. Likewise, Microsoft Money was such a poor seller that Gates attempted to buy Intuit Inc., which produces the leading personal-finance package, Quicken. Gates dropped the bid rather than wait out an antitrust investigation. The Money team went back to work, and today an improved version of the program is getting raves.

Another dud: Microsoft Baseball, which had the misfortune to be born during the 1994 season, just when the baseball players' strike was alienating ball fans. In games--the hardcore heart of multimedia--Microsoft remained a lowly No.7 in the first half of the year, according to PC Data.

Microsoft, never a slouch at marketing, has one quick fix: a giant pre-holiday price cut. As of Oct. 1, Microsoft's 50-odd consumer titles, which had been priced at a premium, have been scaled back to match or, in some cases, undercut the market. Now, more than 30 Microsoft programs cost less than $50; some are selling for $30.

Stonesifer is working hard to give her division the needed creative talent. She has hired from places such as Disney, Paramount, Lucas, Sony Films, Sega, and Blockbuster Entertainment, and the preliminary results will be visible this Christmas. Fury3, a space-age action program, makes you the pilot--dipping, spinning, and battling enemies to save planets from destruction. Microsoft is counting on Fury3 to establish its credentials with serious gamers, and early reviews give it a thumbs-up.

On the kids side, there are two promising new titles. One is an addition to the popular Scholastic's Magic School Bus series: Explores the Ocean. Wacky science teacher Ms. Frizzle again takes kids on an educational romp, this time through a 3-D sea of giant kelp. And then there is the real grabber: 3D Movie Maker. Kids can compose animated stories by selecting from a cast of 40 actors that can be seen from 30 different camera angles. It has Gates jazzed: "Of all Microsoft's products I've seen in the last year, whoooa!"

Today there are 75 people in the consumer div. working on at least 10 games, everything from action adventures to espionage thrillers. To increase the odds of creating the next big hit, Microsoft is operating like a Hollywood studio: financing, producing, and marketing titles that are cooked up by independents. Some 90% of Microsoft's games are in the hands of outside developers, such as Larry Holland, who designed the hit Tie Fighter game for LucasArts. Magic School Bus programs have been developed by New York-based software maker Music Pen Inc. in conjunction with Scholastic Inc., publisher of the book series.

Of course Microsoft still counts heavily on technology to make all this creativity come to life. It is spending an estimated $10 million to build a 20,000-square-foot production facility that George Lucas would admire. This "digital backlot" will have suites for synching sound, a recording studio, video editing suites, and a digital imaging lab to transform analog material into digital. "I heard before I came here it was a stodgy place," says Larry Frame, a former Paramount executive who joined Microsoft eight months ago as manager of the digital backlot. "But Microsoft has a commitment to creativity, and this facility is proof of it."

The company is eyeing a 50,000-square foot facility in Redmond for a film and sound stage. And then there's the "Blender," set up earlier this year. There, a blend of artistic and technical talent--industrial designers, an illustrator, film director, photographer, and user-interface expert--dream up ideas for interactive TV. They also test multimedia programming on different types of hardware. Says Charlotte Guyman, general manager of the Kids & Games Business unit (dubbed KGB): "This is so we can be smart across media: CD-ROM, online, and NBT--the Next Big Thing."

The Next Big Thing could be putting more consumer programs in cyberspace. CarSource is just the beginning. Nearly every group in the consumer div. is looking into how their titles would play on Microsoft Network or the Internet. Reference works with oodles of information--Encarta Encyclopedia 96, Cinemania 96, and Music Central 96--will tap into the Internet and MSN this Christmas, letting Cinemania owners get fresh movie reviews, for example.

HOLLYWOOD BOUND. Next year, Microsoft plans to launch half a dozen online-only products. In two or three years, the company expects only 70% to 80% of its consumer programs will be on CD-ROM. Says Melinda French, general manager of the information business unit and Gates' wife of nearly two years: "Everyone in my group knows the future is online."

Another potential big deal: DreamWorks Interactive, the joint venture between Microsoft and DreamWorks SKG, the startup run by Steven Spielberg, Jeffrey Katzenberg, and David Geffen. The joint venture has 33 employees working on a dozen games and kids' titles. Executives will only say that they are emphasizing storytelling and will probably use characters from DreamWorks movies. Stonesifer negotiated Microsoft's deal with DreamWorks and is now acting CEO of DreamWorks Interactive. "Patty is that rare breed of executive that can be incredibly focused, decisive, commanding, and compelling--and genuinely have a good laugh along the way," says Katzenberg.

For every story of Stonesifer's relentless drive--she works 12-hour days and answers e-mail on weekends--there's another about her humor and her self-effacing style. Subordinates tell about a tense meeting when she and Gates announced that, because of the Intuit bid, the Money program would be given to rival Novell Inc. After delivering a rousing speech to employees, Stonesifer and one of her executives charged out the door--the door to a closet. Stonesifer laughed so hard she cried as she backed out. Today, she tells that story in management meetings to teach "survival skills." Says Stonesifer dryly: "Nobody's leadership is perfect at any given moment." Perfect or not, this is her moment.

Coming to a Christmas stocking near you

To boost its chances of having a holiday hit, Microsoft is using both outside and in-house developers


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