The Long Shadow Of Bill Gates

Valley executives can't forget for a second who's the guy to beat

Microsoft Chairman William H. Gates III doesn't get down to Silicon Valley all that often--which could be a good thing. After all, this is hostile territory. One Valley competitor made gifts of golf balls with a photo of Gates on them, inviting people to take a whack. And a columnist for a hometown newspaper recently dubbed Gates the "Prince of Darkness."

Funny, yes. But there's a raw edge to this rivalry. Silicon Valley may be celebrated as the cradle of American innovation, but its executives don't forget for a nanosecond that Microsoft Corp. dominates the world of personal-computer software. It was Microsoft's Windows software--along with Intel Corp.'s chips--that provided a standard for thousands of PC makers and software developers to build upon. And like it or not, many find their fortunes tied to the software giant.

Still, the might of Microsoft is a threat to the very tenet of the Valley: If one company dominates, the best ideas--and companies--may not bubble to the top. Gary L. Reback, with the law firm of Wilson, Sonsini, Goodrich & Rosati, says the Valley is like a popcorn popper: Throw in a bunch of entrepreneurs, add some venture capital, and watch it explode. If one company rules, he argues, innovation is squelched. Adds James H. Clark, chairman of Netscape Communications Corp.: "Microsoft, I think, is fundamentally an evil company."

"CHILLING EFFECT." You know the background. Microsoft has capitalized on its success with Windows--which now runs on about 90% of PCs--to wage war against its software rivals. While Microsoft reaped $3.45 billion in profits in its just-ended fiscal year, the next nine largest PC-software makers combined posted just $523 million in operating profits.

What really ticks Valley-ites off is when Microsoft rubs it in. Last August, Microsoft execs met with about 50 Valley venture capitalists and advised them not to sink money into startups that challenge its control of the computing "platform," according to L. John Doerr of Kleiner Perkins Caufield & Byers, which has backed rival Netscape. Reback, who has represented several software firms in court cases against Microsoft, says those tactics have "a chilling effect."

Thanks to the Internet, Reback's bleak warning doesn't resonate like it did just two years ago. The Web has spawned a new crop of startups undaunted by Microsoft's long shadow. "People who don't know how to compete with Microsoft feel threatened. People who know how to compete, don't," says Mike Homer, Netscape's executive vice-president for sales and marketing.

GANGING UP. Homer can back up his bravado with numbers. In just three years, Netscape has lined up 65 million customers and is on track to log sales of $600 million this year. Still, the company is racing to stay ahead of Microsoft, which has already grabbed 30% of the browser market that Netscape pioneered.

Indeed, taking on Microsoft is a job too big for any one company, spurring Netscape, Sun Microsystems, Oracle, and IBM to form a united front against their common foe. Their weapon: Java. Sun's programming language promises to let developers create programs that will run on any computer and, potentially, lessen their dependence on Microsoft. "Microsoft is feared and loathed, and that drives companies together against them," says George Paolini, director of corporate marketing for Sun's JavaSoft Div.

Not all companies are willing to take the risk of offending Gates. Most rely on Microsoft's support in developing products for Windows. And picking a fight with Microsoft can be a fast track to oblivion. So the majority of Silicon Valley companies maintain cordial relations with their neighbor to the north. Even Borland International Inc., which in May sued Microsoft, alleging it stole some of its best programmers, retains close ties with the Redmond (Wash.) software giant.

Microsoft is quick to point out that its 320 resellers and partners in Northern California made $16 billion in Microsoft-related sales last year. And it shrugs off criticism. "We compete hard, but we compete fairly," says Charles Dietrick, Microsoft's manager for Northern California. Even small partners can get kid-glove treatment. Tiny Sessionware Inc. of Campbell, Calif., paid $2,000 last year to be part of Microsoft's service-provider program--but got $10,000 back for training.

That's winning Microsoft some fans. Rand Morimoto, president of systems integrator Inacom Oakland, even posted a snapshot of Gates on his Web site. The way he sees it, the Valley has a love/hate relationship with Gates. "With Windows, Microsoft has everybody in shackles," he says. "But, at the same time, it drives a big part of the business here." As long as that's true, when Gates comes south for a visit, most people are likely to grin and bear it.