What's a Microsoft Rival to Do Now?

Getting out of Redmond's way becomes a key survival skill

By the time the antitrust case against Microsoft Corp. (MSFT ) ended with a whimper on Nov. 1, the guys who started it all had long since given up the fight. Marc Andreessen, whose Netscape Communications Corp. was trounced by Microsoft in the Internet browser wars, steers well clear of his former nemesis. Indeed, for his startup, Opsware Inc., he purposely chose a business that Microsoft isn't yet chasing--server-automation software. "Everybody should compete with Microsoft once in their lifetime," says Andreessen, "so they have stories to tell their grandchildren. And then don't do it anymore."

It's hard to fault Andreessen for feeling that way. During the half-decade that Microsoft has been under intense government scrutiny, the Redmond, Wash., behemoth has become more powerful than ever. Now, unconstrained by the court's slap-on-the-wrist settlement, Microsoft is free to spend its $40 billion cash hoard to enter new markets or acquire companies practically at will. Anybody who was counting on the Feds to rein in Microsoft is flat out of luck. Their only remaining hope is that an antitrust probe by the European Union could take it down a peg.

So how are tech rivals and customers adjusting to the prospect of living with an unfettered Microsoft? For many companies, survival means figuring out when to accommodate the giant and when to fight. For corporate customers, it's about making sure they have viable alternatives to Microsoft products.

In the wake of the court verdict, Microsoft says it's going to be a good citizen. "We're committed to moving forward as a responsible leader in an industry that is constantly, constantly changing," says CEO Steven A. Ballmer. But Ballmer also has said there's no business that he will rule out entering. Analysts expect the company to plow into new corporate-software markets and perhaps even to greatly expand its technology-consulting services--competing with the likes of Accenture Ltd. and Electronic Data Systems Corp.

Already, Microsoft is attacking new worlds. Among them are "smart" mobile phones for Web surfing and run-the-business applications for small and midsize companies. In each case, the company will leverage its monopoly products, Windows and Office, to get a leg up on the competition. In the business-application market, Microsoft is building links between its accounting programs--which have lots of competition--and its Office word-processing and spreadsheet programs--which don't.

When Microsoft eyes the competition these days, it sees a ragtag band, not an army. AOL is still No. 1 in online services, with a 31% U.S. market share vs. 10% for Microsoft's MSN. But a steep advertising decline has AOL on the defensive. Sun Microsystems Inc.'s (SUNW ) one-third revenue drop over the past two years curbs its ability to stay ahead of Microsoft in high-end computer software. Meanwhile, Apple's (AAPL ) share of the U.S. PC market fell from 4.5% to 3.9% in the third quarter, says Gartner Dataquest. In their weakened state, these foes can't put up a fierce fight when Microsoft plows into new markets.

The juggernaut's No. 1 counterbalance is not a company but a technology: the free Linux operating system. It's catching on for server computers with a market share of 26%, up from 6% five years ago. Now, thanks to a clumsy move by Microsoft itself, Linux adoption could quicken. Microsoft's new licensing rules, which went into effect on Aug. 1, raised prices for at least 20% of its corporate customers. That prompted 7% to look for alternatives, according to a survey by Goldman, Sachs & Co. For corporations, choosing Linux is about protecting themselves from too much dependency on Microsoft. "Riding that [Linux] wave will give us choices going forward," says John A. McKinley Jr., executive vice-president and head of technology for Merrill Lynch & Co.

To hold their own against Microsoft, rivals will have to be more nimble--and just as aggressive. Intuit Inc. (INTU ) beat Microsoft in the tax business by creating both a software product and a successful online tax service before the Redmond giant entered as a software-only player. While other pioneers eventually succumbed to Microsoft, Intuit stays ahead by targeting just a handful of markets and pricing even more aggressively than Microsoft does. "We didn't count on a silver bullet from Washington," says Intuit founder Scott D. Cook. "We believe you win the old-fashioned way--in the market."

The same could be said for rivals in the world of mobile gizmos. Microsoft has had its eye on wireless phones for years, but mobile-phone giant Nokia Corp. (NOK ) is fighting back with relentless innovation and a willingness to take risks. Nokia surprised the world last fall by offering to license its crown-jewel handset software for phones that offer Web browsing and messaging. Today, more than a million new Nokia-powered phones have been shipped. Meanwhile, Microsoft has virtually zero share. And its showcase client, British phone maker Sendo Holdings PLC, is switching to Nokia's software.

While many venture capitalists won't invest in companies that compete with Microsoft, a few do so--judiciously. "We will still invest in areas competitive with Microsoft if we believe we can build a business to effectively compete with them. In areas such as telecom they are only now building expertise," says Gary E. Rieschel, partner at Mobius Venture Capital.

Ignoring Microsoft won't work. Tech companies understand that it'll jump into any software business where the opportunities are large. So the smart ones try to ensure at least a level field. That's how IBM (IBM ) approached the just-emerging market for so-called Web services. IBM forged a sometimes uneasy partnership with Microsoft to develop standards to give the nascent industry a boost. Now that standards are in place that don't favor any one company, IBM believes it can outdistance Microsoft.

Still, most tech companies aren't capable of standing up against the software giant, so their best bet is to avoid a pitched battle. SONICBlue Inc. (SBLU ), the purveyor of ReplayTV personal videorecorder service, is aiming for the high end of the market where Microsoft doesn't yet play. "We're going to be the small guy in the field for a long time, and in situations where they're coming up against us, we're going to have to scramble to get out of the way," says CEO L. Gregory Ballard.

The drawback with that tactic? If most everybody does it, eventually there will be few alternatives, and we'll be seeing Windows just about everywhere for a long time to come.

By Steve Hamm in New York, with Jay Greene in Seattle, Andy Reinhardt in Paris, and bureau reports

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