Online Extra: Gates: "IBM Isn't Doing That Much"

Microsoft's chairman says when it comes to productivity software, his company has to push the frontiers on our own

There are few markets Microsoft (MSFT ) is pouring more resources into than collaboration software. In 2003, it spent $202 million buying PlaceWare, the No. 2 Web-conferencing company behind WebEx Communications (WEBX ). In March, it agreed to pay $120 million for Groove Networks, a company that developed a technology to make it easy for workers at different companies to collaborate on projects through corporate firewalls. And it's pouring millions more into research and development to come up with new ways to enable workers to communicate using their PCs.

All those efforts put Microsoft on a collision course with longtime foe IBM (IBM ). While Redmond has eroded Big Blue's share of the corporate e-mail market, it had watched as IBM jumped into the markets for secure instant messaging, Web conferencing, and shared document workspaces.

No more. Microsoft has plowed into those markets, and it's working quickly to leverage Office, its monopoly desktop-productivity suite, to gain share. Chairman William H. Gates III recently sat down with BusinessWeek Seattle Bureau Chief Jay Greene to talk about his company's stepped-up collaboration software efforts and its latest battle with archrival IBM. Edited excerpts of their conversation follow:

Q: Microsoft has made some acquisitions in the collaboration software business and built some of its own technology. IBM is developing some interesting technology, too. How do you see the competition between the two companies evolving?


Well, frankly, IBM isn't doing that much. You can go track. The only product they have left that relates to information workers is [Lotus] Notes. And you can go and get the data from the analysts of how they've lost market share with Notes.

Q: What about their new Workplace product?


Well, when people want to look at business information, as far as I know, people use Excel to navigate business information. When people want to be notified about things and organize their communications, it's the Microsoft e-mail client. Outlook and Outlook Express are the primary tools people are using there.

IBM made a serious try with OfficeVision and the Lotus stuff. And maybe they'll introduce a new word processor. Who knows? But in terms of sitting down and thinking about office workers -- how do they spend time, is it in meetings, how should they deal with their priorities -- that's integrated into Outlook because that's where you want to see these new things happen.

We do major improvements to Office every two-and-a-half years or so, and the most important one we'll do is the one that comes out next year. It's based on this idea of collaboration. And the Groove technology -- which we'll offer right now but we'll do deep integration [into Office] -- is part of that next big wave.

Q: Groove is a tiny company with $20 million in annual sales. Is this acquisition really more about getting Groove founder Ray Ozzie in-house, or is it about the technology?


Well, fortunately, we get both and they're not that really separable. Ray has built a team that has a vision of how to make people more effective. We're going to incorporate that in to the overall Office picture.

Ray will make very broad contributions because he can tell us how we should improve the Windows platform to help Office. And so you can kind of think of Ray as almost having three roles: He's going to make sure this Groove technology evolves to fulfill his vision of that. He's going to help Office think about collaboration in a more advanced way. And then he's going to make sure our Windows platform work allows him to fulfill the scenarios that he has in mind.

Q: Revenue in the Information Worker group at Microsoft, of which Office is a part, is growing only in the single digits right now. Do you think collaboration software could eventually get the group back into double-digit revenue growth again?


Well, the Office business is one of the most incredible businesses there is, measured by the positive impact it has on worker productivity, measured by how innovative that group is, measured by how profitable that group is, measured by how it helps drive the Microsoft platform. Office is an unbelievable thing.

We have to convince people, to have any revenue at all, that the new version is exciting to them. You don't rent Office, you license it, and then you can just sit on it. We've done a series of ads with these guys with these dinosaur heads on saying, "Hey, we've got Office 97. What's wrong with us? We're so inefficient. Jeez." So that's a fairly helpful message to let people know they should get the latest and greatest.

So I'm not the one to make financial predictions, but Office will innovate in areas like business intelligence, collaboration, connection to telephony. Collaboration is one of the big areas of innovation. And the big numbers come when you make it so Office workers have to go to 5% fewer meetings because they're using the SharePoint (a document-sharing application). Or they're using Live Meeting (a Web-conferencing service), so they don't have to take the trip. Or they're connecting up to a partner in a secure way when they would have had to use paper to do that.

And so only by really surprising people with these new productivity applications do we deliver something where the licensing price is a tiny fraction of the productivity benefit that they get out of it.

Q: What are the big areas of innovations or the next big breakthroughs?


Well, the collaboration workflow is certainly number one. The connection to real-time communications -- telephony, videoconferencing, audioconferencing -- that's a huge one. Business intelligence is an absolutely huge one.

Q: And how much are you investing in R&D specific to collaboration technology?


It's complicated because you have to be very careful how you define these things. Take security: In SharePoint, there are huge enhancements to security. But is that in security, or is that in collaboration?

There's no doubt that Office, after Windows, is the most amazing software business that there has ever been on the planet. And it has had more to do with worker productivity than any piece of software ever has. You could certainly say that within Office, collaboration broadly defined is the top area of R&D investment.

Q: Earlier, you were somewhat dismissive about IBM's ability in this business. Do you think IBM will not be a significant competitor in the collaboration software market for you guys?


I think IBM's success in the productivity software business will stay the same that it has been. Do you know anybody using DisplayWrite, OfficeVision, or 1-2-3? What they have is they have a bunch of individual products that they put under an umbrella. WebSphere is an umbrella name. Workspace is an umbrella name.

They are IBM. So you always have to take them seriously, just like we took OfficeVision seriously and their acquisition of Lotus seriously. The only thing really left from Lotus at this point is the Notes piece. And you can look at what has happened with the share of that. They're not even defending what they've had very well at this point. But it just sort of shows in the area of productivity, Microsoft has to push the frontiers on our own. That's the business model that we live in. All we get to sell is our innovation. We don't get to sell the existing strength that we have. It's just the new breakthrough stuff. And hence, you need brilliant people like Ray and his team to drive that forward, full speed.

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