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November 15, 1999

The New Forces Of Change
Microsoft's business customers stay the course as legal findings, and new initiatives, unfold

By Aaron Ricadela

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s Microsoft's legal tangle moves into its next stage--negotiations in Judge Thomas Penfield Jackson's chambers--the company's business customers are watching closely, but not overreacting. Indeed, if anything causes a change in the way companies license and access Microsoft software, it's as likely to be the developer's fast-changing business model as any court-ordered remedy.

Despite the buzz that followed the Nov. 5 release of Judge Jackson's findings of fact, it's business as usual among companies that use Microsoft products, according to a survey completed last week by InformationWeek Research. The survey of 150 IT managers found that 78% say Microsoft's legal situation will have no impact on their plans to buy the company's products. Indeed, 86% say they'll spend as much money, or more, on Microsoft's products next year.

So much for knocking the wind out of Microsoft. "It's too early to see any difference," says Bob Schwartz, VP and general manager at Nordstrom.com, the online division of the Seattle retailer. "Microsoft is a great company, and they have great products--and as long as that keeps up, we'll work with them."

Joseph Garchinsky, network manager at Cellular One Group, a wireless carrier in Philadelphia, says that "regardless of the outcome of the trial, Microsoft is so ingrained in our technology base, we can't steer away from them." Cellular One runs more than 300 Windows NT servers. Microsoft's legal troubles "haven't affected the way we do anything," Garchinsky says. "If they decide to break it into separate companies, we'll deal with it then."

Bill Gates Microsoft last week deflected some of the attention away from its legal setback with several new initiatives, including plans to host its Office applications on the MSN network (see sidebar story, "Why Own When You Can Rent?"). As part of that effort, Microsoft is entering a new market--applications hosting--with implications both for how it distributes and licenses its software.

Microsoft CEO Bill Gates made his case in the court of public opinion, speaking at the company's stockholder's meeting on Nov. 10. Gates was also scheduled to give a speech Nov. 14 at the Comdex/Fall show in Las Vegas. His general message: Microsoft is flexible on some of the charges facing the company, adamant about others.

"If we can't define the user experience of Windows so that all Windows machines operate the same way, then the Windows brand becomes absolutely meaningless," Gates says. "No company should accept these kinds of limitations on their ability to innovate."

Still, the judge's findings--which made little direct mention of how Microsoft's practices have affected its business customers--did raise a red flag among some IT managers. Nearly 20% of respondents to the InformationWeek Research survey say the situation will make them more cautious in dealing with Microsoft; 26% say that if Microsoft were broken into smaller companies, they would re-evaluate their use of its products.

"If they split the company in a way that made the database group different from the tools group, that kind of division would go at the heart of the benefits we take advantage of," says Kim Orumchian, VP of product development at Fatbrain.com Inc., the online bookseller.

The Justice Department and 19 states have charged Microsoft with squelching innovation in the PC industry by carefully apportioning access to its operating system. But Microsoft is transforming itself into a vendor whose business practices are in some ways notably different from those at issue in the trial. Even one of the most commonly discussed legal remedies--splitting the company along its product lines: operating system, application software, and Internet technology--ignores the way in which the Web is pervading every corner of Microsoft's business.

"It's a double-edged sword," says Larry Hazen, director of IS at Granite Construction Inc., a $1.2 billion civil construction contractor in Watsonville, Calif. "Microsoft has brought a tremendous amount of innovation to the industry--they provide leadership. Everyone I talk to says they're arrogant, and they do what they want. But we're standardizing on Microsoft because we want to be in the mainstream in five or 10 years."

Microsoft executive VP and chief operating officer Bob Herbold, in an interview last week, said the company has lost no business as a result of its legal situation. "I hope that customers aren't alarmed--they shouldn't be," he said. "We'll see our way through it and fight for an important principle--that we need to be able to innovate our products based on what we hear from customers and see in the industry."

Microsoft's distribution channel is shifting away from having resellers license CD-ROMs that customers own to software delivered as a service, via the Web, for a monthly fee. "The nature of what our product is--how it's delivered--changes," says president Steve Ballmer. "Instead of having releases that only come once every N years, we'll be continuously streaming improvements to our customers."

For the first time, Microsoft is proposing licensing arrangements that don't hinge on tracking individual users. It's introduced a licensing scheme for Windows 2000 server products that lets dot-coms authenticate thousands of users for a fixed price, and it's experimenting with subscription-model licenses for application service providers.

Delivering software as a service, as Microsoft is doing with Office Online, is "where the company will live and die over the next few years," says Warren Wilson, an analyst with Summit Strategies. The move, Wilson says, is "a response to the tidal wave of hosting and ASP activity that we're seeing, another point along the path of offering more functionality for ever-cheaper prices."

Even access to the company's cherished source code is under review. Government lawyers are considering a remedy that would require Microsoft to publish its full set of Windows APIs, removing a means of control over competing developers. But Microsoft is already reviewing opening the code on a selective basis, perhaps pre-emptively.

Ballmer said recently that the company is examining scenarios in which customers could view source code to help solve technical problems. "There are some questions for which getting in and looking at the source code is very helpful for developers," he said.

Perhaps most important, Windows itself is changing. The operating system is evolving into a platform that can be more easily distributed, updated, and supported via the Web. Ballmer says Windows users can expect "an ongoing relationship where, if a customer was connected to our servers, our servers would update that customer with the latest and greatest: with help, with new releases, with better support."

Given how deeply Internet computing has seeped into not only Microsoft's, but all developers' products, legal arguments about unbundling Web support from Windows appear out of step with the industry, some users say. "The implications of the case need to be looked at more broadly than Internet technology," says Fred Berlack, an IT manager at Texas Instruments. "With their latest technology, it's so built-in, it's not the issue anymore."

At Comdex/Fall, Microsoft executives will note that the company is designing Windows 2000 as a platform for "business Internet" systems comprising extranets, E-commerce sites, and application hosting. "Microsoft faces many competitive challenges," says Gates. "There's nothing new about this, but they're particularly acute as we redefine ourselves around the Internet and services."

There are even areas in which Microsoft's position is tentative at best. Its Windows 2000 Data Center Server, for example, will face stiff competition in the enterprise-server marketplace when it's released next year.

Business customers aren't particularly worried that Microsoft's legal woes will impede their deployment of Windows 2000: Only 27% say a major setback to Microsoft might delay their rollout. "You're always going to have that doubt in the back of your mind, but we're designing everything around [the next version of Exchange], so we need Windows 2000," says Howard Jones, CIO at Snapper Inc., a 1,000-employee mower and snowblower manufacturer in Atlanta.

What should Microsoft do next? A majority of survey respondents--70% of the IT managers surveyed--say Microsoft should remain focused on developing and improving its technology. But companies are also closely watching the outcome of the antitrust trial for signs that Microsoft's vaunted product integration will not be harmed.

"What Microsoft has done really well is pull all these disparate tools together and made them work," says Fatbrain's Orumchian. "There's an advantage for us in dealing with just one company.

I would hate to see that go away."

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