Business As Usual?

The last time Microsoft launched a new version of Windows, it was under pressure from all sides. The Justice Department was threatening to split the company in two. Business customers were saying its products weren't scalable enough to run burgeoning Internet environments. And the sharpest IT job-hunters were bypassing the old-school tech leader for richer offers at startups with higher stock prices.

Fast forward 20 months, and it's a different picture. Microsoft has outlasted the U.S. government in its antitrust fight, averting the threat of a breakup. Windows 2000 is winning plaudits for its technical performance in demanding environments. And Microsoft executives say it's easier to recruit and retain employees in the aftermath of the dot-com bust.

One might expect Microsoft to be chastened by past troubles. But as it prepares to launch its Windows XP operating system in New York next week-and perhaps inject life into a moribund computer market-business customers say some things haven't changed. Microsoft still aggressively claims markets by bolting new products onto old ones, stealthily raises prices, and requires customers to buy additional products to get the most out of existing ones. Little wonder, then, that a September InformationWeek Research Web survey of 500 IT professionals who buy or maintain operating systems shows that more than 60% say Microsoft doesn't understand the needs of businesses; more than 70% say the vendor isn't responsive to their companies' needs.

"The biggest problem about Microsoft is you get yourself deeply entrenched-you're stuck with no way to get out," says Eric Lesatz, a VP of IT at New York brokerage firm A.B. Watley Inc. It's a blunt assessment-one that some customers won't make for fear of damaging their relationship with Microsoft. Last year, A.B. Watley replaced 200 Windows NT servers with machines running Sun Solaris, citing scalability, security, and the ability for the Java shop to more easily switch to another platform if licensing costs rise too high.

Concerns like that could hinder Microsoft, because Windows XP is a lot more than a new PC operating system: It's a platform for building personalized software that remembers users' preferences, detects if they're online, and automatically swaps data among their applications. It's intended to be used with Microsoft's upcoming Windows.Net Server, Visual Studio.Net development environment, and Passport Internet authentication software. Future Microsoft .Net software could help businesses build networks that authorize wide swaths of people inside and outside company walls to use their systems-hard to do with client-server software-and disseminate company data to employees and customers' PCs, servers, and wireless devices.

Realizing this vision will require more trust between Microsoft and its customers than the vendor has been able to muster thus far. Microsoft isn't helping its cause with a new enterprise licensing program for Windows, Office, and other applications. Companies with at least 250 PCs must sign up by next year for pricey three-year maintenance contracts in order to upgrade their software from older versions. IT advisory firm Gartner says the change will cost companies that upgrade software every three years 33% to 77% more a year. Customers will get new software as soon as it comes out, while Microsoft collects money each year from them-whether they upgrade or not.

That has angered customers. "Microsoft's licensing policies have removed many of the options customers have for staying legal and getting upgrades," says John Jahraus, chief technology officer at Bechtel Corp, a $14.3 billion San Francisco engineering and construction company. Bechtel also runs Microsoft Visio and Project and is upgrading database, E-mail, and file servers that support 34,000 users to Windows 2000. Bechtel will pay a lot more on average each year under its newly negotiated contract than it did when it upgraded software every few years. "This licensing model was dreamt up when the market was booming," Jahraus says. But it's being implemented just as a shaky economy further unravels after the Sept. 11 attacks. The timing is "unfortunate," Jahraus says.

While about two-thirds of respondents to the InformationWeek Research survey say Microsoft provides good overall software value, 84% say they wish there were more low-cost alternatives to its products. Just one-quarter say Microsoft uses its position of power to benefit customers. Last month, a consortium of 98 British companies, including Cadbury Schweppes, Glaxo SmithKline, and Prudential, filed a complaint with the British government, saying the new upgrade program will cost them an additional $1.3 billion. "We don't have a problem with Microsoft trying to iron out the peaks and valleys of its revenue," says a spokesman for Glaxo SmithKline, which has about 80,000 PCs. "But in some scenarios, it could almost double our costs-we weren't very happy with that." Last week, Microsoft softened the licensing rules, extending by five months-to July 31-the date for companies to upgrade contracts and letting Office 2000 shops qualify for its new maintenance plan along with Office XP users.

Microsoft also faces customer unrest on other fronts. Upcoming software called .Net My Services (previously code-named Hailstorm), which offers users hosted E-mail and contacts databases, has people wondering if Microsoft will protect the personal data they must reveal via its Passport online authentication software to use these services. As new services target business clients, the calls for data privacy could multiply.

"People say, 'Is there some big plot here?'" CEO Steve Ballmer told investment analysts in July. "The people who use .Net services own their own data and their own customers. There's no other scenario that makes any sense at all."

But even if Microsoft has no ulterior designs on customer data, how safe is that data? A rash of computer viruses and worms that prey on Internet Information Services, the widely used Web server bundled with Windows, had Microsoft scrambling last month to issue system patches and lockdown tools.

"Microsoft has squandered its good name with a certain percentage of the market," says Dwight Davis, an analyst at research firm Summit Strategies. Competitors see an opportunity to exploit users' concerns. Sun Microsystems is spearheading a consortium of companies to develop an alternative to Passport. "The service-driven network is the approach every company is taking on the Internet," says Sun chief technical evangelist Simon Phipps. "There needs to be some federated authentication mechanism on the Internet," he says, rather than letting that function fall to one company-Microsoft.

Though Microsoft's business products are gaining momentum, president Rick Belluzzo admits it "still has a very small percentage" of most companies' IT budgets. The vendor has forecast only single-digit growth in desktop Windows sales for the fiscal year that ends in June. In the InformationWeek Research survey, just one-quarter of respondents say they'll buy Windows XP within a year. In the past two years, Windows, the SQL Server database, E-commerce servers, and other products posted scalability and reliability gains. Yet as Microsoft prepares to release the first of its .Net-era software for building distributed computing environments that run across the Internet, company executives know it will take more than better benchmarks to impress buyers. They need to build customer confidence in their development strategy, too.

That could be a challenge. "Microsoft is adding a bunch of features, but some of this stuff could be hard to implement," says Bob Egan, VP of IT at Boise Cascade Corp., a Boise, Idaho, paper and lumber producer. Microsoft tools are fine for building administrative software, he says, but "we wouldn't build an order-entry system on .Net."

Microsoft is embarking on a companywide sales, support, and product development reorganization, code-named Sable, that aims to prove to big customers that Microsoft can sell systems, not just piecemeal products. The vendor will assign dedicated account managers to more than 100 large U.S. companies-a privilege previously reserved for global accounts such as Coca-Cola. One problem Microsoft hopes to correct is its practice of urging employees to change jobs frequently within the company. That let salespeople gain a wide range of experience, says global accounts VP Jonathan Murray, but it's also "encouraged people not to have long-term relationships with customers."

Microsoft will also configure at least a half-dozen packages of Windows and E-business servers tailored for specific applications and designate 700 specially trained sales representatives this year to sell them. Chris Atkinson, VP of .Net enterprise solutions, says Microsoft has overemphasized the merits of individual products, without explaining how they fit together. "Either we'll make these changes for our customers or we'll just continue to be a supplier of cost-effective, departmental software." There are two Sable-style packages: a supplier-enablement combination of Windows, BizTalk Server 2000 for XML integration, Commerce Server, and SQL Server; and a BizTalk package for the health-care industry. On the way are a BizTalk combo for financial-services companies; an Internet business offering for E-retailing; a business-intelligence setup that includes SQL Server, Office, and the new Data Analyzer OLAP client; and a "high-availability Windows" package.

Microsoft sales reps who understand several products could ease support headaches, says a software engineer at a multibillion-dollar Seattle-area manufacturer. "It doesn't seem like anyone at Microsoft knows how to put the right pieces in place to make their products do what we want them to," he says. The manufacturer has met with Microsoft about how to replicate changes to Windows 2000's Active Directory between its Web site and dedicated dealer network, but "no one at Microsoft knows how to make it work," the engineer says.

Microsoft is also rewriting services contracts so they can be priced into software licensing agreements, to help ensure that customers don't come up short of support. Col. William Lord, CIO of the U.S. Air Force Air Mobility Command-which is involved in the Middle East deployment-says Microsoft has worked closely with him to migrate 80,000 E-mail users to Exchange and Windows 2000 Active Directory. Because the project to equip personnel with high-speed E-mail access from any base may roll out across the Air Force's 700,000 computer users, Lord says he gets very good support from Microsoft. Even so, escalating calls up the help-desk ladder takes a lot of time. "Typically, they've been very responsive, but responsive is relative when you have folks at the end of the food chain waiting to get their machines fixed," Lord says.

While Microsoft fixes internal problems, its legal situation remains unresolved. Still undecided are remedies in its U.S. antitrust case and an ongoing European Union inquiry into its business practices. The company broadly interpreted the U.S. federal appeals court recommendation in June proposing a tougher test for proving it illegally tied Internet Explorer to Windows-though the court also said bundling that stifles competition can still be ruled illegal. Chairman Bill Gates said the court ruling "sets a high bar for any ruling against the inclusion of new features in any software product."

Windows XP contains lots of forward-looking technology, including embedded Passport code that favors XP as the endpoint for hosted .Net My Services. The first beta version of that software could arrive as early as next week. Microsoft is also developing a real-time collaboration server for businesses to let them manage and secure instant messages sent via XP-a boost for Microsoft's Windows Messenger.

Ballmer says customer benefit, not legal questions, will be the only criterion Microsoft considers when designing new Windows features. This interpretation leaves a wide-open door for Microsoft to innovate-and perhaps bundle more products into its platform. More than half the surveyed users say they have a strong incentive to buy more Microsoft products to get the most value out of current ones-87% say Microsoft uses its power to lock customers into its products. It's easy to see why. Exchange 2000 Server requires Windows 2000's Active Directory. Users need a Passport account to log on to many Microsoft Web sites and to .Net apps. IT departments that want to manage Passport accounts will need Windows.Net. And so on.

"You've got dependencies, and you weigh the switching costs," says Stephen Hassell, VP and CIO at Newport News Shipbuilding Inc., a Newport News, Va., supplier of ships to the U.S. Navy. "Is Microsoft in a dominant position? Absolutely. Do they use that position to further their business interests? Absolutely." But he says there are checks on its influence. "Microsoft received an education in antitrust."

Other customers say there are advantages to working with a supplier that sells low-cost products that integrate easily. Solutia Inc., a chemical company in St. Louis, bought BizTalk Server 2002 this year to automatically route data from purchase orders and invoices into its SAP system by transforming them into XML. BizTalk requires SQL Server 2000, and Solutia E-business director Chip Merritt envisions buying more Microsoft software for updating Solutia's production-planning database when customers change forecasts. "It's classic Microsoft," he says. "They were late to this market. But they watch, then leap with a user-friendly product at a price that blows everybody else away."

Still, some customers also want Microsoft to take a bigger role in setting and abiding by technology standards. Take Active Directory. It's compliant with the industry-standard Lightweight Directory Access Protocol, but, says Bechtel CTO Jahraus, "you wonder, have they put so much added functionality on LDAP that it's really not standard at all?"

Microsoft disputes the notion it curtails choice by extending specs and making products closely interdependent. "If a company has lock-in as an objective, it fails," says VP of Windows marketing Cliff Reeves. But he admits the hooks between products help keep users loyal. "It's not worth it to learn something new, even if it's marginally better," he says.

It's true, and that's part of the problem IT buyers have with Microsoft: There isn't much choice. Customers say it still feels like Microsoft develops products in a vacuum. Asked why companies would upgrade to Office XP when other versions work fine, Steven Sinofsky, senior VP, Office development, describes Microsoft employees happily marking up documents on the vendor's intranet, managing projects online, and downloading XML data into Excel 2002. Trouble is, who else works like this? Says Boise Cascade's Egan, "People at Microsoft view the world differently from anybody else, because they're such a different company than anyone else."

--with Martin J. Garvey