Software Hardball: Microsoft's Gates Uses Products and Pressure To Gain Power in PCs
Strategy of Setting Standards Makes Him a Billionaire; How Apple Felt His Bite
Zoom and Icon: IBM Rejects
By Brenton R. Schlender, Staff Reporter
The Wall Street Journal
September 25, 1987
In 1985, soon after John Sculley became chairman of Apple Computer Inc., he found out firsthand why William H. Gates III, the chairman of Microsoft Corp., was fast becoming the most powerful man in the personal-computer industry.
Mr. Sculley wanted Apple to bring out a computer language called MacBasic for its then struggling Macintosh personal computer. Apple thought MacBasic was important because a similar language that Microsoft licensed to Apple had helped fuel the market for the Apple II.
But when the youthful Mr. Gates heard of Apple's plan, he immediately confronted Mr. Sculley. He threatened to cut off Apple's license to use Microsoft's program for the big-selling Apple II unless Mr. Sculley killed MacBasic and signed over to Microsoft the rights to the MacBasic name. Mr. Sculley had no choice but to cave in, but the decision was especially painful. It came at a time of low morale at Apple, and, besides losing the program, Apple lost several key software engineers who resigned in disgust.
"He insisted that Apple withdraw what was an exceptional product," recalls Bill Atkinson, an Apple software engineer. "He held the gun to our head."
With that strong-arm tactic, Mr. Gates had won yet another near-monopoly for his company. Microsoft has become the kingpin of the personal-computer software industry by developing products aimed at imposing standards on the PC industry and thus giving the company a guaranteed slice of many software markets.
In a series of coups, Microsoft has set standards for a variety of programming languages, for programs that manage PC networks and peripheral devices and, most notably, for the operating-system software that controls the inner workings of all 10 million International Business Machines Corp. PCs and compatible machines. Now, Microsoft is hard at work creating its most ambitious standard yet: the operating system, called OS/2, for IBM's recently unveiled second generation of PCs.
In just 12 years, the standard-setting strategy has made Redmond, Wash.-based Microsoft hundreds of millions in revenue, and Mr. Gates a billionaire based on the value of his Microsoft stock. (The per-share stock price as of last night was $61.25.) But it is a strategy partly built on the 31-year-old Mr. Gates's sheer willpower and his skill at persuading and cajoling -- and occasionally threatening -- his most important customers to buy a vision of personal computing that involves Microsoft at every turn.
These traits stand in sharp contrast to his unassuming public image as the industry's consummate computer nerd, and have earned him some ill will among his peers. But they have also enabled Mr. Gates to establish himself not only as the PC industry's leading technological visionary but also as its savviest deal maker.
"What people overlook is that Bill is a better salesman than the guy who sold the Brooklyn Bridge," says Philippe Kahn, president and chief executive of Borland International Inc., a Scotts Valley, Calif., concern that is one of Microsoft's keenest rivals. "He has everyone -- even enemies like IBM, Apple, Tandy and Compaq -- believing he's their biggest ally. Of course he's the one that's the biggest winner."
But some customers, competitors and computer users grumble that Microsoft has become arrogant and overly ambitious in its attempts to orchestrate what has always been a buccaneering industry. Some suspect that the peripatetic Mr. Gates has made more commitments than his fast-growing company can deliver. Others think that IBM might grow weary of being so dependent on Microsoft and set off in a new direction. And there are concerns that Mr. Gates's intimate knowledge of so many competitors' business plans gives Microsoft unfair competitive advantages.
"Sometimes Microsoft seems like the fox that takes you across the river and then eats you," says Willard E. Petersen, executive vice president of WordPerfect Corp. Mr. Petersen, whose Orem, Utah, company makes the biggest-selling word-processing program for IBM-compatible PCs, is suspicious of Microsoft's dual role as the standard-setter for systems software -- the operating system and other programs that tell the machine how to work properly -- and as a competitor in markets for word-processing and other applications programs. "There isn't any part of the market that they don't want," he says.
In Microsoft's earlier days, Mr. Gates was lucky as well as persuasive. When IBM first approached Microsoft in late 1980 to help it develop the operating system for its new personal computer, Mr. Gates didn't think the fledgling company that he and a high school chum had started five years earlier could cobble together the complex software fast enough. So he suggested that IBM instead talk to a competitor. Fortunately for Microsoft, the competitor, too, turned IBM down.
In the meantime, recognizing his mistake, Mr. Gates found a Seattle programmer who had hacked-together something called Q-DOS -- the Quick and Dirty Operating System. With a few refinements -- including the new name MS-DOS -- the software, which Microsoft purchased for $50,000 plus the promise of a job for its author, was just what IBM was looking for.
Mr. Gates clearly learned his lesson from that close brush with obscurity. Now his plans to shape the PC industry are all-encompassing. To start with, Microsoft is writing OS/2, which will enable high-performance computers built around Intel Corp.'s 80286 microprocessor, such as IBM's PC-AT and most of its new PS/2 series machines, to run several programs at once, and will make it possible for several connected machines to share the same programs and data. Microsoft is also building, along with OS/2, what it calls "presentation manager" software to handle on-screen graphics in a consistent way for both personal computers and IBM's full line of larger computers.
Microsoft even reached an agreement with American Telephone & Telegraph Co. -- its main competitor in providing operating systems for high-performance PCs -- that licenses Microsoft to sell a standard version of AT&T's Unix operating system under Microsoft's name.
Moreover, Microsoft provides most of the computer languages that professional programmers use on IBM and Apple personal computers. And it has announced software products -- or partnerships to develop such products -- that set the standards for devices that plug in to PCs and for communication among PCs. (Microsoft also sells a variety of applications programs for IBM-compatible PCs such as a word-processing program, two financial-spreadsheet programs and the popular Flight Simulator game.)
In fact, the only major personal computer or PC peripheral device that Microsoft doesn't set standards for is Apple's Macintosh, the main alternative to IBM-compatible PCs.
Even so, Microsoft had a hand in the Macintosh's early development. And, in another example of Mr. Gates's high-pressure tactics, he managed, by threatening to stop work on what eventually became the most popular word-processing and spreadsheet programs for the Macintosh, to extract a virtual blank check to borrow many Macintosh ideas for Microsoft's own products. These ideas included mouse-activated pull-down command menus and overlapping "windows" of on-screen text.
"Bill isn't saying that everybody must wear a blue suit," says Edward Esber, chairman and chief executive of Ashton-Tate Co., the third-largest PC software concern and the maker of dBase III, the biggest-selling database manager program for IBM-compatible PCs. "But he is saying everybody must go to his tailor."
That's not necessarily a bad thing, in the eyes of most industry executives. "Microsoft must be complimented for its role in shaping the industry," says Benjamin Rosen, a venture capitalist who helped such successful companies as Compaq Computer Corp. and Lotus Development Corp. get started. Mr. Rosen, who likens steering the PC industry to "turning an ocean liner," says that Microsoft should get credit for "pointing IBM in the right direction in the very beginning. . . . And by making their operating system available to others, the industry is far richer."
Nevertheless, many worry that Mr. Gates's grandiose goals to dominate so many PC software markets could spread the company too thin. The company has grown so fast that Microsoft's 18-month-old campus headquarters has already been expanded twice, yet parking spaces and offices for its 1,700 employees are still in short supply.
"Microsoft is trying to be all things to all people," says Tim Bajarin, an industry analyst for Creative Strategies Inc., a computer-industry market-research firm. "There's no doubt they have tremendous talent, but from a project-management standpoint they have to be straining. The thing we keep hearing from Microsoft is manana, and that's frustrating."
For example, IBM and Microsoft initially hinted that OS/2 or something like it would be available a year or two following the 1984 introduction of IBM's high-performance PC-AT. Now, however, most industry executives expect that it will be at least the second half of 1988 before computer users will see OS/2 and its presentation manager, and the application programs tuned to run on them.
Microsoft also was slow to release a final version of Windows, an OS/2 presentation-manager precursor first promised back in 1983. In addition, a word-processing program for the Macintosh that was running late was shipped in February before all the bugs had been worked out, forcing a hasty reissue of a cleaned-up version in June.
Mr. Gates concedes Microsoft took short cuts in its rigorous testing procedures for the Macintosh word-processing program, something he says "won't ever happen again." But he bridles at the suggestion Microsoft has problems meeting production schedules. "You'll think we're a bloody machine gun this fall, we have so many products coming," he says.
To its credit, Microsoft shipped application development kits for OS/2 to independent software developers in May, a few weeks ahead of schedule -- and according to Borland International's Mr. Kahn and others who have seen it, the preliminary version seems to be free of bugs. The independent developers will use the kits to test early designs of software aimed at taking advantage of the OS/2's special features.
While Microsoft's close relationship with IBM gave the smaller company its birthright, many believe that Mr. Gates has had to compromise on some of his visions for future PCs to win that partnership. OS/2 itself is emblematic of the problems of hitching up to IBM's wagon.
The main hangup in developing OS/2 has been the Intel 80286 microprocessor. A microprocessor, the "brains" of a computer, executes the directions given by the operating system. While the 80286 is more powerful than the microprocessor used in previous PCs, it was difficult to write a new operating system that could tap its full power and could also seamlessly handle all the old software written for MS-DOS machines. Mr. Gates has rankled both IBM and Intel officials by privately joking that the 80286 is "brain-damaged."
He could foresee the problems with the 80286 back in 1983, when IBM was drawing plans for the PC-AT, and he urged Big Blue to wait for Intel's next microprocessor, the state-of-the-art 80386, which started showing up in computers about a year ago. But IBM chose to build the PCAT around the 80286 anyway, to get a higher-performance machine on the market quickly. To this day, Mr. Gates readily admits he would rather be writing OS/2 expressly for the 80386 chip. "But hey," he adds, "at this point you can't ignore all those ATs that are already out there."
Working so closely with IBM has foisted other, more trivial changes on Microsoft. A case in point: IBM wouldn't stand for Microsoft's vivid "Zoom" and "Icon" commands, which enlarge and shrink the work space on the screen in the new presentation-manager software. Instead, Big Blue insisted on using the stodgier-sounding "Maximize" and "Minimize."
Still, on most important issues, Mr. Gates's views seem to have prevailed. Perhaps his greatest victory was convincing IBM last spring to adopt a version of Microsoft's Windows to handle the on-screen graphics for its new computers. "Microsoft has done a great job of playing chess with IBM and winning," says William Zachmann, a vice president of International Data Corp., a computer-industry market-research and publishing concern in Framingham, Mass. Besides, he says, "there's no way IBM can get off Microsoft's bus now, because Microsoft has gotten too deep into IBM's own strategy."
While most industry executives and analysts agree that it's unlikely IBM will ever walk away from Microsoft, there are tantalizing hints that IBM wants to take back some of the standard-setting authority for itself. For one thing, IBM has promised to come out with its own extended OS/2 version designed to work with data bases on larger computers. And earlier this year IBM announced a technology-sharing agreement with Microsoft's archrival, Lotus, the maker of the best-selling spreadsheet, Lotus 1-2-3.
For now, however, Microsoft is at the center of the industry, and Mr. Gates is without question the industry's most influential individual, huddling regularly for strategy sessions with all its main players. As such, "Bill is in a position where the potential for conflict of interest is rife," says Richard Shaffer, the publisher of Technologic Computer Letter. "He knows what everybody is working on."
That doesn't seem to bother the hardware manufacturers much. "There's nobody in the industry more trustworthy than Bill Gates," says John Roach, chief executive of Tandy. "He has earned the respect that he has . . . by always being careful not to divulge what others are planning."
Almost always. Recently, Mr. Gates let slip the fact that Intel was working on yet another high-performance microprocessor, called the 432. "I shouldn't have done that," he says.
As the MacBasic episode illustrates, Mr. Gates isn't above playing the heavy with Microsoft's customers and competitors. But Steven Ballmer, Microsoft's vice president for systems software, doesn't think his company's approach is "all that unusual in business."
Mr. Ballmer, 31, who has shepherded the OS/2 development team, worked as a marketing man for Procter & Gamble Co.'s Duncan Hines cake-mix product line before coming to Microsoft. His claim to fame there was redesigning the chocolate-cake-mix boxes so that they sat on a shelf horizontally rather than vertically.
"The whole idea was to hog shelf space. You know, squeeze the other people off the shelf," he recalls with a chuckle. "Come to think of it, that's sort of the same thing we're trying to do at Microsoft."
| [Table] |
Microsoft's Fundamentals |
Stock's 52-week range 64 1/8-13 3/4 |
Sept. 24 close (Nasdaq) 61 1/4 |
Latest annual revenue $345.9 million |
Latest annual earnings $71.9 million |
Employees 2,000 |
Software |
Microsoft Industry |
1987 stock price |
change +154% +56% |
Current P/E ratio 44.2 40.8 |
Latest year's |
revenue growth +75% +34% |
Latest year's |
earnings growth +67% +31% |
Profit margin 21% 6% |
Return on equity 28% 13% |
Source: Media General Financial Services |
Copyright Dow Jones & Company Inc