Information Processing

'Microsoft is Like an Elephant Rolling Around, Squashing Ants'

As the company's dominance grows, so have the complaints of other suppliers of software

Richard Brandt in San Francisco
Business Week

October 30, 1989

There's no doubt about it. Microsoft Corp. wants to dominate the world -- the personal computer software world, that is. And it isn't very far from doing so: It already supplies the core software for just about all of the world's 25 million-plus IBM PCs and their clones. It has done well, too, in many sectors of the huge market for PC applications programs -- spreadsheets, word processors, and the like. All in all, it's the leader in total PC software sales -- Wall Street expects revenues of $ 1.1 billion for the year ending next June, up 40% from the year before.

Now, Microsoft is beginning to suffer the slings and arrows that often come with such fortune. Other suppliers of PC software are downright angry over its dominance. The company, they say, is just too powerful and its products too pervasive. Its virtual monopoly in PC operating systems -- the software life-support systems that all other programs call upon for access to the PC's memory, disk drives, and display screen -- means that Microsoft's every technical change, strategy shift, or mistake can adversely affect producers of applications software. They argue, moreover, that Microsoft is abusing its systems software edge to put them at a disadvantage -- and win greater control of the market.

INTIMATE TIES

This, critics say, will make it harder for Microsoft's small competitors to prosper. And that hints at less innovation in software, the one part of the world computer market in which U. S. companies still hold an unassailable edge. Says Fred M. Gibbons, president of $ 100 million-plus Software Publishing Corp.: ''Microsoft is like an elephant rolling around, squashing ants.''

William H. Gates III, Microsoft's CEO, argues that such fears are misplaced. He contends that his company is so influential simply because it knows more than any other about how the pieces of a PC fit together, from chips to other components to software. Microsoft's intimate ties with leading companies such as IBM, Compaq, and Intel bode well for the U. S. computer industry, he argues. By virtue of those relationships, Microsoft can establish coherent technical standards -- in graphics, communications, or computer languages, for instance -- that if followed by everyone would speed up the process of writing new programs. Those would help sell machines, fulfilling Gates's vision of a PC on every desk and in every home.

What worries other software makers is where they fit into this vision. While tightening its grip on the $ 1.4 billion systems software market, where its MS-DOS and OS/2 operating systems are king, Microsoft has pushed harder than ever into the $ 4.4 billion market for applications packages. Its Microsoft Word text-processing program, Excel spreadsheet, and other such products now account for 47% of total revenues -- almost equal to its systems business. And competitors say they're getting squeezed.

Recently, for example, Microsoft stopped providing them with lists of customers that use Windows, its graphical extension to MS-DOS. Instead, it offered to place ads for their Windows-compatible software in a booklet shipped with each copy of Windows. Competitors suspected that Microsoft's own applications group was still getting the lists. So they complained -- and got the lists back.

VOCAL CRITIC

More unsettling are suspicions that Microsoft doesn't keep its systems and applications groups as separate as it promises -- that church and state tend to mingle. Competitors figure that if Microsoft's applications people get peeks at unannounced systems software, they should, too. Otherwise, they're at a disadvantage. Microsoft fuels suspicions by sometimes shifting workers between its groups. And at Agenda 90, a recent trade conference, outsiders were angered to see an Excel specialist demonstrating new operating system features that they hadn't been briefed on. Apple Computer Inc. solved such conflicts in 1987 by spinning off its applications group into an independent company, called Claris Corp. Gates says that's not necessary at Microsoft.

Micrografx, a tiny graphics software company, might disagree. Recently, it approached Microsoft with a program it thought the larger company might want to use. But it showed it only to Microsoft's applications developers -- not to its systems people, who it feared would copy its proprietary ideas. Micrografx President J. Paul Grayson says that one person who saw his program was soon transferred to Microsoft's systems division. Eventually, Gates placated Grayson with a cross-licensing deal, which Microsoft concedes was unusually generous. Still, Grayson says he was ''manipulated by Microsoft,'' which insists it did nothing wrong.

PAINFUL P.S.

Whatever the case, Microsoft's tactics have strained relations even with partners. This fall, John Warnock, chief executive of Adobe Systems Inc., had an emotional, public falling out with Gates. Adobe's top product, called Postscript, is a key program for desktop publishing. Earlier this year, Apple, Adobe's best customer, said it would replace Postscript in Apple computers. Microsoft continued to do business with Adobe. Then, in September, Apple and Microsoft surprised Warnock by announcing at an industry conference that they would collaborate in competing with Adobe. Says Warnock: ''We used to be a strong ally of Microsoft.'' Now, ''it's easier to help their competitors.''

The biggest gripes have been with Microsoft's moves in operating systems. Like Microsoft, its competitors use those basic programs as ''platforms'' upon which to construct applications software. But if the platform is shaky, late to market, or just not selling well, writing software for it can be risky -- as the tale of Windows shows.

Starting in early 1983, Microsoft tried to supplement MS-DOS with Windows, a program that makes PCs act much like Apple's Macintosh. But outside developers were wary of writing programs for Windows, which was 16 months late to market, because of its many early technical problems. They say Microsoft also gave them mixed signals: It positioned Windows as a program mainly for low-end PCs, while it worked on a more advanced -- but incompatible -- operating system called OS/2 for more powerful computers. And IBM threw its weight behind OS/2.

Much to the industry's surprise, however, OS/2 has caught on slowly. And Windows has taken off. Microsoft has shipped 2 million copies of it, compared with only 150,000 of OS/2. And next year, it will bring out a major revision of Windows that will be easier to program and more functional than the original -- enough so, in fact, to do many of the same jobs that OS/2 was supposed to handle. Windows, says David G. Bayer, an analyst at Montgomery Securities, ''has become the platform of choice.''

DUPLICITOUS?

Guess which company is poised to exploit that platform? While most competitors concentrated on writing for OS/2, Microsoft has been readying a slew of applications for Windows as well. They include a fancy new word processor, a project management program, and a long-rumored data-base program called Omega. That's leading companies such as Lotus Development and Software Publishing to call Microsoft duplicitous. They charge that Microsoft enhanced Windows just to help its own applications group. And, they claim, the more powerful Windows will further hurt OS/2. ''It's irresponsible of Microsoft to do that,'' says Software Publishing's Gibbons.

Even discounting the effect of a revived Windows, Microsoft has disappointed those counting on OS/2. Introduced in 1987, that program still can't do all it promised, such as use all the power of Intel Corp.'s popular 80386 chip. Worse, perhaps, is that Microsoft still offers no aids for modifying Windows programs to work with OS/2. A recent poll shows that software executives don't expect OS/2 to really catch on until 1993 -- two years later than what they predicted last year. Gates's answer: Microsoft is devoting the maximum feasible engineering talent to OS/2 and Windows, favoring neither.

'SLIDEWARE'

On top of all this are wilder accusations -- for instance, that Microsoft peddles nonexistent products to scare off competition. Michael J. Maples, the company's vice-president of applications software, shows slides at trade shows that list the software markets Microsoft intends to enter -- programs for desktop presentations, for instance. One competitor calls that ''slideware. They have slides saying they're going to be involved in every conceivable area of innovation five years from now,'' he says. ''It slows the pace of innovation'' by intimidating smaller competitors.

Gates laughs off the idea of software companies quaking in their boots. ''So what are they doing instead, starting fast-food restaurants?'' he quips. ''I've never heard anyone say, 'we're chicken, we can't compete with you.' '' WordPerfect Corp., for example, is beating Microsoft in word processing, with a 40% share of the market, up from 16% three years ago. And companies such as Micrografx and Atlanta-based Samna Corp. have drawn technical praise for their applications programs for Windows.

In fact, many of Microsoft's critics helped create their own problems when they ignored its pleas to develop applications for Windows. ''Even when Gates makes a mistake, people turn it into a Machiavellian plot,'' says Gordon E. Eubanks Jr., president of software house Symantec Corp. And Steven A. Ballmer, senior vice-president for Microsoft's systems division, disputes the charge that his people give their counterparts in applications previews of their upcoming systems products.

Since Microsoft earns more from systems than from applications programs, Ballmer says, he would be foolish to jeopardize his market just to boost applications sales. Indeed, he recounts an occasion when Microsoft's developers of Excel accosted him in the company cafeteria for revealing their work to Lotus, which confers often with Microsoft on changes in its operating systems. ''Telling me is as good as telling Lotus,'' he says, as if to prove his independence.

So, the tension mounts. But what can Microsoft's rivals do? Their dependence on its PC operating systems puts them at a disadvantage. But no company -- not even IBM -- has been able to avoid that. They might try to subvert Microsoft's efforts to win control over every critical software standard in the PC market. ''If people are feeling mishandled, they're going to look for other partners,'' warns Lotus CEO Jim P. Manzi. A likely one would be the group of suppliers backing American Telephone & Telegraph Co.'s Unix operating system, which rivals OS/2 in scope and function.

But Unix' base of existing customers is minuscule compared with MS-DOS's. And Microsoft already has the best-selling version of Unix for personal computers, called Xenix. Perhaps, for competitors, there's just one choice: Learn to dance with the elephant.

GRAPHIC: Photograph, MAPLES, GATES, BALLMER, DOES MICROSOFT USE ITS MONOPOLY UNFAIRLY? PHOTOGRAPH BY CHUCK KUHN; Graph, MICROSOFT'S HEADY GROWTH Data: Microsoft Corp., Shearson Lehman Hutton Inc. CHART BY JOHN DECKERT/BW

Copyright 1989 McGraw-Hill, Inc.