Microsoft, IBM to finalize divorce Friday

By Martin Wolk
Reuters News

Seattle -- September 16, 1993 -- Microsoft Corp.'s messy divorce from International Business Machines Corp. becomes final on Friday, leaving lingering questions about future relations between the two computer industry giants.

Under an agreement between the two former allies sealed a year ago, Microsoft and IBM will not share information about any operating system software developed by either of them after this week.

Over the near term, that means Microsoft will be able to develop new features in its popular Windows and DOS operating systems that IBM will not be able to match immediately, analysts said.

That advantage could help Microsoft improve its already dominant position in the market for desktop operating software. An operating system controls a computer, allowing it to recognise keystrokes and other core commands.

IBM officials have said they have all the software code they need from Microsoft.

They expect their competing OS/2 operating system to win new converts and allow IBM to "regain control of operating systems technology," said John Dodge, executive editor for news at PC Week in Medford, Mass.

"That may be wishful thinking," Dodge said, but other analysts said OS/2 may indeed be poised to gain ground because of disappointment in Microsoft's new Windows NT operating system, typically for advanced users.

"There's a school of thought that says Windows NT is so high-end and people who thought it would solve their problems are taking a second look at OS/2," said Chuck Stegman, an analyst for Dataquest in San Jose, Calif.

He said Windows NT requires memory and power generally found only in more expensive personal computers.

Microsoft got its start, when IBM first used its DOS programmes as the brains of the IBM-PC. The explosive growth in the PC-market in the 1980s fuelled Microsoft's expansion.

Microsoft and IBM in 1985 began to develop what became known as the OS/2 operating system, which was released in 1987 in conjunction with IBM's PS/2 line of personal computers.

The relationship began to disintegrate in the early 1990s when Microsoft's Bill Gates decided to throw his support behind the Microsoft-developed Windows system, which provides a graphic interface that makes it easy for users to navigate through applications using a mouse.

Since the first version of Windows in 1985, some 25 million copies have been shipped, and most personal computers sold today have Windows pre-loaded onto them.

IBM has shipped more than 2 million copies of OS/2, which now can be used to run Windows applications.

Differences between the two operating systems are not always easily apparent to users, although both Windows and OS/2 have their adherents.

An IBM spokesman said OS/2 is faster and more powerful.

"We feel like the product really has taken off and will continue to do so," the spokesman said.

Despite the acrimonious separation, IBM and Microsoft will still have ties, said Bob Kruger, Microsoft director of business development.

For example, IBM will continue to sell its personal computers loaded with up-to-date Microsoft software, including Windows.

"We have a very good relationship with the IBM Personal Computer Co.," said Kruger.

The two companies will make a final exchange of source code Friday, with Microsoft handing over its latest work in progress, including the "Chicago" version of Windows and DOS that is expected to be ready for shipping next year.

Under their agreement IBM will pay Microsoft royalties for each copy of OS/2 it sells over the next five years, depending on how much Microsoft programming code is included. Microsoft said it does not expect much of a financial boost from the royalties, currently put at $20 to $30 per unit.

Industry sources and analysts say there are still disagreements between the two companies.

"It's unclear exactly what happens going forward," said Lou Giglio, an analyst with Bear Stearns in New York.

One question is whether IBM has the right to "reverse-engineer" its software to maintain compatibility with new Microsoft programmes. Reverse engineered software is made by dissecting another finished product and copying it without access to the original code.

Analysts have pointed out that even if IBM were to reverse-engineer its software, it would be very difficult and time consuming to figure out the necessary computer codes to achieve the desired application.

Microsoft executive vice president Steve Ballmer, speaking to reporters at a trade show in Austin, Texas, said the changing relationship between his company and IBM will affect mainly users of OS/2.

"For those people who might be impacted it means, I think, that there will be longer delays or perhaps infinite delays between the time we release new capabilities for Windows and the time OS/2 supports them," he said.

Giglio noted that the slowdown in the growth rate of the personal computer industry has increased the stakes and bitterness in the battles between Microsoft and its rivals.

"It's not exactly pretty in the software industry these days," he said.

(c) 1993 Reuters Limited