A Software Whiz Kid Goes Retail

Information Processing

Software

Business Week

May 9, 1983

Over the past eight years, nearly every major personal computer maker -- big names such as Apple, International Business Machines, and Tandy -- has trekked to Bellevue, Wash., to seek advice and buy software from William H. Gates, the founder and chairman of Microsoft Corp. Simply put, the reason for such a following is that 27-year-old Gates "is a very brilliant individual," says Jon Shirley, a vice-president of Tandy Corp.

Despite Gates's youth, his company is one of the pioneering old-timers in the fledgling personal computer business. In 1974, while studying mathematics at Harvard University, Gates decided to drop out and start Microsoft. The business took off in 1977 when Tandy hired Gates to develop some of the software for its Radio Shack TRS-80 personal computer. In 1981 the company got an even bigger boost: International Business Machines Corp. selected Microsoft software for its new Personal Computer. This year 40% of all personal computers will be shipped with Microsoft software, estimates Portia Isaacson, president of Future Computing Inc.

That will send the privately held company's revenues soaring to an estimated $70 million this year, up from $32 million in 1982. Microsoft is so profitable that it intends to finance its growth from retained earnings. In fact, Gates does not expect to go public for several years. To maintain that rapid growth, Gates is radically reshaping his company and its market strategy. Most important, he is about to diversify by going after a new class of customer, the individual end user. He says his goal is "to be a one-stop supermarket for the [personal computer] software of the future." He hopes to gain a big share of the personal computer software market, which market researchers at InfoCorp expect to soar from $3.5 billion this year to $9.9 billion by 1987. Says Jean Yates, an industry consultant: "Microsoft is positioning itself for a shot at the No. 1 spot."

THE HOTTEST TREND

To reach the growing horde of consumers who are using personal computers, Microsoft expects early in May to introduce an array of applications software -- programs that tell the computer how to perform specific tasks, such as financial analysis or word processing. The company began moving in this direction six months ago with Multiplan, a "spreadsheet" program for financial analysis.

True to form, Gates wants to lead the market in the hottest trend going in personal software now, the so-called integrated software that combines multiple functions -- filing, business graphics, and a spreadsheet, for example -- into one easy-to-use program. Several of these innovative products are due to go on sale shortly, including Apple Computer Inc.'s Lisa and VisiCorp's VisiOn. Gates expects to introduce his integrated software sometime this summer.

Applications software could reach 40% of the company's sales within a year, predicts James C. Towne, Microsoft's new president. To become No. 1, Microsoft will have to beat out the current applications software champion, VisiCorp -- which sold $35 million of its programs last year -- as well as such established competitors as MicroPro International and Digital Research Inc.

But the new diversification effort will take Microsoft into risky markets in which it has had little experience selling. Its primary thrust until now has been convincing savvy computer makers of the virtues of its systems software -- the instructions that control a computer's basic operations. To sell its new applications software, however, Microsoft will have to learn how to sell to neophyte users in a retail market. "Technical expertise is not enough to ensure success -- you've got to be good at marketing and sales," says David L. Ferris, a San Francisco software consultant. And, he warns, "Microsoft has yet to prove itself in those fields."

Gates is counting on Microsoft's dominance in systems software to speed its move into applications software. To have their systems software ready on time, personal computer manufacturers currently furnish Microsoft with a prototype many months before a new model goes on the market. Gates estimates that this lead time will allow him to offer the applications software for such new machines as much as six months ahead of his competitors. Microsoft reportedly is now working on software for several Japanese computers rounded up by Kazuhiko Nishi, the company's parttime vice-president.

MORE MATURE

Competitors, however, question whether Microsoft can move fast enough, even with such a time advantage. "I wonder whether there's enough key management talent to move in all these different areas," says Mitchell D. Kapor, president of Lotus Development Corp., an applications software company. Until recently, Gates ran his company almost single-handedly. And while Gates is widely respected for his intellect, he is frequently described as immature. "He can be difficult [to work with] at times," agrees Tandy's Shirley.

To cope with the management problems created by growing into a large company, Gates in June recruited Towne, a veteran executive of Tektronix Inc., to become president. Insiders report that the two men are clashing over decision-making responsibilities, but Towne maintains that the tension is not serious. "We are going through a transition process from a centrally organized outfit," he explains, "to something where others have more responsibility."

Towne, 40, has already brought a more mature management style to a company where the average age is 25. For example, he instituted monthly profit-and-loss statements. He is also delegating responsibility in product development and marketing. Microsoft recently hired two experienced managers, one to head a new retail product group and the other to run a group that handles products for equipment makers. A product-marketing group has been established, as well.

So far, the company's new push into the applications market is paying off. Its Multiplan program is now No. 5 on one software best-sellers chart. And dealers say that Gates is learning quickly how to do business with them. "Microsoft gives me fantastic support," says Susan J. Bohlmann, manager of Quest Computers Inc., a San Francisco computer store. Now, she adds, "we look forward to new products from Microsoft."

GRAPHIC: Picture, MOST OF THE TOP PERSONAL COMPUTERS HAVE SOFTWARE FROM GATES'S MICROSOFT