Computer Feud Enters a New Phase

By John Markoff
The New York Times

Redmond, Wash. -- May 26, 1992 -- Once best friends, now quarrelsome enemies, Microsoft, the nation's largest software company, and I.B.M., the largest computer company, are edging toward a much wider war. The battlefield is the heart of the International Business Machines Corporation's market: the data-processing centers of Corporate America.

The Microsoft Corporation, which dominates the personal computer business, has invested $40 million and spent five years developing an operating system -- the software that controls computer operations -- that may make it a force in commercial computing and the fast-growing work station business.

The program, the subject of industry chatter for more than two years, is known as NT, for new technology. NT is scheduled to be given to outside software developers who write applications programs in July and, if all goes well, to be released commercially in early 1993.

Microsoft's Hope

Microsoft hopes NT will provide a framework for essential programs like those that perform payroll, accounting, inventory and other business computer applications. If Microsoft is right, success will come not only at the expense of I.B.M.'s latest version of its OS/2 operating system, which was released in March, but from its more expensive mainframe and minicomputer machines as well.

At the core of the NT project is a team of almost 100 programmers in Redmond led by David Cutler, a software designer who many people believe is Microsoft's foremost weapon in its challenge to I.B.M.

At Digital Equipment during the 1970's and 1980's, Mr. Cutler was legendary as one of the nation's most prolific and successful software developers. There he engineered Digital's VMS software, the basis of Digital's successful attack on I.B.M. in business computing during the mid-1980's.

Frustration With Digital

A protege of Gordon Bell, a leading computer designer, Mr. Cutler sought to distance himself from Digital's corporate politics after Mr. Bell left the company a decade ago. Still working for Digital, he moved a team to the Seattle area and began designing software and hardware around chips for reduced instruction set computing, or RISC.

In 1988, Digital decided to build work stations based on a competing chip made by Mips Computer Systems Inc., leaving Mr. Cutler and his team frustrated.

With little difficulty, William Gates, Microsoft's chairman and co-founder, was able to woo them from Digital.

It was a good match. Mr. Cutler, 50 years old, who keeps his hair short and neatly trimmed, may not look like the young programmers, some of whom wear their shoulder-length hair in pony tails. But they all share the take-no-prisoners tradition at Microsoft.

His current team includes Leif K. Pederson, NT Windows development manager; Lou Perazzoli, software engineering manager, portable systems; and David M. Thompson, development manager, portable systems.

No Time for Interviews

Mr. Cutler would not sit for a formal interview, preferring to spend time on his passion -- writing software. In contrast to many old hands in the industry who leave actual coding to a younger generation once they become managers, he has written the crucial kernel of his new program almost single-handedly.

"He's one of the classic software engineers who has no formal computer science training," said Roger Heinen, a vice president in charge of Macintosh software at Apple Computer, who was Mr. Cutler's colleague for many years at Digital. "He's an iconoclast and he has rough edges, but he hardly ever makes mistakes."

While NT is at least a half-year away from shipping, it has already attracted the attention of corporate customers, and Microsoft has prepared a group of 100 software "evangelists" to try to persuade companies that have written their programs for I.B.M. computers and Unix work stations to rewrite them for NT.

"I've been extremely surprised by the number of large corporate customers that take NT seriously," said Patricia Seybold, president of the Patricia Seybold Group, an industry consulting firm in Boston.

Falling Price of Hardware

Increasingly in recent years, as computer hardware has fallen in price and become more of a commodity, operating systems have taken center stage in the industry wars. Mr. Gates has likened them to the railroads of the information age. His message is simple: The company that wins the coming 32-bit operating system war will control the computer industry.

"NT represents the end of the dichotomy between what's a PC and what's a work station or a mainframe," Mr. Gates said.

But positioning NT is a delicate challenge for Microsoft, which is trying to straddle the desktop and commercial markets. The company is anxious to avoid the fate that befell OS/2 when it was introduced by Microsoft and I.B.M. in 1986. Incompatible with existing MS-DOS software, the program was largely ignored by computer users.

Now, Microsoft officials say NT will eventually be widely used as a desktop PC operating system, but they acknowledge that few desktop machines are powerful enough to run the program, which will require 8 megabytes of memory and 100 megabytes of hard disk space.

So, the strategy is to reach far beyond desktop technology. The program is both scalable and portable -- industry jargon that means that it can handle computers based on not just one processor chip but clusters of several and that it can easily be modified to support many different types of computers.

"NT is targeted at the core of I.B.M.'s business," said Steven Ballmer, Microsoft's executive vice president.

Mr. Ballmer, a longtime Microsoft employee who attended Harvard with Mr. Gates, acknowledges that when NT is introduced it will at first be little more than a niche business.

Yet, Microsoft's persistence and staying power are an established fact. Mr. Gates first introduced his Windows program in 1983. The program was generally ignored and did not become a best seller until nine years later, when Microsoft introduced it for the third time.

System Shows Its Age

NT is crucial to Microsoft's strategy because its 11-year-old MS-DOS program is showing its age. The software publisher is under pressure to respond to I.B.M.'s OS/2, which has a number of modern features -- most notably the ability to run several programs at once efficiently, known in the industry as multitasking.

Many software executives expect the introduction of NT to be a painful process for Microsoft. They point to the high cost of I.B.M.'s agonizing difficulties in trying to ship a blemish-free version of OS/2 2.0. The program was delayed numerous times before it shipped in March.

Competition among 32-bit operating systems is likely to be far more punishing than what Microsoft has experienced in the PC market, many executives say, and the company will have added difficulty because it will not be first to market.

Crowded Playing Field

In addition to I.B.M.'s OS/2, other high-powered operating systems are on the playing field. I.B.M. and Apple Computer have a joint venture called Taligent that is completing a radical new operating system called Pink. Apple has its own System 7 for the Macintosh, and Sun Microsystems has Solaris. Unix Systems Laboratories and the Novell Corporation will announce a new version of Unix for PC's and work stations later this month. In addition, Next Inc. has its own version of Unix that in many ways is the technically most advanced operating system today. All have a lead on Microsoft and are serious about grabbing a share of the future operating-systems market.

"Microsoft is coming in to a world that is already fragmented," said Richard Shaffer, editor of Computerletter, an industry newsletter published by Technologic Partners in New York. "It's a disadvantage."

Microsoft had hoped to draw many of the competing operating systems together into a proposed consortium called the Advanced Computing Environment, or ACE. The idea was to marry both Intel and RISC chips, and NT and Unix operating systems into a single standard, but the effort collapsed earlier this year because of industry bickering.

Microsoft says it will have access to Corporate America, where systems must be sold with sophisticated support and service, through its alliance with the Digital Equipment Corporation, which is planning on marrying the NT operating system with its new Alpha microprocessor chip, on which the company is betting heavily for future sales.

But Digital, which built its business on David Cutler's VMS operating system in the 1980's, has stumbled badly in the last year, largely because it has sent its customers a confused message about what its future plans are and because its VAX minicomputers have lagged behind RISC systems in processing power.

For its part I.B.M. professes to be unworried about the pending competition. "We have evaluated NT, and what we have seen so far has not made the cut," said Lee Reiswig, the I.B.M. executive in charge of OS/2 development.

From their former alliance the two companies have a software joint licensing arrangement, so I.B.M. has been able to review NT as it has been developed. Indeed, several I.B.M. software experts are still members of the NT team in Redmond.

But that may soon end, and Microsoft executives have been quietly telling industry software developers that I.B.M. will be unable to follow future Windows advances after the summer of 1993, when the code-sharing agreement is scheduled to expire.

Mr. Gates says that without the ability to offer Windows compatibility in the future, I.B.M. will be boxed in because it has been unable to persuade the software industry to write applications for OS/2.

The final break in the relationship cannot come any too soon for Mr. Gates, who says that I.B.M. appears to be in disarray.

"Nothing makes me madder than the notion of somebody taking my code and competing with me," he said.

GRAPHIC: Photo: Dave Cutler, seated, team leader of Microsoft programmers, with team members Leif K. Pederson, left, Lou Perazzoli, center, and David M. Thompson, at Microsoft's offices in Redmond, Wash. They are developing the NT, or new technology, program to compete with I.B.M.'s OS/2 system. (Therese Frare for The New York Times)

Graph: "A Challenge for I.B.M."

Microsoft's next operating system, NT, will be able to run not just on personal computers but also on work stations and mainframe computers, making it easier for customers to break the I.B.M. hardware habit and buy other companies' machines.

I.B.M. 1991 Revenues By Segment (In billions, excluding specialized sales to Federal agencies)

Software, including operating systems    $10.52
Printers, disk drives and other peripheral equipment    $10.47
Personal computers    $8.51
Services, financing, and other sources    $7.75 Maintenance    $7.41

(Segments expected to face increased competition because of NT)

Mainframes and other large computers    $14.95
Technical work stations    $3.22

CORRECTION-DATE: May 28, 1992, Thursday

An article in Business Day on Tuesday about the rivalry between the Microsoft Corporation and the International Business Machines Corporation misstated the amount of money invested by Microsoft in developing an operating system intended to make it a force in commercial computing and in the work station business. It is $40 million, not $400 million.

Copyright 1992 The New York Times Company