Microsoft Corp. to Scrap OS/2, Refine Windows

G Pascal Zachary, Staff Reporter
The Wall Street Journal

January 28, 1991

Microsoft Corp., the biggest supplier of software for personal computers, is dropping OS/2, a software program that four years ago it declared would replace DOS as the system that controls the basic operations of the PC.

In its place, industry executives said, Microsoft plans to build its future operating software around Windows, a program that displays information in pictures and menus instead of strings of characters. Since an updated version was released last May, Windows has caught on like wildfire, and practically every important PC application has been or is being redone to make use of Windows' graphical features.

Microsoft said it will offer details tomorrow at a meeting at its offices in Redmond, Wash. But in response to questions, Steve Ballmer, who runs the company's system software division, said "there are elements of truth" in the idea that Microsoft was swinging all its marketing efforts behind Windows. Mr. Ballmer declined to elaborate, but executives familiar with Microsoft's plans said it will salvage much of its OS/2 code by incorporating it into future Windows programs.

Microsoft's action further strains relations with its longtime ally, International Business Machines Corp., the biggest PC maker. IBM, based in Armonk, N.Y., has been lukewarm in its support for Windows, but has been a major booster of OS/2, even to the point of assuming a central role in its design last September. Still, Microsoft executives privately have hinted for many months that the surging popularity of Windows meant the death-knell for OS/2, a technically impressive program that has never caught on with customers.

James Cannavino, who heads IBM's desktop computer operations, conceded that differences exist between Microsoft and IBM on the question of future PC operating systems, but he said the partnership between the two companies isn't threatened. Mr. Cannavino said IBM is committed to delivering fresh versions of OS/2 and added that "as we start attracting more customers (to OS/2), Microsoft will see (OS/2) as an opportunity."

Others doubt that will happen. "OS/2 was a millstone for Microsoft," said Ruthann Quindlen, who specializes in software deals for investment banker Alex Brown. "Now they want to campaign on behalf of something else."

The way Microsoft markets its operating software has sparked controversy for years. Some rivals complain the company uses its position to strengthen its business in applications -- word-processing, spreadsheet and other programs. Indeed, Microsoft, which years ago derived most of its revenue from DOS-related products, now is a huge supplier of applications.

Others accuse Microsoft of having tricked its rivals into spending huge sums to develop applications for OS/2, while all along believing Windows would replace DOS as the standard for PC software. "I've been saying all along that Microsoft's strategy is really Windows," said Phillipe Kahn, chief executive officer of software maker Borland International Inc., Scotts Valley, Calif.

Microsoft repeatedly has insisted it hasn't deceived anyone about its plans, but many in the industry think Microsoft never fully supported OS/2, but agreed to develop it as a concession to IBM. Now that Windows has caught on, Microsoft wants Windows applications to work with any future replacement for DOS. Microsoft had been calling this future system "portable OS/2." Now it's known internally as "NT Win 32," which refers to new code that enables Windows to process 32 bits of data at once rather than 16 bits.

A version of OS/2 -- to be released later this year by IBM -- also will have 32-bit power. But OS/2 is designed for computers built around chips made by Intel Corp., Santa Clara, Calif., while Microsoft now promises that future Windows systems will run on any computer hardware.

In building its future operating system, Microsoft isn't starting from scratch, but will salvage a great deal of the code it has developed for OS/2. So extensive is Microsoft's reliance on OS/2 code that Fred Gibbons, chief executive officer of Software Publishing Corp. in Mountain View, Calif., concludes, "Win32 is simply OS/2 by another name."

Not quite. A key part of OS/2 is Presentation Manager, another software menu system. Microsoft is scrapping Presentation Manager in favor of it Windows menu in future operating systems; that stings Lotus Development Corp., Cambridge, Mass., and other Microsoft rivals who invested heavily in writing software for Presentation Manager. It also hurts IBM, which has told many of its largest customers that the combination of OS/2 and Presentation Manager is a big part of its effort to neatly tie together PCs with its mainframe computers. Indeed, at press time, IBM -- concerned about a backlash from its own big accounts -- was lobbying Microsoft to speak in support of Presentation Manager tomorrow, one software executive said.

"Basically, Presentation Manager is a dead-end for software developers," said Rick Sherlund, a Goldman Sachs analyst.

People in the industry say that Microsoft's strategy generally should benefit PC owners, who will be assured that applications they buy today will work on future combinations of hardware and software. "Windows has won a central role in the (PCs) of the future," said Paul Grayson, chief executive of Micrografx Inc., a Richardson, Texas, software company.

Nevertheless, Microsoft's decision to bind itself more tightly to Windows could backfire if it pushes IBM into the arms of another software supplier. Big Blue already has cut a deal with a Microsoft rival to produce basic software for a new class of computers without keyboards. And last year, it struck a deal with Metaphor Computer Systems Inc. to jointly develop an entirely new approach to operating software for PCs.

Mr. Cannavino, of IBM, said it was too soon to tell where Metaphor, based in Mountain View, fits into future plans, but the partnership may result in an alternative operating system that doesn't have "the liabilities you collected over the past 10 years" with DOS and Windows.

Many industry executives think IBM's ties to Metaphor and other software developers give it leverage over Microsoft -- leverage IBM needs if it is to convince Microsoft that it should continue to support standards such as Presentation Manager, which is important to some large IBM customers. Others, however, argue it's too late for IBM to set the standard for PC software.

"Microsoft is now driving the industry, not IBM; the game is over," said Mr. Gibbons, of Software Publishing. He added that Microsoft had won for the right reasons, because it is "more of a champion of the customer, so they won the game on fundamentals, not on Machiavellian techniques."