Off the ropes and fighting back

When 20,000 Microsofties streamed into the annual employee meeting last September, chief executive Steve Ballmer had to fire up the troops.

So Ballmer dipped deep into his bag of motivational tricks. On a huge video screen, he played a clip from the 1974 title fight between Muhammad Ali and George Foreman. Foreman, seven years younger, was expected to win.

But Ali was the people's choice, and the 60,000 fans broke into spontaneous chants: "Ali, bomaye!" meaning "Ali, kill him!" Finally, Ali pounced, sending Foreman to the canvas. As the video ended, the loudspeakers resounded with a new chant: "Microsoft, bomaye! Microsoft, bomaye!"

Like Ali, Microsoft has absorbed some bruising blows. "We were getting shots from everywhere. Maybe there was even a flicker of fear in our eyes," said Ballmer. Then his voice suddenly rose to a shout: "You know what I say? I say we're off the ropes!" The Microsofties roared.

Back then, it was wishful thinking - now it's looking like an understatement. Instead of the internet relegating Microsoft to the sidelines, the company has grown stronger in its PC business, gained ground in the enterprise, and fought its way to the top of the web tree.

All the while, it has made a mind-boggling amount of money: it has $30b in cash and is adding $1bn a month to its bank account.

That gives it the luxury to spend lavishly. This year, it will spend $4.2bn on research and development - more than AOL, Sun Microsystems and Oracle combined.

Now, Microsoft is about to unleash the biggest onslaught of products in its 25-year history. Hot on the heels of Office XP will come Stinger, an operating system for mobile phones, followed by the Xbox game console.

In October comes Windows XP, which chairman Bill Gates says is Microsoft's most important product since Windows 95. With XP, Microsoft can harness its products and websites, feeding users from one product into another in a chain reaction.

Test versions of XP include fast access to a browser that starts Windows Media Player. That zaps you to the MSN portal, which offers ways to sign up for instant messaging and email.

Add it up, and Microsoft's ability to elbow rivals aside is staggering. Analysts expect sales of Windows PCs to top 160 million next year. MSN has five million subscribers and 50 million monthly visitors, while Hotmail has just opened its 100 millionth account.

"The threat Microsoft poses is to turn the internet into a Microsoft town," said Jonathan Schwartz, senior vice president of corporate strategy at Sun.

Nonsense, replied Gates, insisting that Windows doesn't stifle innovation. "There's no block to people putting features on Windows," he snapped.

Instead, he sees Microsoft's products as a way to make the internet richer. He envisages a day when Microsoft software will run on any device, easily connecting people to the web, wherever they are. Once that happens, Microsoft hopes to deliver software like a steady flow of electricity, collecting usage fees that will give it lush, predictable revenues.

If everything works, Microsoft could be at every point a corporation touches the web. Since the internet is now the backbone of most computing, that puts Microsoft at the centre of all things digital. It's a huge turnabout for a company that was mocked for being late to the web. "We're not playing catch-up," said Gates. "We're back in a pioneering position."

To rivals, it's like unleashing a hungry rottweiler in a steakhouse.

To keep the lead tight, AOL Time Warner has launched a lobbying campaign, warning the US Senate that Microsoft's strategy is "the boldest, most aggressive move in Microsoft's history to leverage its monopoly to constrict the internet". AOL executive vice president Kenneth Lerer said: "It appears that Microsoft is doing all over again what it did before."

The internet revolution promised a world where thousands of companies would flourish and the web - not Microsoft - would be king. But the collapse of internet stock prices put more than 400 dotcoms out of business this year, and the remaining would-be revolutionaries are hard pressed to fight.

The war at home

In contrast, Microsoft's stock price has soared 60 per cent this year, and you can feel the old feistiness returning. During the trial, Microsoft became an industry pariah, with only its most loyal partners coming to its aid.

Burned out or lured by the internet, about 20 top managers left, including chief financial officer Greg Maffei and Paul Maritz, the architect of the new web strategy. "It was their Vietnam," said Roger Siboni, chief executive of software maker E.piphany.

Now, Microsoft claims that 86 per cent of candidates offered jobs accept, compared with 79 per cent during the dotcom craze. While industry stalwarts such as Cisco and Dell are laying off staff, Microsoft expects to hire 8000 this year.

Still, much of its success hangs on its ambitious .Net strategy. This year, it will spend $2bn on .Net technology that will make it possible for unrelated websites to talk with one another and to programs on a PC. The strategy relies on Microsoft persuading programmers to use the technology, yet many still harbour a distrust of the company.

At the same time, Windows 2000 has only begun to convince businesses that it's ready to handle the most demanding jobs. And to succeed as a web services company, it will have to get consumers to pay, while most web experiences are free.

Microsoft is undaunted. "We want to keep the pedal to the metal," said Ballmer. Indeed, Microsoft seems more aggressive than ever. In test versions of Windows XP, when consumers start up a PC for the first time, they'll see a host of Microsoft products available with one or two clicks of a mouse.

Consider the Passport service: XP prompts users to sign up the first time they log on to the web. If they agree, they'll be asked a series of questions about where they live, their email address, and their credit card numbers. Rather than fill out a new form every time a web surfer visits a site or submit a password on sites requiring it, Passport transmits the information directly, saving time and hassle.

All the pieces fit together

Microsoft's enemies portray Passport as the Trojan horse that could allow the firm to dominate the internet. Microsoft boasts 160 million Passport accounts and another 160 million new Windows PCs are expected to be sold next year.

As sales grow, it will be easier for the company to convince website owners to accept Passport. That ultimately puts Microsoft in the position to charge online merchants a fee for the service.

Microsoft executives bristle at such talk. "We have behaved consistently," maintained Ballmer. "We believe the law entitles us to continue to innovate. We thought that five years ago, two years ago, one year ago, now. We have not varied in our craft."

Other companies are expected to engineer similar technologies, but Microsoft has tremendous advantages. It boasts 5.5 million Windows developers and an array of mature server software. "Microsoft has all the pieces to make this thing go, and no one else does," said Forrester Research analyst Ted Schadler.

There's still a lot of packaged software to be sold, especially to corporations. For much of the past decade, Microsoft unsuccessfully tried to run the technical plumbing of huge organisations - the industrial strength servers that kept corporate networks humming and handled their most important transactions. Windows 2000 Datacenter Server, released last year, began to change that.

The market for Windows servers grew 32 per cent last year to $13.9bn, while sales of servers running rival Unix grew only 14 per cent to $29bn. The software impresses even former nay sayers. "The giant is back," said Gary Bloom, the former number two at Microsoft arch rival Oracle.

The key to winning more corporate business will be .Net. Microsoft aims to provide the technology that will turn websites and software into virtual Lego. If it comes together as planned, firms will be able to snap sales, accounting and inventory software programs together so that customer orders automatically update balance sheets and set off requests to replenish supplies.

One of the first converts is Matthew Dunn, chief information officer at Canadian skiing operator Intrawest. He wanted to set up a single site where skiers could book holidays to any of its resorts, arranging for lodging, lift tickets, ski rentals and classes.

But he also wanted to tie those orders back into Intrawest's programs that track customer relationships and accounting. It proved tricky. Dunn ran into glitches with Oracle and BroadVision software. But using early versions of .Net, he had the system running in 90 days.

Intrawest did about $1.5m worth of business online last winter, even though half of its destinations weren't tied into the new system. Dunn expects the site to generate $10m.

With Microsoft's need to grow, there's hardly a sizeable market it can ignore.

Next up: programs for small and medium sized businesses. For years, Microsoft left that market to others, content that accounting, human resources and procurement applications would run on Windows. But last December it dived in with the acquisition of Great Plains, a leader in finance software, for $1.1bn. But accounting is just the first step.

Microsoft is now cobbling together a suite of applications that handle everything from accounting to procurement. What it doesn't build, it will buy. This is how it conquered the desktop market. Ultimately, it plans to plug these applications into bCentral, its small business website, and offer the software as services.

Great expectations

Who should be scared? UK financial software specialist Sage, for one. The niche software maker went head-to-head with Great Plains and did well. Now it faces a giant. "Is it a gorilla? Absolutely," said Sage chief executive Paul Walker. He has confidence, though, in the ability of Sage's products to succeed.

But that's what the execs at WordPerfect and Lotus thought when Microsoft set its sights on the word processing and spreadsheet markets.

Microsoft has stumbled before. Take interactive TV: in the past three years, it has invested $8bn to secure a spot for its set-top box software. But after a decade of tinkering, its software is hard to find. Only one cable company is using it: Globo Cabo in Brazil.

But when Microsoft targets a market, it perseveres. Its MSN portal languished for nearly six years - today, it's the second-most popular portal on the web. It shows the same persistence when it comes to research.

Even while its latest products are waiting on the launch pad, it pours money into research and development in search of the Next Big Thing.

Gates is so excited about the future of software he stepped down as chief executive 18 months ago to become chief software architect, letting him spend more time with the company's researchers. "The whole idea of valuing the user's time; that's the Holy Grail," he said, jumping out of his seat with excitement.

A lot of these markets remain a gleam in Gates's eye. But time and again Microsoft has shown that it has the focus and the financial staying power to get it right eventually. That could mean we'll hear echoes of "Microsoft, bomaye!" for years to come.

Copyright 2001 by the McGraw Hill Companies. All rights reserved. Business Week www.business-week.com/technology.