Bill Gates: Behind Microsoft, Money, Malaria

by Forbes Staff

  Could McNealy, like Dibachi, be suffering from what PC guru Esther Dyson calls Bill Envy? “Just about all the guys in the business have it,” Dyson says. “It makes them feel inadequate and it makes them do stupid things. He’s the Rorschach blot of the industry. What people think of Bill tells more about them that it does about him.”

  “I don’t have Bill Envy,” McNealy quips. “I have a great wife, a nice house and I’m sure my kid is smarter than his kid.”

  “Is there Bill Envy in Silicon Valley?” Dibachi asks himself out loud. “There’s money envy in Silicon Valley, and Bill’s got a lot of money.”

  We prefer to call it “Billophobia” because it goes beyond envy and embraces fear and dislike. Does Billophobia sometimes cloud people’s judgment in Silicon Valley? Almost certainly.

  We put the question to Bill Gates himself. “There were some people in the past who were very focused on duplicating what Microsoft did and were very jealous of what we had achieved,” Gates says with a smile. “And what they did was to their own detriment. Is that repeating itself? It’s hard to say. When does it go from being pure economics or competition to being an emotional and irrational set of reactions? I guess we’ll know in 10 or 20 years.”

  The competitive struggle here is more complicated than the give-‘em-hell rivalry you would expect between Ford and General Motors. At the same time they compete, computer companies have to cooperate, or their products won’t work together. There is no one supplier that can meet all of a customer’s hardware and software needs, as did the IBM of yore.

  So why doesn’t McNealy supply Sun servers (powerful computers that stand at the hub of a network) with the popular Windows NT preinstalled? McNealy argues that succumbing to the pressure for Windows NT would put Sun at risk of degenerating into a low-margin assembler of boxes whose profits would go to Microsoft in the form of software royalties. Better to fight than to yield.

  McNealy has a plausible weapon with which to resist the Microsoft military machine: Java. This is intended as the Esperanto of computer languages, understood by most brands of hardware. McNealy and his allies have ambitious plans for Java. They’re pushing it as an operating system to compete with Microsoft’s Windows, the software that runs on 80% of today’s PCs.

  Although today’s Java is, like most new software, slow and unreliable, the anti-Microsoft crowd sees salvation in it. Longtime Gatesophobes IBM, Apple Computer and Novell, Inc. were early Java enthusiasts. Newer phobes like Corel (which competes with Microsoft in office productivity software), Oracle Corp. (the database designer) and Netscape Communications (Microsoft’s Internet rival) have eagerly signed on. L. John Doerr, the famed venture capitalist who funded both Sun and Netscape and continues to sit on their boards, has established a $100 million fund to back fledgling Java software developers.

  The Java consortium is not the first anti-Bill Gates gang. In the mid-1980s, software companies rallied around IBM’s OS/2. When OS/2 flopped, it took an assortment of application programs down with it. Lotus Development Corp., WordPerfect Corp. and Borland International all lost their dominant positions (in, respectively, spreadsheets, word processors and programming languages) because they banked on OS/2 and came around to Windows-compatible versions of their software too late. They paid dearly for their Billophobia.

  After the OS/2 disaster, IBM cooked up another anti-Gates plan: The project, temporarily named Pink, would be an entirely new operating system—one that, without changes, could run on any piece of hardware. IBM joined forces with its rival, Apple Computer, to write the new code. Motorola was enlisted to design a superfast microprocessor to show off the new operating system to its best advantage. The Billophobes embraced Pink. But Pink was never finished, and last year IBM and Apple quietly closed the doors to their software joint venture.

  More recently, an anti-Bill Gates consortium lobbied federal regulators to levy sanctions against Microsoft. They are well aware that in the old days, when a company became too powerful, its struggling rivals had often received succor from the antitrust crowd in Washington. At various times Alcoa, General Motors, IBM and, believe it or not, Pan American Airways felt the antitrust lash because they had become too dominant in their respective businesses.

  Aware of the precedents, Sun, Borland and Netscape hired antitrust lawyer Gary Reback to work the corridors of the U.S. Justice Department. Reback’s notable success was foiling Microsoft’s plan to buy financial software designer Intuit. But since then federal regulators have remained rather quiet as Microsoft has spread its reach into the Internet, cable and entertainment. But attitudes toward size and corporate power have changed, and the Clinton/Gore crowd seems more anxious to embrace Gates than to curb him.

  The fight, however, goes on. When Netscape introduced Navigator, its Internet-browsing software, three years ago, it became the core of an anti-Bill Gates consortium. PC makers preinstalled Navigator on their machines, and software vendors wrote programs to work readily with Navigator. Microsoft’s competing browser, Explorer, arrived later. By then, Netscape’s Navigator had landed 70% of the browser business.

  But if Bill Gates is good at making enemies, he is adept at finding allies when he needs them. At one point, Stephen Case’s America Online was an enemy, because Microsoft was pushing a new online business to take away AOL’s customers. Now AOL is Microsoft’s friend. Microsoft promised to bundle AOL with its latest version of Windows. What was in the deal for Microsoft? America Online agreed to drop Netscape’s browser in favor of Microsoft’s Explorer.

  Now Apple has defected from the get-Bill coalition. To get Microsoft’s $150 million and its assurance that it will continue to write software for the struggling computer maker, Steve Jobs agreed to drop Netscape’s Internet browser software in favor of Microsoft’s.

  The Microsoft/Apple investment also threatens to weaken Apple’s support for Java. McNealy is not happy. “Bill operates mainly on sentimentality, and the other thing he operates on is altruism,” he says of the Apple deal, his voice dripping with sarcasm. “He held a silent gun to the head of management and said if he doesn’t get what he wants he’ll stop writing software for [Apple’s] Macintosh.”

  Apple’s change of allegiance is only one of McNealy’s problems. Eager to make Microsoft a follower in Sun’s Java parade, McNealy offered Microsoft a Java license. But Gates proved the better negotiator: Under the contract, Microsoft has the right to “improve” upon Java in any way it wishes. McNealy has threatened to revoke the Java license if Microsoft makes changes to Java that render it incompatible with Sun’s version. Microsoft appears to have the upper hand here.

  Sun’s predicament recalls Apple Computer’s when it entered into its disastrous deal with Microsoft in the early 1980s. Desperate to get Microsoft to write office productivity programs for its struggling Macintosh PC, Apple handed over the recipe for its user-friendly operating system, notably, the graphical interface. When Microsoft came out with a copycat operating system, Windows, Apple sued. After a long legal battle, Apple lost the case: The contract had not stipulated how Microsoft could use Apple’s precious code. Sun may have invented Java, but there is a good chance Microsoft will capitalize on it.

  Oracle chief Lawrence Ellison has a bad case of Billophobia. He rarely misses an opportunity to take a swipe at Microsoft. But he’s doing more than just ranting. He is entering the desktop software business via the coming Network Computer, a $500 PC for surfing the Internet. The NC, Ellison’s nickname for the machine that will be made by manufacturers like RCA and Zenith, will run Sun’s Java and not Microsoft’s Windows. Good strategy or just spite?

  The problem is that Oracle, which sells expensive databases to large corporations, has never designed desktop software.

  Edward McCracken, chief executive of ex-Wall Street darling Silicon Graphics, is a classic Billophobe. Silicon used to coin money with its hardware and software package that allows graphics artists to produce compelling 3D animations. Nowadays the world is moving away from propr
ietary systems like SG’s and toward general purpose computers running Windows NT. If McCracken embraced NT, he could probably sell Silicon Graphics’ 3D and virtual reality software to corporations setting up commercial World Wide Web sites. He’s not about to embrace NT.

  Would Netscape have been better off as Microsoft’s ally rather than its bitter enemy? Right before Netscape’s August 1995 initial public offering, Gates approached Netscape Chief Executive James Barksdale with a proposition: The two companies would enter into a broad alliance in which they would share technology and Microsoft would buy a minority stake in the promising startup. Barksdale nixed the deal when Microsoft demanded a seat on Netscape’s board of directors. “Why would you want a spy on your board?” says Barksdale. “It’s a classic Microsoft game. They learn more about you so they can hollow you out to the core. Their motives are not pure.

  “If we had done anything differently we would have been eviscerated and minuscule. They have a winner-takes-all attitude and anybody who thinks you can buddy up to them is just plain naive.”

  Ray Noorda, the former chief executive of Novell Inc., became a Billophobe more than a decade ago and has yet to shake it. In the early 1980s Noorda took over Novell, an eccentric little computer company started by a group of talented but undisciplined Brigham Young University engineers. Noorda transformed it into the leading supplier of software for connecting office PCs. But Noorda eventually grew dissatisfied with life in Microsoft’s growing shadow.

  When Microsoft branched out into the networking market that Novell dominated, a vengeful Noorda decided to take Gates on in Microsoft territory: operating systems and applications like word processors and spreadsheets.

  In the early 1990s Novell bought two aged operating systems: Unix and DR-DOS, a clone of nearly obsolete MS-DOS, the software designed by Microsoft for IBM’s first PC. Then he purchased WordPerfect’s word processor line and Borland’s spreadsheet. A good portion of the $1.4 billion they spent went down the drain. Noorda left shortly thereafter, and his hapless successor, Robert Frankenberg, spent months trying to unload the white elephants at fire sale prices.

  That’s not the end of the story. Among the buyers was none other than Noorda. After leaving Novell, Noorda funded a group of ex-Novell employees who planned to design software for managing computer networks. Noorda saddled the young company, Caldera, with his new purchase: DR-DOS.

  Why did Noorda want the ancient operating system? Mainly to get an antitrust claim against Microsoft. The same day Caldera acquired DR-DOS from Novell, it filed suit against Microsoft, reviving many of the same charges that the U.S. Department of Justice had investigated and settled.

  “We could have just purchased a license to DR-DOS, and that’s originally what we were talking about with Novell, but by purchasing it outright, we got the right to litigate,” says Bryan Sparks, Caldera’s president. “I would have been happy with a license.”

  Borland International’s new chief executive, Del Yocam, was chief operating officer at Apple Computer in the mid-1980s. He seems to have taken personally the whipping Microsoft delivered to Apple. At any rate, he has taken up the anti-Microsoft campaign waged for years by Borland’s founder, Philippe Kahn. Borland has filed a lawsuit against Microsoft, charging it with improperly recruiting key employees. “It was something I had to do,” Yocam maintains.

  “They’re trying to kill us. I know Bill well enough from my days at Apple that we had to do something like this to get his attention.”

  Contrast the battle-scarred Kahn, who has been cured of the anti-Bill syndrome. His new company, Starfish Software, has partnered with Microsoft to make software for mobile computers.

  “If I’ve learned anything, it’s not to fight battles I can’t win. What I don’t understand are the companies that, instead of learning from the past, head straight for disaster,” says Kahn.

  It’s a real dilemma. If they embrace Microsoft, they risk getting swallowed. If they fight, they risk getting crushed.

  It’s all right out of Herman Melville’s Moby-Dick, with Bill Gates as the great white whale. What should Captain Ahab do now?

  PUTTING OUT FEELERS

  By Julie Pitta

  May 1998

  BILL GATES ONCE OBSERVED, picking up on the famous metaphor from chaos theory, “Some butterfly did the right thing for me.” Chaos theory says that a small change to a complex system can result in a large and unpredictable outcome—thus the flutter of a butterfly wing in Beijing could conceivably start air currents that might change the weather in North Carolina. For want of a nail a kingdom was lost—that’s chaos theory before there was chaos theory.

  You can explain a lot about Bill Gates’ business philosophy by thinking about chaos theory. It helps explain why Microsoft dabbles in so many different businesses, why—seemingly at random—he invests $150 million in rival Apple Computer, Inc., starts a highbrow political magazine, Slate, enters into news partnerships with NBC and takes dozens of small stakes in high-tech investments and websites. Does Bill Gates want to own the world? More likely he does not want some butterfly to waft bad currents in his direction.

  Massachusetts Institute of Technology professor Michael Cusumano is the coauthor of Microsoft Secrets, a 1995 book detailing Microsoft’s technology strategy. He explains why Gates pursues a seemingly random investment pattern. “In an area where the future is uncertain,” Cusumano says, “they throw things out there and let the market decide.”

  Contrast this with the old style of diversifying and product marketing: Before taking a new idea to market it had to be thoroughly tested. A computer simulation would take the results of exhaustive market research and determine the probability for success. As a final step, the product would be cautiously rolled out in carefully chosen test markets, the data analyzed and a go or no-go decision made.

  That’s fine if you have plenty of time. In the silicon society you don’t have that kind of leisure. Everything moves faster. What works today stops working tomorrow. Look how quickly the old Wang went from market dominance to Chapter 11. Wang had hardly established dominance in word processors than word processors were made obsolete by the PC.

  In an interconnected world, tied together by jet planes and fully wired, small changes quickly work their way through the whole system.

  Market tests are limited because they cannot test all the variables that exist in the real world. That, we suspect, is where Gates’ seemingly random investments come in. Even with all its brainpower, Microsoft can’t test all the variables. So it forms alliances with smart people who are doing things Microsoft is not or cannot.

  In such a world, planning gives way in importance to improvisation.

  “In a highly uncertain market, strategy becomes … an improvisation,” says Stanford University professor Kathleen Eisenhardt, coauthor with McKinsey & Co. consultant Shona Brown of the recently published book Competing on the Edge: Strategy as Structured Chaos. “It’s about being early to a new market and grabbing share when the profits are the highest,” Eisenhardt says.

  Procter & Gamble practically invented the old style of product development: methodical, careful. “Procter & Gamble used to spend 12 to 18 months testing a product before it would be rolled out,” says Microsoft Corp. Chief Operating Officer Robert Herbold. “That time period has been compressed to three or four months.”

  Herbold ought to know: Before coming to Microsoft he was a Procter & Gamble executive.

  Listen to Herbold’s boss, Microsoft Chairman Bill Gates, talking about how he almost missed the boat on the Internet: “[Once a technology] achieves a critical mass, it feeds on itself—everything has to be tied into that. When you have critical mass things, then you can be surprised by the timing. … You have to make sure you’ve got feelers out to see if those things are about to achieve critical mass.”

  Think then of many of the steps that Gates has taken as “feelers” rather than as investments. You’ve got to have lots of feelers or something may sneak up on you f
rom an unexpected direction. As the Internet almost did on Microsoft.

  Gates admits Microsoft wasn’t paying attention when the Internet first started taking off. Upstart Netscape Communications Corp. swept in with easy-to-use software for viewing Internet pages. Waking up and finding itself without a product, Microsoft quickly signed a licensing deal with Internet software maker Spyglass Inc. in order to gain a foot in the door. Note that Gates didn’t tolerate the not-invented-here syndrome. It couldn’t afford to wait to develop its own product. Microsoft made improvements to the Spyglass software: Today its Explorer browser is, in many ways, better than Netscape’s.

  Which is why Microsoft today is running off in so many sometimes-contradictory directions.

  Video compression is a critical technology if the Internet is to compete with television. To make sure it isn’t left out in video compression, Microsoft peddles three different Internet video technologies: It bought one of the technologies by acquiring its developer and licensed the other two. In a chaotic world, one hedges one’s bets. “Putting out feelers.”

  Is cable the wave of the future? You can’t be sure, but in case it is Microsoft made a $1 billion investment in cable company Comcast.

  Assuming that Gates had anointed cable, the market bid up cable stocks. More likely Gates wasn’t anointing anything. He was just sending out a strong feeler.

  Evidence? A few months later Microsoft promised to work with a consortium of telephone companies developing broadband Internet access over telephone lines. Better have a feeler there, too.

  Microsoft’s $425 million purchase of WebTV Networks, Inc., a Silicon Valley startup providing Internet via the TV, grabbed headlines. Less noticed were smaller Gates “feelers” in the last two years, seven small Internet startups and four other technology companies, including its $150 million investment in Apple. Whatever happens next on the Internet, Microsoft doesn’t intend to be blindsided.