New Tech Markets May Pose Greater Threat Than Court

Monday’s ruling by a U.S. District Court judge that Microsoft Corp. operates an illegal monopoly raises many questions about its long-term future.

But with many of the company’s existing businesses struggling, there already are doubts about how well Microsoft will fare in the Internet age.

Microsoft built its empire on the strength of its operating systems--DOS followed by Windows, which now runs about 90% of the world’s personal computers--and its related business-productivity programs. However, the software giant has fared far less well in 17 other categories of software it makes, according to the Framingham, Mass., researcher International Data Corp.

Microsoft, for example, has 9% of the PC game market, 6% of the market for firewall security software, and only 2% of the networking software business.

And software is increasingly being given away as a loss leader for Web-based services and advertising. Meanwhile, Microsoft’s core PC products are less bankable in the long run, because of the surge in cell phones, hand-held computers and growth of other Internet-linked appliances, as well as programs or services stored on the Internet.

“Microsoft is tied to a model that says for every machine you have a [sale]. But [today’s model] says for every person you have a subscription,” said Rob Enderle, an analyst with Norwall, Mass.-based Giga Information Group.

Microsoft’s efforts to reinvent itself as an Internet company are viewed by many as half-hearted, because the content and services offered online are rapidly assuming greater long-range importance than desktop software, said Paul Saffo, a director of the Institute for the Future in Menlo Park, Calif.

Granted, Microsoft generated nearly $20 billion in revenue last year with sales of Windows operating systems accounting for 44% of the take. Desktop applications such as word processor Word and spreadsheet Excel combined for another 44%. Microsoft has also used its monopoly power to build its Internet Explorer into the most popular tool for browsing the Web.

And Microsoft will remain a force to be reckoned with for years to come, analysts agree. Even if the company is ultimately broken into parts by the antitrust action, each smaller company might become a major player in a remade technology landscape.

But historically, Microsoft has succeeded not by being the industry’s top innovator. Rather, it has acquired rivals to absorb their technologies or copied them with an army of software engineers, then deploying its vast marketing muscle and monopoly power from its operating system to overtake competing products.

If Microsoft continues to rely on its operating systems for the bulk of its profit, it will face trouble down the road, said Dan Kusnetzky, vice president of systems software research for IDC.

When corporate customers go shopping for an application like a database, they select the database program they like best and then select an operating system that can support it.

If the customer chooses Microsoft’s database program, SQL Server, then they have to run it on a Microsoft operating system. But if the customer picks a database from Oracle Corp., there are numerous operating systems to choose from--and most of them cost far less than Microsoft’s Windows NT or Windows 2000, Kusnetzky said.

“[When] Microsoft can’t use their monopoly they tend to fall behind,” said James Barksdale, former chief executive of Microsoft’s Internet browser rival Netscape Communications, and a key prosecution witness in the antitrust trial.

Some support for that argument can be found in Microsoft’s long struggle to compete in personal-finance software. Because of the success of Quicken, the flagship product from Intuit, Microsoft introduced a rival program called Money. But when Microsoft failed to make a dent in Intuit’s market share, in 1994 it decided to simply buy its rival.

But federal antitrust officials sued to block the Quicken deal, and Microsoft called off the merger in 1995. Since then, Microsoft’s Money market share has dropped from 22% to about 6%., while Intuit’s Quicken has maintained more than 70% of the market, according to market research PC Data in Reston, Va.

In another large arena, PC games, Microsoft ranks only seventh with 5% of the market, according to PC Data. In educational software, Microsoft is also ranked seventh with a mere 1.2% market share, compared to the 45% share held by Mattel Interactive and the 23% held by Havas Interactive.

And even its Windows crown jewel is facing a meaningful threat from Linux, a free operating system that has rapidly claimed a 25% share of the fast-growing market for servers that operate networks of computers--an overnight success that took the industry by surprise.

That soaring popularity has stimulated increasingly independent postures by Microsoft’s most important customers, the leading PC vendors, most of whom now offer Linux as an option along with Windows.

Even Intel, Microsoft’s key ally in PC development, has funded several Linux projects and companies.

The trend toward alternatives to Windows is being duplicated on Internet appliances.

The booming popularity of hand-held organizers, led by the Palm, triggered Microsoft’s entry into the field. Microsoft’s product is Windows CE--a stripped down version of its PC operating system also sold for interactive TV.

But critics say that Microsoft CE requires more costly, powerful hardware than competing systems. Partly due to this problem, the Palm hand-held computer outsold CE-based rival devices by more than 2 o 1 last year in the U.S., according to San Jose-based Dataquest.

In the interactive TV market, Microsoft is making up for CE’s deficiencies with an open checkbook, analysts said, by acquiring equity stakes in cable companies with the understanding that those companies will use CE on their interactive set-top boxes.

But many observers say that the dizzying pace of change makes a checkbook strategy for innovation a losing battle. There is simply too much money out there, and Microsoft’s sway over where it is spent is waning.

“Two or three years ago you couldn’t have a meeting without considering what Microsoft was up to in order to partner or stay out of its way,” said Roger McNamee, a venture capitalist with Integral Capital Partners. “Now the far greater concerns are Yahoo, AOL and Cisco,” among other Internet leaders, he added.