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There were others, though, who argued that IBM was a victim of the microprocessor revolution that began with the world’s first personal computer, the Altair, and that it had sown the seeds of its own destruction when it had handed the operating system contract for its first PC to a guy named Gates. Further, this argument went, giving the PC an “open” architecture was a critical mistake.
In fact, IBM had no choice, for in 1980, its engineers had to turn to outside companies like Microsoft and Intel in order to get a personal computer into the marketplace quickly. Designing a closed system would have required years of work.
A more convincing argument was one raised in the book Computer Wars: How the West Can Win in a Post-IBM World (Random House, 1993). Authors Charles Ferguson and Charles Moore held that the roots of IBM’s decline began when it failed to demand the source code for DOS from Gates. Thus, each new upgrade had to be purchased from Microsoft, which maintained control of the most critical piece of software in the PC industry.
In the mid-1980s, industry talk said that Microsoft and IBM were about to split, but in August of 1985, they signed a long-term joint agreement that guaranteed the continuation of DOS and IBM. This followed months of speculation that IBM was mobilizing to develop its own proprietary operating system for its PC line. According to industry insiders, there were internal discussions within IBM about going it alone, but in the end the company decided to stick with Microsoft. At the time, Gates said it was “the biggest contract” Microsoft had ever signed.
The reason Gates had won, though, was that he stubbornly refused to deliver the DOS source code to IBM. In a key meeting with the IBM brass at Armonk, New York, the young Microsoft chairman had refused to back down.
But perhaps IBM’s decline was inevitable. Software, not hardware, now drove the computer industry. And by being smart, opportunistic, hard-working, aggressive, devious, and just plain lucky, Gates had cornered that market.
On January 26, 1993, one day less than a week after IBM’s market value fell below that of Microsoft’s, Big Blue’s board of directors solemnly took their seats inside the company’s glass skyscraper on Madison Avenue. Although the timing of the board meeting had nothing to do with the fall of IBM’s market value, the end had come for Akers, and he knew it. But the old fighter pilot refused to be shot down. He proposed that he “retire” as chairman, then left the room while board members considered his offer. It was quickly accepted.
The search was then on for a new chairman, a Moses who could lead IBM out of the desert and into the Promised Land. Mitch Kapor, the founder of Lotus, was quoted as saying that Bill Gates would be the best choice to replace Akers as IBM chairman. Gates, his old rival said, had “the right combination of talent and ruthless ambition.” That take-no-prisoners attitude had made Gates the most hated man in the industry and Microsoft the most feared competitor—some would say predator.
Gates, who had started out as only a low-level soldier in the information age revolution, now towered over the industry like a colossus. He had gained the kind of power and influence over an industry that John D. Rockefeller once held over America’s oil industry at the turn of the century. Like a high- stakes player at a Vegas craps table, Gates was on a roll. Both his fame and his fortune were growing at an astronomical rate.
The title as America’s richest person had officially been bestowed on Gates a few months earlier, in October 1992, when Forbes published its closely watched list of the 400 richest people in America. The magazine put Gates’s net worth at $6.3 billion, or a billion or so dollars more than his closest challenger, Metromedia owner John Werner Kluge. Gates had at least $2 billion more than the third name on the Forbes list, that of his good friend Warren Buffett, who had made his fortune in the stock market. But not even Forbes really knew how much Gates was worth. The $6.3 billion figure was the result of a simple calculation, arrived at by multiplying the number of shares of Microsoft stock Gates held by the stock’s selling price on Wall Street. Gates, however, was beginning to diversify, selling off nearly a half billion dollars of his stock each year, making investments that only a select few people knew about. And it was a pretty safe bet that Gates was making deals that were not losing him money.
Still, even the conservative $6.3 billion was an impressive figure, and writers and reporters who covered Gates and the computer industry did some calculating of their own to find new and colorful ways to express just how much money that was. One enterprising reporter for Forbes calculated that if Gates spent all his money on Rolls Royce Silver Spurs, they would stretch bumper to bumper from Seattle to Vancouver, British Columbia, a distance of some 130 miles. A writer for Fortune figured that Gates could buy an entire year’s production of his 99 nearest competitors, burn it, and still be worth more than tabloid media mogul Rupert Murdoch or Ted Turner, owner of Turner Broadcasting.
Along with its leader, Microsoft was on a roll, too. The company’s stock continued to rise toward Pluto. Its Windows program was selling a million copies a month. By early 1993, Windows had replaced DOS as the biggest-selling application of all time. Together, the programs brought in about $ 150 million a month for Microsoft. Its spreadsheet and word processing applications were also generating cash at record rates. Excel, first released for the Macintosh computer in 1985, was now the best-selling spreadsheet in the industry, well ahead of faltering spreadsheet pioneer Lotus. Sales of Microsoft Word for Windows were ahead of those for WordPerfect for Windows. Like a giant collapsing star, Microsoft was sucking in everything around it, including most of the software industry’s money. It had become the Energizer Bunny on steroids, the company that kept going and going and going, hauling in money by the dump-truck load while others Were laying off employees and watching profits shrink.
By the end of 1992, Microsoft had captured an astounding 44 percent share of the software market, while its closest competitors either held their position or lost ground. (Microsoft had 29 percent of the market at the end of 1991.) In second place at the end of 1992 was Lotus Development Corp., with 11.7 percent, down from 13 percent in 1991. WordPerfect remained in third place at 8 percent. Dataquest, the leading keeper of statistics for the software industry, put Microsoft’s 1992 revenues at $3.4 billion. Lotus, producers of the popular Lotus 1-2-3, had revenues in 1992 of $894 million, according to Dataquest, which was the equivalent of just 26 percent of Microsoft’s market share.
Neither Microsoft nor Gates was showing any signs of slowing down. Microsoft had hired 2,500 people in 1992 and planned to hire about the same number in 1993, which would bring its worldwide workforce to about 15,000. The company was now being called “Big Green” by some in the industry, not so much for the evergreen trees that dotted its sprawling Redmond campus, but for all the money the company was making, and because it was starting to act a lot like Big Blue of the 1970s.
“Microsoft is the IBM of the ’90s and uses exactly the same marketing tactics IBM used to,” Philippe Kahn, chairman of Borland International, told Business Week for a cover story on Gates that hit the newsstands in February. The cover asked, in large type, “Microsoft: Is It Too Powerful?”
As he talked about the IBM job with Thomas Murphy in his office that day, soon after Akers had submitted his resignation, Gates immediately made it clear he was committed to Microsoft and was not interested in the job. He then turned the job interview into a critique of IBM. Gates recalled that Akers had visited Microsoft several years earlier and they had talked about how difficult it was for IBM, because of its size, to keep up with the challenges presented by smaller, more focused competitors. Gates told Murphy that IBM had not kept pace with the fast-changing computer industry, and that in order to pull ahead, IBM needed to break up into several smaller firms.
Changes were coming fast, all right, so fast that some companies, unable to respond quickly enough to new markets, might never see the twenty-first century. Gates, always afraid of the fall, knew the pitfalls that lay ahead for Microsoft.
“We are scared all the time,” he had told an audience celebrating the twenty-fifth anniversary of the University of Washington’s computer science department. “We’re always saying, ‘Is this the day we’ve reached our peak?’ ”
For a clear and present reminder of what could go wrong when a great company didn’t maintain the quick pace set by the industry, Gates needed to look no further than the headline of the day and troubled IBM.
Gates would later say that the phenomenon of the Internet had first shown up on his radar screen in April 1993 during one of his “Think Weeks.” But he did not surf the Net for the first time until another one of these weeks later that year in October.
Gates spent these Think Weeks alone, using the time to read, write company memos, study the competition, and map out Microsoft strategy. It was a tradition that he had started in Albuquerque, when he would periodically fly home to Washington State to spend a week at his grandmother’s house on the Hood Canal.
Although it took awhile before the Internet caught his attention, Gates had already started to focus on on-line services such as America Online (AOL) and CompuServe, where he believed Microsoft could gain an important foothold. In December 1992, Gates had called one of his product managers, Russ Siegelman, into his office and given him marching orders to find out everything he could about on-line services, come up with a strategy for what Microsoft should do, and report back. Siegelman was 30 years old. He had a degree in physics from MIT and an MBA from Harvard. Most recently, he had been working on Microsoft’s Windows for Workgroups.
America Online was the early star of the on-line services, with its growth-at-any-cost strategy winning hundreds of new customers with each passing day. It had such a commanding lead that Siegelman considered a Microsoft gambit that had worked before when it needed to overtake the competition: if you can’t beat ’em, buy ’em. Siegelman approached AOL Chairman Steve Case, but Case didn’t want to sell. Microsoft would have no choice but to build its own service. Siegelman came up with a plan that he figured would eventually give Microsoft a huge advantage. He proposed that Microsoft create a rival service and include it as part of Chicago, the code name for what would become Windows 95. It seemed to be a brilliant strategy—all those millions of Windows customers hooking up to Microsoft’s on-line service.
On May 11, Gates officially approved Siegelman’s plan. The hush-hush project, code-named Marvel, would later be called the Microsoft Network, or MSN.
A few weeks later, a Microsoft executive who had met with Gates to talk about the on-line project found him angry and preoccupied with another pressing matter: the government’s probe of Microsoft’s supposedly anticompetitive practices.
“Is this goddamn crap ever going to end?!” Gates had exploded at the executive.
In fact, it was just heating up.
The Trustbuster
Microsoft’s annual meeting with Wall Street analysts has become something of a predictable ritual of whistling past the graveyard, with the company posting phenomenal numbers, then parading out Gates and other executives who warn that such growth can’t be sustained forever.
The meeting with stock analysts in early August 1993 would be no exception.
The company was enjoying its eighteenth consecutive year of record profits and revenues. Quarterly revenues had topped $1 billion for the first time. For the fiscal year, profits were $953 million, up 35 percent from 1992 figures. Revenues had reached $3.75 billion, up 36 percent over the $2.76 billion the previous year. Such performance was being driven, for the most part, by the success of the company’s operating systems, DOS and Windows, now installed on nearly 90 percent of the world’s personal computers. Microsoft had shipped 30 million copies of Windows and continued to sell 1.5 million copies a month. Version 6.0 of MS-DOS, introduced earlier in the year, had sold 5 million copies. And as good as those numbers were, they could only get better. Just a few days before the meeting with the analysts, Microsoft had begun shipping Windows NT, its new-technology, 32-bit operating system aimed at more powerful computers.
Gates, still the poker player from his days at Harvard, was taking a huge gamble with NT, but if he pulled it off, Microsoft would control the operating system environment from the PC to mainframes. Said a report by First Boston of the NT development: “What Microsoft is trying to do is, in fact, the most aggressive piece of software ever written by mankind.” Microsoft hoped that NT would not just eventually take the place of DOS, but would become a sort of universal interface between all computers, big and small. NT was Microsoft’s industrial- strength operating system, or, more appropriately, its corporate- strength system. On a computer screen it looked nearly identical to Windows 3.1, but it had much more muscle. It was meant to run on more powerful workstation computers, those used in networks and in corporate America. In addition to being able to handle multitasking assignments, NT could also run on a variety of computer chips. NT had characteristics of a mainframe operating system, but it could use the wealth of software written for DOS and Windows. Users who already knew Windows and DOS would not have to learn a new operating system with NT. And Microsoft was already working on an improved version of NT, code-named Cairo, that was due out by early 1995.
“We Set the Standard,” the company’s motto since its early days on the eighth floor at Two Park Central Tower in downtown Albuquerque, New Mexico, was still at the heart of the company’s strategy for staying on top. Gates knew that in the fast-changing computer industry, all it would take was just one slip, and in the blink of an eye some other company could come along, set a new standard, and leave Microsoft to play catch-up as a second-rate software company.
Gates had been prepared to put the usual spin on Microsoft’s performance over the previous quarter when he addressed the analysts and reporters. But shortly before the meeting, he got word from Microsoft’s general legal counsel, William Neukom, that the United States Department of Justice had decided to become involved in the investigation of Microsoft by the Federal Trade Commission. Less than two weeks earlier, the FTC had deadlocked in a 2-2 vote on whether to take action against Microsoft. Gates had flown to Washington, D.C., before the vote to personally lobby the commissioners. The deadlock represented a victory to Gates. Surely the FTC would not continue to waste taxpayer money on its probe, which now was nearly three years old? The commission also had deadlocked when it met to consider action against Microsoft in February.
There had been speculation in the media whether Anne Bingaman, the Clinton administration’s new head of the Justice Department’s Antitrust Division, might take over the case. But few lawyers familiar with the inside workings of Washington believed that would happen. It would be unprecedented for Justice to take a case that had already been investigated by the FTC. Art Amolsch, editor of the Washington-based newsletter FTC Watch, had told a reporter for the New York Times a few days before the FTC vote on July 21 that the odds against Justice getting involved were astronomical. “It’s possible at some point an asteroid will hit the Earth,” he said. “It’s possible that this could get moved to Justice. We’re looking at the same odds.”
Thus, when Gates got the news in Redmond that the impossible had happened, the explosion there was nearly as great as an asteroid hitting the Earth. “Bill just went through the roof. He went ballistic. He was so mad he was actually throwing things,” said one Microsoft manager.
Gates’s publicist, Pam Edstrom, had advised him not to answer any questions about the FTC investigation at the meeting with analysts. But Gates was so upset at the intervention by Justice that he didn’t even wait for questions before he launched into an angry attack on Novell and its chief executive, Raymond Noorda. Novell was the ringleader of a handful of disgruntled Microsoft competitors who had been complaining to the FTC and stoking the fires of its antitrust investigation. Gates put the blame squarely on the 69-year-old Noorda, whom Gates and other Microsoft executives had taken to calling the “grandfather from hell.”
“Ray has a tremendous vendetta against us,” Gates said, and accused Novell of mounting a “paranoid political attack” against Microsoft. “After dumping $110 million into an unpopular software product,” Gates said, “Novell now asks, ‘Government, can you help us?’ ” He was referring to DR DOS, a competing operating system to Microsoft’s that Novell acquired when it bought Digital Research.
Not long after the meeting, according to Microsoft insiders, a still-angry Gates told several of his top executives that if the Justice Department wanted an all-out war, it would damn well get one. Microsoft would never allow itself to be dismembered, Gates said, no matter how long the government’s investigation lasted. He was not about to do what another Seattle magnate had done the last time a corporation in that city had come under attack from federal trustbusters: in the early 1930s, Boeing founder William Boeing had quit in disgust and sold his stock rather than watch as his company, United Aircraft & Transport, was split up.
But William Henry Gates III had much more in common with John D. Rockefeller than with William Boeing, and that’s why the government’s antitrust bloodhounds were on his trail. A century earlier, Rockefeller hooked America on oil and became one of the richest men in the world. Not content just to own most of the oil wells, Rockefeller had realized that he could get even richer if he also owned most of the filling stations that sold his gas. His fortune was estimated at $1 billion in 1911 before a trust-busting U.S. Supreme Court ruled that Standard Oil of New Jersey was an illegal monopoly. The oil baron was forced to break up his empire into 39 companies.
In less than two decades since its founding in the high desert of Albuquerque in 1975, Microsoft had become the computer industry’s Standard Oil of the late twentieth century. And just as the government had moved against Rockefeller and again decades later against IBM, Gates’s chief rivals wanted the government to move against Microsoft—if not to break it up then at least to level the playing field and slow down Microsoft’s hard-driving leader.
