Computers -- Microsoft, IBM Set Battle Lines -- `Divorce' Is Deeper Than First Thought

Microsoft and IBM, the computer industry's Tracy-Hepburn matchup of the '80s, will be strictly the War of the Roses from now on.

The Microsoft-IBM "divorce settlement" clarified yesterday is deeper than previously believed, leaving the two companies fiercely competitive and the $80 billion personal-computer industry without a clear operating-system direction for the first time since the IBM PC was released along with Microsoft DOS more than a decade ago.

Microsoft stock responded well to the news, trading at $70.50 per share late today, up $3.75 from Friday. IBM's stock also climbed, up $1.125 to $98.375.

Details of the arrangement made it clear that the two companies will ask thousands of hardware and software vendors to choose between two distinctly different visions of the future: Microsoft's Windows or IBM's OS/2.

IBM has touted OS/2 as the system for corporate America to standardize on. But Microsoft has backed Windows.

"What this means is that whoever wins this little war between OS/2 and Windows will probably shape the future of the industry," said Bill Whitlow, analyst for Pacific Crest Securities in Seattle.

Denying previous reports that the new arrangement will allow the companies to share code for compatibility between the two systems, Steven Ballmer, Microsoft's executive vice president said, "This is not a strategy to keep Windows and OS/2 in sync."

Under the agreement drawn up by lawyers for the companies, Microsoft will pay IBM a lump sum for use of IBM patents in software

development. The figure has been reported by some to be between $10 million and $20 million, although neither company would confirm an exact dollar amount.

IBM in turn agreed to pay a royalty to Microsoft, which jointly developed IBM's OS/2 2.0, for each copy of the program sold. At 700,000 units shipped so far, according to IBM, that amount is said to total about $16 million based on $23 per copy.

Before September 1993, the companies will have access to each other's code, assuring OS/2 buyers that the program will run the new 3.1 version of Windows released in April.

But the agreement prevents IBM from having access to next-generation Windows NT and Windows 4.0 code. Both projects are considered key to Microsoft's goal of expanding Windows to everything from hand-held jot-pad computers to entertainment-education systems and high-end "workstations" linked together in corporate and academic systems.

IBM is banking on customers to back OS/2 instead of waiting for more powerful promised, but not-yet-available, versions of Windows.

As corporations have replaced large mainframe computers with PCs, software linking desktop computers and managing records across such networks has become increasingly vital. The market is expected to reach $250 billion to $500 billion by the turn of the decade.

"This agreement clears the decks for us to compete now based on the technical and financial merits of the products," said Scott Brooks, IBM spokesman. Nailing down the previous uncertainties over royalty and cross-licensing issues "leaves our clients free to go with the system available now, and that's OS/2," Brooks added.

Under terms of the former arrangement, IBM was paying Microsoft for NT development, Brooks said. "We didn't think it was a worthwhile investment," he said, in part leading the company to relinquish rights to NT code.

IBM and Microsoft have had numerous ups and downs during their 11-year partnership but have maintained enough compatibility to set a convenient industry standard. In 1985 the two entered a joint development agreement that led to initial versions of OS/2, first released in the spring of 1987.

The operating system is a computer's choreographer, coordinating the performance of software programs and peripherals such as video displays and printers. OS/2 was supposed to inherit the desktop from DOS - the original operating system refined by Microsoft for the initial IBM PC - but never caught on, in part because it required considerable investment in hardware and software.

Instead Microsoft's inexpensive Windows program, which was compatible with DOS and used a pointing device called a mouse and pictograms representing files and programs to make the computer's operation easier, captured the imagination of the IBM-compatible market in its third iteration released in May 1990.

That version of Windows sold more than 10 million copies before Microsoft issued 3.1, which in less than three months has sold 3 million.

The success of Windows 3.0, which propelled sales of computers made by manufacturers other than IBM, led to what Ballmer yesterday termed a "prenuptial agreement" in September 1990, giving the bulk of OS/2 development to IBM and leaving Windows under Microsoft's control.

But disagreement arose over whether IBM owed Microsoft royalties, and if so, how much, for copies of OS/2 sold.

With the two companies at loggerheads, potential IBM customers raised concerns that OS/2 would become an orphaned product without ensured compatibility with Windows.

The new agreement ensures compatibility until the September 1993 cutoff. After that, older Windows software will still run on OS/2, but new systems and software will not.

The new arrangement comes as Microsoft prepares to unveil Windows NT to more than 4,000 developers in San Francisco next week. NT, designed to link PCs and run on high-end computers, performs such tasks as inventory management, billings, payroll and proprietary record-keeping. It represents Microsoft's biggest onslaught to date against IBM's traditional corporate market.

Despite Windows' success, it is not a shoo-in for adoption by corporate America, analysts said.

"Microsoft's reputation with large (corporate and academic) sites is a mixed bag," said Mark Mackaman, co-founder of the newly formed Redmond Group, an independent consulting group to information managers and executive-level corporate decision-makers. "They're used to IBM coming in and doing everything for them, but Microsoft won't do that because it can't make money at it."

Despite Microsoft's plans to roll out NT software development kits with great hoopla, rumors are rampant that the kit won't be as robust as promised, that Microsoft's plans to ship NT by the end of the year are overly optimistic, and that the company is cutting back features to meet its development deadlines.

Microsoft Chairman Bill Gates acknowledged that the NT team has "still got a lot of bugs to fix," and that NT will ship without C2 security certification, a feature required by Department of Defense and other government agencies.

As for delays, Gates said he still hopes to ship NT by December but "we're not going to commit hara kiri if we don't make the end of the year."

Some analysts are suggesting that Microsoft's attention has shifted from NT to its further-generation Windows, code-named Cairo or Windows 4.0. That system, being kept tightly under wraps, is supposed to have object-oriented design enabling easier applications development, especially for RISC (reduced instruction set computing) microprocessors.

IBM is involved in co-developing with Apple Computer a competing RISC-based object-oriented system called Taligent. Brooks acknowledged that the venture was a contributing factor enabling IBM to sever its Windows ties.