Two Years Ago Gates Dropped A Warhead That Is Still Exploding

Two years ago, on the 53rd anniversary of the bombing of Pearl Harbor, Microsoft and its chairman, Bill Gates, were under fire for having missed the digital-communications revolution known as the World Wide Web.

Microsoft stock had been downgraded by Wall Street's leading analyst, Goldman Sachs' Rick Sherlund. Web-centric companies and their technologies - Netscape and its leading browser, Navigator; Sun Microsystems' new Java programming language, and the "thin client" Network Computer backed by Oracle, Sun and others - were attracting investor dollars, consumer interest and the media limelight.

Playing off the potent symbolism of an auspicious date in history, Gates struck back. In a memorable address to media and analysts at Seattle Center, the software kingpin detailed a sweeping campaign for building the Web into his company's strategy and products. Microsoft would "embrace and extend" the Internet, Gates pledged in a phrase that has been continually amplified, altered and parodied since.

Two years later, Microsoft is again under fire - this time for attempting to monopolize the Web. Embrace and extend has become, in Sherlund's phrase, engulf and devour. In 24 months Microsoft has gone from a clueless naif unable to "get the Net" to a predatory ogre bent on crushing every successful entity in its path.

Competition still reigns

A close examination of historical record, combined with a little perspective on the software industry, shows the flaws of both characterizations. In reality, Gates' strategy was in place well before his talk two years ago. And although Microsoft is making formidable gains in browser, server and related Web technologies, its potential for overtaking the leaders in Web markets depends as much on their ability to innovate and execute as Microsoft's.

One of the more tantalizing documents to emerge from the Justice Department's investigation is a nine-page memo titled "The Internet Tidal Wave" and dated May 26, 1995 - half a year before the Pearl Harbor Day address. It has received relatively little attention from most observers, many of whom assume it is the same document Microsoft released in November 1995, partly to counteract the rampant "Microsoft is missing the Web" publicity.

White out at work

That three-page, later version was heavily edited, however. The actual "Tidal Wave" memo is much longer and brilliantly detailed. One of several sections excised from the previously released memo contains the illuminating Gates observation:

"All work we do here can be leveraged into the HTTP/Web world. The strength of the Office and Windows businesses today gives us a chance to superset the Web." In other words, Gates saw no reason why the Internet should not be an extension - subset - of Microsoft technology.

In exploring how Microsoft could exploit the technological underpinnings and commercial potential of the Web, Gates makes call after prescient call. The whole CD-ROM multimedia business model "will be dramatically affected by the Internet," he noted. For users logging onto the Internet other than through Microsoft Network, "we will have to make MSN very, very inexpensive - perhaps free," Gates acknowledged.

Perhaps most noteworthy is Gates' insistence that Cairo - a next-generation version of Windows NT, Microsoft's high-end Windows - have directory services (for finding, communicating and, most important, doing business with others on the Web).

"If the features required for Internet directory are not in Cairo or easily addable without a major release we will miss the window to become the world standard in directory, with serious consequences," Gates warned.

On and on: Gates called for Windows NT to be "the highest performance http (Internet protocol) servers." To compete with Netscape, he called for integrating the browser and MSN into Windows and working with Netscape customers, including "MCI, newspapers and other (sic) who are considering their (Netscape's) products."

Finally, Microsoft's OLE technology for integrating information from several sources into files, records and documents, should become the Web standard, Gates urged. The result was ActiveX and its outgrowth, Internet Explorer's Active Desktop.

Gates left virtually no element of the Web untouched in the memo; every aspect represented an opportunity for Microsoft. On the issue of electronic commerce, he noted, "Perhaps we can establish the lowest-cost way for people to do electronic bill paying," later adding: "All the financial institutions will find it very easy to buy the best Internet technology tools for (sic) us and others and get into this world without much technical expertise."

Miles to go

Clearly, Microsoft's Internet ball was rolling well before the Pearl Harbor Day address. Just as clearly, Microsoft has not yet "Borged," or assimilated, the Web. ActiveX/OLE is far from a standard technology on the Web. Microsoft has not established the cheapest Web billing mechanism.

MSN has not become the standard way for accessing the Web and lags far behind America Online's 10 million subscribers. Word Assistant, the word-processing add-on Microsoft licensed from BookLink in the fall of 1994, has fallen well short of dire warnings that it would become the dominant standard for creating Web pages, giving Microsoft control over Web documents.

`Sleeping giant' hears alarm

Not that Microsoft was, or is, anything close to a "sleeping giant," to use the phrase Gates invoked at Pearl Harbor Day.

In the browser and NT server markets, Microsoft is making remarkable strides. And, albeit more slowly than Gates would have liked, the company is building Internet directory services into its e-mail and server products.

But even though software is transforming other industries, Microsoft's ability to dominate those industries through its software is an open question. Hollywood, TV, banks, newspapers and other established service and content providers are wary of Microsoft and have a huge installed base to leverage. They have financial resources, political influence and the wisdom of insider experience on their side as well.

Their challenge may well be to do what Microsoft does to win markets - hire smart people, give them a stake in the business, invest in research and development, and figure out ways software can enhance their business plan and markets.

If anything held Microsoft back on the Internet, it was Gates' innate sense of timing. As early as the spring of 1993, his advanced technology lieutenant, Nathan Myhrvold, told me in an interview that Microsoft saw no way of making money on the Internet. Until it did, Myhrvold suggested, the Net would be of marginal interest.

By Pearl Harbor Day 1995, the money-making potential of the Web was far more clarified, and the Microsoft machine began to crank. The fact Microsoft has come so far so fast is a testament to his company's talent and focus, Gates would tell you, but by no means a guarantee it will superset the Web.

User Friendly appears Sundays in the Personal Technology section of The Seattle Times. Paul Andrews is a member of The Times' staff. Check out his Web home page at /paul/andrews.html. Send e-mail to: