Hard Drive: Bill Gates and the Making of the Microsoft Empire (42 page)

In theory, Microsoft keeps the playing field level by segregating the operating systems division and the applications division. Information is not supposed to flow freely between them. This imaginary partition is called the “Chinese Wall,” a term borrowed from the securities industry to describe the separation between investment bankers, who have inside knowledge of stock sales, and stock brokers who could profit from that information. Still, Microsoft’s competitors complain that the company’s Chinese Wall is full of holes, and Microsoft adds fuel to the fire when it shifts workers between applications and systems.

One senior application programmer at Microsoft, who has been with the company since the early 1980s, said the Chinese Wall is a creation of the media, not Microsoft. It doesn’t exist, he said. “I remember Bill Gates saying many times, ‘There is no Chinese Wall.’ Somebody got this idea there was this wall between systems and applications so we wouldn’t talk to each other. There’s no such thing. We don’t have any separation here, just one big company. . . . We don’t have any limits to our corporation across those boundaries. We never id. And there’s no reason to. That doesn’t make sense. This is the real world, isn’t it? If somebody wants to write application for our operating system, they’re going to take what they can get, right?”

Stewart Alsop, for one and there are others who agree with him, said the fundamental advantage Microsoft has is not the operating system but Bill Gates. “He never allows Microsoft to goof off. He always deals with the problem. Every other company allows something else to get in the way. But Gates is tenacious. That’s what’s scary.”

He noted that the first versions of Microsoft Word and Windows were market failures because they didn’t work well. But Gates kept coming back until he got it right. “Bill always comes back, like Chinese water torture,” Alsop said. “People are scared of Microsoft because they are so persistent. They have executed better than any other company. Others don’t feel they are capable of competing with Microsoft. It’s a lack of self-confidence. Every other company has screwed up. Does Microsoft have an unfair advantage that results in inferior products in the industry? That’s the myth. That’s what all the competitors want you to believe. . .. Microsoft has made it harder to compete because it’s constantly addressing problems. It single handedly forced Lotus to improve its products. Lotus was not doing a good job of upgrading its products. But because of Excel, Lotus clearly felt a competitive threat. . . . That’s the irony. The reason Microsoft has such a hold on the industry, a monopoly, is that they make better products.”

Nonetheless, many in the industry would like to see the “monopoly” they claim Microsoft has broken up by splitting Microsoft’s operating and applications divisions into separate companies. One example of such a separation occurred at Apple. In 1987, Apple Computer spun off its application software group into an independent company known as Claris Corporation.

After the FTC broadened its investigation of Microsoft, there were rumors the company might do just that—divide— and not wait to see what came of the investigation. In fact, the company chose just the opposite tactic when Microsoft reorganized in early 1992, and Mike Maples was placed in charge of both systems and applications. Maples had previously been vice-president of applications and Steve Ballmer vice-president of systems. The move was hardly one that Microsoft would have taken if it were running scared of the FTC.

Microsoft refused to back off in the face of the FTC probe, even as government investigators carried out boxes of documents from Microsoft. Among other things, the FTC ordered Microsoft’s legal department to notify all employees they were not to kill any E-Mail dating back prior to mid 1991. If Microsoft was worried about complaints it was monopolizing the industry, it didn’t show it. At an applications briefing for reporters well after the announcement of the FTC investigation, Maples said, “If someone thinks we’re not after Lotus and after WordPerfect and after Borland, they’re confused. My job is to get a fair share of the software applications market, and to me that’s 100 percent.”

Although Gates professed not to be concerned about what the FTC might find, a Microsoft manager close to Gates said Gates was hurt by the viciousness of the attacks against Microsoft in the wake of the probe.

“The FTC investigation was a lightening rod to bring computer people forward and say that it would be helpful if Microsoft was hobbled in some way,” Gates told
Newsweek
in June of 1991. The
Newsweek
article ended with an apt passage from John Steinbeck’s novel,
Cannery Row:
“The things we admire in men, kindness and generosity, openness, honesty, understanding and feeling are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest are the traits of success. And while men admire the quality of the first they love the produce of the second.” The same, apparently, was true about Gates.

Shortly after the unveiling of MS-DOS 5.0 in New York in the spring of 1991, a confidential state-of-the-company memo from Bill Gates to key executives, outlining potential “nightmare” scenarios for Microsoft in the year ahead, was leaked to the press. A very different portrait of the “megalomaniac” Gates that some in the industry pictured emerged. The memo revealed a Gates motivated by fear, rather than arrogance. The reaction on Wall Street may have made his memo the most costly in corporate history.

In the six-page memo, Gates said his worst fears for Microsoft were coming true. IBM was “attacking” Microsoft in systems software, Novell was “defeating” Microsoft in networking and “more agile, customer-oriented applications competitors” were releasing applications for Windows. Gates candidly talked about all of the problems facing Microsoft, from differences with IBM to the FTC investigation and the Apple lawsuit.

The Apple lawsuit clearly represented the biggest threat to Microsoft, at least in Gates’ mind. “Microsoft is spending millions to defend features contained in every popular window system on the market and to help set the boundaries of where copyrights should and should not be applied,” he wrote. “I think it is absurd that the lawsuit is taking so. long. . . . Our view that we almost certainly will prevail remains unchanged.” But Gates also went on to say that if the judge hearing the Apple case rules against Microsoft, it could be “disastrous.” Apple was seeking more than $4 billion in damages from Microsoft. The real concern, however, was not the money, but having to make fundamental changes in the product, which could set Microsoft back several years.

Not surprisingly, IBM received a fair amount of attention in the memo, as well. Gates asked his executives to refrain from publicly criticizing their former partner. “We will not attack IBM as a company and even our public attack on OS/2 will be very professional,” Gates said. “Eventually, we will need to have a neutral relationship with IBM. For the next 24 months, it may be fairly cold. . . . We can emerge as a better and stronger company and people won’t say we are the standard because IBM chose us.” Gates bluntly said that the breakup with IBM meant Microsoft would no longer have to accept IBM’s “poor code, poor design and other overhead.”

The
San Jose Mercury News
obtained a copy of the memo from a Microsoft source and printed portions of it. Other papers, including the
Wall Street Journal,
ran the story as well. In the end Microsoft, concerned that the national media was only focusing on negative aspects of the memo, eventually released it in its entirety to the industry press.

Rick Sherlund, the analyst with Goldman Sachs & Company who first broke the news about an FTC probe of Microsoft, said of the memo, “There’s no arrogance here. Bill Gates is open- minded, intellectually honest and motivated by fear of competitors.” Despite the gloomy picture painted by Gates, Sherlund still recommended buying Microsoft’s stock. But the reaction on Wall Street was quite different. Microsoft’s stock fell dramatically as investors reacted to the bleak message Gates had delivered. Both Gates and Microsoft suddenly looked vulnerable. Word of the memo knocked the company’s stock down more than $8 in one day, to $103, in over the counter trading. Gates, who at the time owned 38.8 million shares, lost $315 million on paper.

About the same time Gates was delivering his memo, IBM Chairman John Akers was delivering one of his own. IBM was facing yet another quarter of poor earnings. For the second consecutive year, overall annual sales had declined—the first time that had happened since 1946. Once a stock market leader, IBM’s reputation and leadership were being questioned. Akers decided it was time to read the riot act.

“The fact that we are losing market share makes me goddamn mad,” Akers complained in his tirade, which also made its way into the press. “The tension level is not high enough in the business—everyone is too damn comfortable at a time when the business is in crisis.”

Once
the
name in computers, IBM’s overall market share worldwide had slipped to about twenty-three percent, down from nearly forty percent in 1983 when its PC was taking the personal computer market by storm. Tough times require change, Akers told his executives. And IBM was about to make one of its biggest ever, forging an alliance with rival Apple Computer to take on a common enemy—Microsoft.

A few years earlier such an alliance between the archenemies, whose very battles had defined the personal computer industry, would have been unthinkable. But times had changed. Apple and IBM had both slashed prices and squeezed profits, all the while watching their shares of the personal computer market shrink. Apple’s share was down to fifteen percent, and IBM’s share was down to seventeen percent. Despite their past differences, they now needed each other.

Other companies were forming technology alliances, too. In April of 1991, a group of 21 computer hardware and software companies, led by Microsoft, Compaq Computer, and Digital Equipment Corporation, had made a pact to develop a new standard for advanced desktop computers based on a chip known as RISC (Reduced Instruction Set Computing). Members of the new alliance, called ACE (Advanced Computing Environment), had been meeting secretly for several months. An executive from one company in the alliance described the project as the “second coming of the PC.” The RISC chip does just what the name implies—processes information easier and faster than ever before. Neither Apple nor IBM had been asked to join the alliance. Although the new technology was not expected to have much of an effect until well into the decade, Apple and IBM saw the ACE alliance as a real threat.

Both IBM and Apple had things to gain by working together. Apple veteran Michael Spindler, chief operating officer, had convinced Chairman John Sculley he could deal a blow to Microsoft by joining with IBM, and at the same time help get Apple out of its slump. In addition, Apple was looking for a partner to build a RISC chip for its planned line of work stations, a growing area of the computer market. IBM, on the other hand, had been impressed with an advanced new operating system that Apple had been working on for several years, code-named Pink (the project was reported to be behind schedule and over budget, which could have been one reason why Apple wanted IBM’s help). If the two companies could work together and finish the system, they could then build computers compatible with each other. Microsoft’s power, and threat, would be greatly diminished.

“We want to be a major player in the computer industry, not a niche player,” Sculley would say later. “The only way to do that is to work with another major player.”

IBM may have had a hidden motive in wanting to team up with Apple. Some industry insiders believed that if Apple won its landmark copyright suit against Microsoft and Hewlett-Packard, it would then go after IBM for Presentation Manager, since it is very similar to Windows. But Apple would be less inclined to go after IBM if it were a partner.

Publicly at least, Gates did not seem worried. Addressing industry consultants in Seattle in mid-June, Gates said an alliance between Apple and IBM might be good for the industry. “There’s no way anybody can feel bad about something like that because we need more cooperation in this industry,” he said.

On July 3, the day before Independence Day, Apple and IBM put an end to all the speculation. They announced in a brief press release, without elaboration, that Jim Cannavino of IBM and John Sculley of Apple had signed a letter of intent to enter into a wide-ranging accord to share technology. It had been seven years since the infamous Apple commercial for its new Macintosh computer had run, comparing IBM to an Orwellian despot.

“Who would have thought these two companies could possibly have anything in common,” said Richard Shaffer, publisher of
Computer Letter.
“It’s like a surfer girl marrying a banker.”

Wrote Bart Ziegler of the Associated Press: “Can a company with a flagship product named after a fruit kiss and tell with a global giant that favors zingy product names like PS-2 Model 30 and 286-E21?”.

Several analysts called it the “deal of the decade.” Said Charles Wolf of First Boston Corporation, “I don’t think anything stranger has happened.” The consensus among reporters, analysts, and industry executives was that the proposed alliance represented nothing less than a direct attack on Microsoft. “I don’t think you can write the Apple-IBM story without a lot of credit going to Microsoft,” Edward McCracken, president of Silicon Graphics, a PC vendor, told the
Washington Post.
One industry analyst called the new partnership an “anti-Microsoft axis.”

At Microsoft, reaction to the official news varied. “We’re flabbergasted,” Steve Ballmer told
Time
magazine. “This does not bode well for future cooperation between IBM and Microsoft.”

Gates told the
Wall Street Journal
the deal did not make sense. “You’ve taken everything that’s unique to Apple and put it in this joint venture. What’s left . . . Apple has sold its birthright. That’s sad.” He went on to dismiss the new threat, saying Microsoft now had one competitor where before it had two.

In the aftermath of the IBM-Apple announcement, Gates was off to spend the Fourth of July holiday at a party his parents hosted at the family compound on Hood Canal. The guest list included Warren Buffett, Katherine Graham, the former Washington Post owner, Meg Greenfield, and several other journalists and state politicians. It was the first time Gates and Buffett, who both had personal fortunes of at least $4 billion, had met. The just-announced deal between Apple and IBM came up only in passing, and Gates showed little interest in the topic. He was much more interested in talking mathematics with Buffett and playing tennis with some of the others.

Microsoft, generally, seemed relatively unconcerned about the IBM-Apple alliance. Mike Maples, vice president of applications, in a pep talk for several hundred of the troops outside the applications building, said he didn’t expect to see any useful products out of the alliance before he retired. Then he corrected himself. “No, I don’t expect to see any products before
you
retire.”