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James Wallace brings readers up to date on the Gates saga to 1997 and reveals the inside story of the struggle to keep Microsoft on top in the World Wide Web game.
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This project began with a request in the spring of 1996 from publisher John Wiley & Sons to update my previous book Hard Drive, which I wrote with Jim Erickson. But it quickly became apparent that so much had happened since the publication of Hard Drive in 1992 that another book was needed to fully tell the incredible story of the rise of the Internet and how Microsoft responded.
As was the case with Hard Drive, Microsoft did not cooperate with research for this book. The company was not pleased with Hard Drive, which had been cited by U.S. District Court Judge Stanley Sporkin in rejecting the antitrust consent decree negotiated in 1994 between Microsoft and the U.S. Justice Department. As a result, Microsoft spent many more months in court before Sporkin’s ruling was overturned.
While Microsoft officially refused any help with this book, some of its employees and executives agreed to off-the-record interviews. Their names are not used in this book, but they know who they are and I would like to thank them for helping me tell this story.
Gates was all too aware of what had happened to once-mighty IBM during the last paradigm shift in the computer industry at the dawn of the personal computer revolution. Big Blue lost its dominance to another upstart company with a bunch of wise-ass kids in pizza-stained T-shirts. That company was Microsoft. Gates was not going to let someone else beat him at his own game. He had decided to reinvent the company. On May 26, three months before the launch of Windows 95, Gates had issued a lengthy memo to his executive staff titled “The Internet Tidal Wave,” in which he announced: “Now I assign the Internet the highest level of importance. In this memo I want to make clear that our focus on the Internet is critical to every part of our business.” Even as Microsoft readied for the biggest celebration in the company's history, it had already shifted into overdrive in the race to overtake Netscape. It was going to be a long, tough fight, but Microsoft had very deep pockets. And it also had Bill Gates.
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Informatie afkomstig uit de Engelse Algemene Kennis.Bewerk om naar jouw taal over te brengen.
In time, CP/M evolved into DR DOS. Until his tragic and mysterious death from a head injury suffered in a fall in a Monterey restaurant in July 1994, Kildall maintained that Paterson had ripped off much of the code in CP/M when he designed the DOS that Microsoft bought for IBM’s first personal computer. Not long before his death, Kildall self-published his memoirs, Computer Connections. Only a limited number of copies were printed and privately distributed to a handful of close friends and to Kildall’s family. In this book Kildall described Microsoft’s DOS as a “clone” of CP/M, and he wrote of Gates: “I have grown up in this industry with Gates. He is divisive. He is manipulative. He is a user. He has taken much from me and the industry.” And about Microsoft’s version of DOS he wrote: “To those who knew the industry, Gates’s DOS was a blatant misappropriation of proprietary materials, and of my personal pride and achievements.”
The weekend after Gates phoned Noorda [Raymond, CEO of Novell] on July 19, 1991, the two met briefly in San Francisco, at the American Airlines Admiral Club lounge to discuss the merger. Gates played his trump card. Before any merger could go forward, he said, Novell had to drop its plans to buy Digital Research [who owned DR DOS, a competing operating system to Microsoft’s DOS]. Noorda would later say that when he raised the possibility that the Justice Department might try to block a merger between the first and third biggest software companies on the planet, Gates responded: “Don’t worry, we know how to handle the federal government.” Gates denied ever saying such a thing, though he did acknowledge that Microsoft wanted Novell to drop its acquisition of Digital Research because clearly the antitrust folks at the Justice Department would not approve a merger if it appeared that Microsoft was buying out its only competition in the operating systems business.
In October 1991, Novell bought Digital Research for about $125 million in stock. Although the FTC staff at the Bureau of Competition had been spending a lot of time investigating Microsoft, they had heard nothing about a possible merger with Novell. It was not until December, when Washington, the lead investigator on the antitrust case, called Noorda to ask about the relationship between Microsoft and Novell that he learned Gates wanted to acquire Novell. The news hit the FTC like a bombshell. It seemed clear evidence of Microsoft’s predatory nature.
But discussion between Microsoft and Novell about a merger ended for good in early 1992 when Noorda found out that Gates planned to buy Fox Software, a database competitor. Gates had never said anything to Noorda about the Fox acquisition.
Noorda and others at Novell, including David Bradford, Novell’s corporate counsel, later questioned whether Microsoft ever seriously wanted to merge the two companies. They figured Gates was up to his old business tricks and had engaged Novell in talks in an attempt to delay its purchase of DR DOS. With the merger talks over, and the distrust deeper than ever, Novell stepped up its anti-Microsoft crusade. Other Microsoft rivals, including Borland, Lotus, and WordPerfect, also were talking to FTC investigators. Microsoft now filled the bully role once played by IBM. Alan C. Ashton, president of WordPerfect Corporation, in Orem, Utah, summed up the feelings of many of Microsoft’s competitors and victims: “Microsoft is a threat to everyone in the industry.”
What was clear to [Rob] Glaser was that the Internet had produced a radical change in the computer industry. The last such change had occurred in the late 1970s, when the development of the personal computer triggered a revolution that gave rise to companies like Microsoft, and altered the fundamental power structure of the industry. Glaser believed the same thing was about to happen because of the Internet, and he was beating the drum loudly.
Even though Glaser was no longer working at Microsoft, he and [Russ] Siegelman had talked several times since that day in mid-September when Gates had asked Glaser to evaluate Microsoft’s on-line service and how it fit with the Internet. Glaser was convinced the Internet was going to be the leading platform for distributing information in the future. And having become convinced of that, it was simply a matter of deciding what Microsoft should do.
In the pre-Internet world, each of the on-line services had its own architecture, its own way of browsing information, its own way of transmitting information, its own infrastructure of servers and clients. Other than through the most minimal form of interchange through e-mail gateways, nothing could connect to anything else. And that was precisely what Microsoft was buying into with its on-line service. The alternative was a standard architecture. But where would it come from? Did it already exist? Glaser believed it did, in the form of the Internet. And Microsoft needed to embrace and extend that architecture.
“I became convinced that Microsoft was building the last minicomputer,” said Glaser, “that the Microsoft Network was based on the notion that your competitors were the model—proprietary on-line services like America Online—and that the reality was that the Internet was going to be such a fundamental paradigm shift, or sea change, that you needed to think about your strategies fundamentally differently.”
Glaser was prepared to make some very radical proposals to Siegelman regarding Marvel. He was going to tell Siegelman that he had to totally change his strategy and build a nonproprietary on-line service that anyone could access through the Internet. But fate stepped in. About a week before the two men were to meet, Siegelman suffered the brain aneurysm. Glaser considered giving his recommendations directly to Gates, but he worried what that might do to the Marvel team while Siegelman was out. Instead, he requested a meeting of all the Marvel managers. He had decided to play schoolteacher, and give a slide-show presentation about the Internet in the conference room of the East Tech building.
“I did not want to randomize the team while Russ was out getting well,” said Glaser. “So I decided to basically teach his staff Internet 101. I explained to them what the Internet was; that it was a fundamental architecture, a fundamental platform and they needed to design their system in light of it. I told them, ‘You guys need to get over to the Internet as soon as possible.’ But what I didn’t say was, ‘If you don’t do this, you’re going to fail.’ Their leader had just taken ill. I had the view that if I just basically educated them on the Internet, they ultimately would reach the right conclusion. Of course, at that point, they were planning to ship MSN with Chicago. But I got the sense that everybody basically bought into my recommendations for the long term. But they were all so busy on their short-term priorities that no one was willing to say, ‘Hey, the emperor has no clothes, we have to change strategy.’”
What some members of the Marvel management team remembered most about the meeting that December day with Glaser was that he had one hell of a time hooking up to the Internet with Mosaic. And they wondered what that coffeepot thing was all about. The coffeepot was just one of the many “cool” things on the World Wide Web that Glaser had wanted to show the Marvel team. In England, someone had rigged a camera to take pictures of a coffeepot, and the live image was transmitted to a Web site. Glaser wanted to use Mosaic to connect to the Web site, but he kept losing his Internet connection, and eventually gave up.
Glaser might have hoped the Marvel team was buying into his vision of the Internet, at least for the long term, but he might as well have been shouting into the wind. “We were not thinking about the Internet at all,” said one Marvel manager. “At the time, our competition was Prodigy and CompuServe and America Online, and that’s what we were focused on, a proprietary on-line service. After that Internet talk, it was like, ‘Okay. Great. Now let’s all get back to work.’ There just wasn’t any sense at all at that point that the Internet was an alternative way of providing information.”
[Jeff] Lill, as technical manager of the project, was determined to keep things on track. A debate within the team about going in a new direction would mean that the deadline for shipping with Windows 95 would not be met. “My attitude was, ‘This is great, but we’ll worry about it later.’ My goal for the whole effort was not so much to come out with a glorious technology that was going to live on for 40 years. It was more to develop an organization that understood what it meant to build an online service and run it. We needed to get our foot in the door with a product that could ship with Windows and start getting significant users. My goal was just to learn and get a foot in the door. In my mind, it was, ‘Yeah, great. We’re going to rewrite this thing in two or three years anyway.’ It ended up being sooner than that. But the primary goal was just to get something out so we could start learning. And frankly, that is Microsoft's forte: A competitor comes in and does something interesting, then we come in and basically clone it; do it marginally better and throw some marketing clout behind it, then relentlessly make it better over the years. That’s our strategy. And it has worked damn well.”
It was a day that many of Microsoft’s rivals had long waited for as they speculated how a change in marital status would affect Gates’s first love—Microsoft. Perhaps marriage and a nursery full of children would slow down the workaholic Gates, distract his focus from business, and at last give them a competitive edge. Few in the industry, though, had actually believed Gates would ever marry.
His life as a bachelor had been the subject of much media humor. Syndicated cartoonist Berkeley Breathed modeled his comic strip antihero Bachelor Tycoon after Gates. Appearing in more than 400 newspapers across America, Bachelor Tycoon, the founder of Micro-Squish Inc., has bad skin, bad clothes, thick glasses, and a microchip tattooed on his stomach. The nerdy character looks a lot like Gates. In one strip, Bachelor Tycoon, the “richest guy on the planet,” has a hard time getting a date until he offers to buy Norway for the girl. But “no kissing,” she tells Bachelor Tycoon.
Gates and [Ann] Winblad had such a special friendship that he sought her approval before he married [Melinda] French. “When I was off on my own thinking about marrying Melinda,” Gates would later tell Time magazine, “I called Ann and asked her approval.”
And before French and Gates married, French gave her approval for him to continue to take a week’s vacation with Winblad at her beach cottage on the Outer Banks of North Carolina. “We can play putt-putt while discussing biotechnology,” Gates told Time. Or as Winblad put it: “We can share our thoughts about the world and ourselves.”
Whether such an arrangement, even if platonic, bothers French is not known. She has never spoken publicly about her personal life with Gates.
The same night as the basketball game, Gates was part of Jay Leno’s monologue on the Tonight Show.
“What’s Bill Gates like after sex?” asked Leno of his live studio audience.
On January 25, 1994, shortly before [Steven] Sinofsky had flown off on his head-hunting trip to Cornell, [James] Allard wrote a long memo to [Nathan] Myhrvold and other senior managers. “I finally just couldn’t take it anymore,” Allard later told Business Week, explaining why he wrote his memo. “I felt the company just didn’t get it.” Titled “Windows: The Next Killer Application for the Internet,” the memo suggested that Microsoft get busy creating its own Mosaic-like browser and include Internet communication protocols in Chicago, which was destined to become Windows 95. Microsoft, he said, had to “embrace and extend.” Those two words would eventually become the centerpiece of Microsoft’s Internet strategy.
Why didn’t Microsoft “get it” sooner? After all, it had some of the smartest people in the industry, including Myhrvold, the technology guru whose job it was to see into the future and help position Microsoft on the road ahead. “Nathan tends to spend a lot of time thinking about the future, but as measured by centuries and millennia, and sometimes he’ll disdain to look at decades,” said Rob Glaser, who had passed along to Sinofsky his recommendations for making Marvel [codename for Microsoft Network—MSN] an Internet-based service. “One of the challenges, when you have real future-oriented people who are great at seeing the world of the possible, is how to marry them with people who know how to see the relationship of the possible and the world of the actual. And while I’m superimpressed with Bill’s personal ability to do that, there’s no way for any one person to do that across an organization that has 20,000 people, that is in so many different businesses and that’s just a structural challenge within any company. . . . There were other people at Microsoft who certainly thought about the future; but in terms of really mapping corporate strategy for a lot of these fundamental sea changes, I think that it’s just inherently an ad hoc process. . . . Having said all that, though, I want to extend my most effusive praise for how quickly the company pivoted, once the company, and Bill personally, understood the magnitude of the impact and the power of the sea change.”
In fairness to Microsoft, Glaser noted, the Internet phenomenon happened very fast, and the difference between being late and being early was a matter of months, not years, and during those months most of the company’s talent was focused on Chicago, which was supposed to ship before the end of the year. “Should they have been smarter about understanding these other overall trends? Well, yeah, they probably should have been,” said Glaser. “However, it’s really easy to get tunnel vision on something you’re focusing on.”
But Microsoft’s hegemony also got in the way: it was used to calling the shots, as it did with DOS and Windows. Microsoft had the band, and the industry marched to its tune. In contrast, the wild and woolly Internet did not look like an environment in which Microsoft was going to be able to call the shots. So Microsoft chose to ignore it, partly out of ignorance, partly out of arrogance.
For much of January and February, while Allard and Sinofsky were trying to excite others at Microsoft about the Internet, Gates was preoccupied with a trial that was being played out before a federal court jury in Los Angeles. In a classic David versus Goliath scenario, Stac Electronics was taking on mighty Microsoft for patent infringement. It claimed Microsoft had illegally used Stac’s data-compression technology in the latest version of Microsoft's operating system, DOS 6.0.
In 1993, Stac had earned only as much money as Microsoft had in any given four-hour period. Microsoft had not lost a significant legal fight since the late 1970s when Microsoft, then a tiny company with a handful of employees, had stood up to Pertec Computer Corporation and its hotshot lawyers. Now Stac, a pipsqueak company based in Carlsbad, California, was facing down Microsoft, and it was about to throw a knockout punch against the biggest in the computer industry.
Stac was essentially a one-product company. In 1990, it had developed Stacker, which compressed the data on a computer’s hard drive to free up valuable space. With Stacker, a 20-megabyte hard drive, for example, could store about 40 megabytes of information. Stacker was available for both the PC and the Mac, and its sales amounted to about 85 percent of the company’s business. In 1992, Microsoft began negotiating with Stac to license Stacker, which was dominating the market. Microsoft wanted to incorporate Stac’s technology into the next version of its operating system. The talks dragged on for several months, then broke off. Stac spokespeople said no deal was reached because Microsoft had refused to negotiate any royalty payment to Stac. In pretrial papers, Microsoft claimed that it had offered Stac a licensing fee of $1 million a month, but that Stac CEO Gary Clow had demanded $4 million, and that’s why no agreement had been reached. Meanwhile, Stac obtained a patent for its Stacker technology, and Microsoft began working on its own data-compression software, called DoubleSpace, for which it subsequently obtained a patent.
In May 1992, Stac had gone public at $12 a share. But after Microsoft announced it would ship DOS 6.0 with DoubleSpace, the price of Stac’s stock dropped to $3 a share and a shareholder class action suit was filed against it. The company had to lay off about 20 percent of its workforce. By the fourth quarter of 1993, Stac’s revenue had dropped 50 percent, to $6 million, versus sales of $33 million in 1992. In court papers, Microsoft claimed Stac had dragged out the negotiations to make its initial public offering more successful, and that it did not state in its prospectus that Microsoft was planning to include its own data-compression product into DOS.
Despite clandestine overtures from both sides, the two companies could not agree on an out-of-court settlement, so the case went on trial on January 18, 1994. The day before, a massive earthquake had rocked southern California, causing widespread destruction and killing a dozen people in an apartment building in Northridge. It was regarded as an ominous start to a trail that was being closely watched by the entire computer industry to see whether a small competitor could stand up to Microsoft’s formidable market power and legal muscle and walk away a winner.
Trustbuster Ann Bingaman had not forgotten about billionaire Bill. Since the Justice Department had taken over the investigation from the FTC in August 1993, there had been a constant flow of newspaper and magazine articles speculating on the kind of action Bingaman might take against Microsoft, and when that action might come. But Bingaman had kept quiet, refusing to comment.
But as her staff painstakingly went about its investigation of Microsoft, there was growing concern among some in the Clinton administration that the probe might do damage to the country’s brightest high-tech star. Some very powerful people within the administration, according to sources, wanted the matter settled out of court. “There was a lot of concern about what was going on at Justice in the Microsoft case,” said a high-ranking official in the White House office of the U.S. Trade Representative. Some of those concerns, the official said, were being communicated quietly to Bingaman and her boss, Attorney General Janet Reno.
Gates would later boast to friends that he told Vice President Al Gore during a meeting in May that if the government tried to break up Microsoft, he would move the company and all its employees overseas, out of reach of U.S. control. Although the vice president’s office denied that any such ultimatum was delivered, a White House source confirmed that Gates made his threat to move the company at that private meeting. The source further said that the vice president had been told much the same thing earlier in the year by Microsoft’s number two guy, Steve Ballmer, a personal friend of the vice president.
Such threats, real or rumor, in the end really didn’t matter. Bingaman’s legal team on the Microsoft investigation had decided by late spring that the best attack against Microsoft was one that focused specifically on the way Microsoft licensed its operating system—charging a processor a fee on every computer sold, regardless of whether it came installed with Microsoft’s operating system.
Breaking up Microsoft into two companies—one for operating systems and one for applications—was out of the question. Novell, ironically, had made the government’s antitrust case against Microsoft more difficult to press by acquiring WordPerfect and Borland’s Quattro Pro. Like Microsoft, Novell now owned both an operating system (its networking software) and applications. Also, the Justice Department had learned its lesson when it failed to break up IBM after spending years in litigation and millions of taxpayer dollars. Bingaman’s team believed that the department would suffer the same fate if it attempted to split Microsoft. But the government lawyers were convinced they had more than enough evidence to file suit against Microsoft on the licensing issue. Thus, everything else was taken off the table.
The case had become increasingly frustrating for Gates. In June, he had complained to a Wall Street Journal reporter that Justice was still requesting documents about Microsoft’s business. “We’ve sent them something like a million pieces of paper,” said Gates, “and they need a million more.” But later in June, Bingaman called Bill Neukom, Microsoft’s chief legal counsel, and suggested that they meet in her office to talk about the case. Several recent stories by industry writers had reported that the government was broadening its investigation of Microsoft. Neukom was told just the opposite by Bingaman, who said that her department was preparing a fairly narrow legal case that would focus on just a few areas of concern, such as Microsoft per-processor licensing fee. She suggested settling the case without a trial, but if Microsoft did not agree, she was prepared to file suit.
Bingaman told Neukom that he could meet with Attorney General Janet Reno if he wanted, which he did, for more than an hour. Reno, who had given the okay to Bingaman to file suit if an agreement could not be reached, also urged Neukom to settle the case.
According to a Microsoft executive, even though Neukom was the lead attorney in the case for Microsoft, he did nothing without the approval of Gates. “When Neukom told Bill that Justice wanted to settle, and that Microsoft might escape without too much damage, Bill gave the go-ahead to start talking,” the executive said. “But Bill made it clear that he would have the final say on any settlement. He was determined to get the best deal possible. Anything else and Bill said he would fight a suit in court for as long as it took.”
On the afternoon of December 16, Microsoft issued a news release, but not regarding the just-completed deal with Spyglass. It came from Microsoft’s public relations department, and it denied a news account published on the Internet that the company had agreed to buy the Catholic Church. Microsoft, a Johnny-come-lately to the Internet, was the victim of a huge cyberprank. As best as it could be determined, around December 1, a very clever cyberprankster had posted a fake dispatch from the Associated Press, the world’s largest news organization. Datelined Vatican City, the story reported that Microsoft had agreed to acquire the Roman Catholic Church in exchange for an unspecified number of shares of Microsoft common stock. “If the deal goes through,” it read, “it will be the first time a computer software company has acquired a major religion.”
Under terms of the alleged deal, Microsoft would get exclusive electronic rights to the Bible and the Vatican’s prized art collection, including works by Michelangelo and da Vinci. Pope John Paul II would become the senior vice president of the combined companies’ new religious software division. Microsoft senior vice presidents, Steve Ballmer and Mike Maples, would be invested in the College of Cardinals.
Further, the story quoted Gates as saying, “We expect a lot of growth in the religious market in the next 5 to 10 years. The combined resources of Microsoft and the Catholic Church will allow us to make religion easier and more fun for a broader range of people.”
Finally, according to the Internet story, the Microsoft Network would make sacraments available on-line for the first time. “You can take Communion, confess your sins, receive absolution—even reduce time in Purgatory—all without leaving your home.”
The story concluded by predicting that the Microsoft acquisition could spark a wave of mergers. It quoted Herb Peters of the U.S. Southern Baptist Conference as saying that other churches would now have to scramble to strengthen their position in the increasingly competitive religious market.
Although the story was obviously a hoax, conservative talk show host Rush Limbaugh read it on his national television program. Soon thereafter, Microsoft was fielding calls and e-mail from angry people who believed the story to be true. Microsoft was not amused, and on December 16, the company issued this terse statement: “The story has no truth and was not generated by the company. The company is not aware how the electronic message originated, but maintains strict policies internally concerning the proper use of electronic communications.” Subsequently, a legitimate wire service story about the hoax carried by the Associated Press quoted Microsoft spokeswoman Christine Santucci as saying: “Given the seriousness of the issue, it’s not something we wanted to be associated with.”
Hoax though it was, the story made news around the world, and finally proved to Bill Gates just how big the Internet had become.
Kahn [Philippe; President, CEO, and chairman of Borland] recalled that he once had found Gates at an industry conference in the late 1980s sitting alone in a corner, looking at a photograph in his hands. “It was a picture of me,” said Kahn. In the early 1990s, an ex-Borland employee who went to work for Microsoft sent Kahn a photo of what allegedly was a room at Microsoft filled with pictures of Kahn. Kahn showed the photograph to the author of this book.
In an interview for an article that appeared in the New York Times Magazine in 1991, Kahn described Gates’s technical capabilities as all talk. “It’s an image he’s trying to put out,” said Kahn. When Gates was asked to respond to Kahn’s remark by Stephen Manes and Paul Andrews, the authors of Gates, a book about Microsoft published in 1993 by Doubleday, Gates exploded: “Fuck this guy! I mean I really hate this guy. . . . I’m so much more technical than that guy.”
For Kahn, the unkindest cut may have come not from Gates but from his former wife, Martine. When they divorced in the early 1990s, the first man Martine dated was Bill Gates. “It made Philippe a little crazy,” said Martine.
In late 1994, during a trip overseas, Kahn had eaten dinner one night with someone he described as a Microsoft executive. “He told me that Gates hates me, that it’s even shocking to Microsoft people,” recalled Kahn. “He said Gates has sworn to destroy me personally by all means; that he is obsessed; that he is paying people to spin bad news about Borland. I can’t think of anything that I’ve done or said about the guy. It's pretty scary, given the power that he has.”
Whether Gates was obsessed with Kahn or Kahn with Gates really didn’t matter. The long and the short of it was that Microsoft had won and Borland had lost. On January 11, 1995, shortly after Kahn returned from his vacation in Colorado, Borland announced that Kahn had resigned as president and chief executive officer, though he would remain on the board. The board had shoved Kahn aside because of a disagreement over the direction in which he wanted to take the company—back to its roots. “I wanted to sell off everything but tools, including Paradox and dBase, and get out of the suites business,” said Kahn. “But the board didn’t want to follow through with ‘Project Boomerang.’ We got into a match and they fired me.”
USA Today’s story on Kahn’s resignation on page 2 of the business section the next day was directly above a piece about Bill Gates by USA Today business columnist Kevin Maney. Headlined “Getting One’s Fill of the Ubiquitous Bill,” the article began, “I’m so sick of Bill Gates I could barf.” Maney went on to complain that Gates was everywhere he turned: on the covers of magazines, in newspapers, on television. Gates recently had begun writing a weekly newspaper column that appeared in papers around the country, Maney said. Gates was also the subject of an entire newsgroup on the Internet, on which people around the planet could post “thousands of messages a day about nothing but what Gates says, how he looks, and whether his house on Lake Washington near Seattle is an architectural disgrace,” wrote Maney.
Already ubiquitous or not, Gates was about to be in the news a lot more. The day before Kahn “resigned,” his good friend Gary Reback, a Silicon Valley lawyer, filed a long brief on behalf of three unnamed Microsoft competitors, asking federal Judge Stanley Sporkin in Washington, D.C., the judge known as “Attila the Hun,” to block the Justice Department’s antitrust settlement with Microsoft. Among the supporting documents that Reback used to make his case was an old Microsoft memo that talked about “sticking it to Philippe.” It would become a critical piece of evidence in helping to convince Sporkin that Anne Bingaman had treated Gates with kid gloves and that the consent decree was not in the best interest of the public. Kahn would finally get to stick it to Gates.
According to another document obtained by the Justice Department, Microsoft had told Intuit that it would spend as much as $1 billion to aggressively promote Money over Quicken unless Intuit agreed to the merger. The threat was implicit in a memo written by a Microsoft executive to Gates, which explained that he had told [Intuit chairman Scott] Cook to accept the merger or else face the consequences. “I tried to tell him how much we could do with $1 billion. I tried to be nonthreatening, but let him know we would do something aggressive.”
These documents and others became part of the public record when, on April 27, the Justice Department filed suit in federal court in San Francisco to stop the merger. [Head of Antitrust Division Anne] Bingaman told reporters that the merger would stifle competition in the personal finance software business. “Allowing Microsoft to buy a dominant position in this highly concentrated market would likely result in higher prices for consumers who want to buy personal finance software, and would cause those buyers to miss out on the huge benefits from innovation,” said Bingaman.
She also said that Microsoft’s proposed solution of selling off its Money product to Novell would not realistically preserve competition in the marketplace. “This so-called fix just won’t work,” she said. “Novell simply can’t replace Microsoft—with its leading position in the personal computer software industry—in competing against an entrenched, dominant product like Intuit’s Quicken.”
Microsoft now had a choice: it could take its case to trial against the Justice Department, or it could walk away from the merger. After first insisting that it would fight the government tooth and nail, Microsoft realized that there were more important battles to fight down the road; and in this case, the chance of victory was doubtful. So, on Saturday, May 20, Gates announced that the merger was off. Microsoft agreed to pay Intuit $46.25 million in compensation for terminating the deal. Asked by reporters how the failed merger would affect Microsoft's future business strategy, Gates replied sarcastically, “The way this might affect our business is that we’ll probably wait at least a week or two before doing anything like this again.”
Six days later, on May 26, Gates sent a memo to his executive staff that signaled he had finally set his watch to Internet time. Microsoft was about to become a very different company. In the memo, titled “The Internet Tidal Wave,” Gates wrote that he believed that the Net was the single most important development in the computer industry since the IBM PC. “I have gone through several stages of increasing my views of (the Internet’s) importance,” he wrote. “Now I assign it the highest level of importance.” It was time for Microsoft to get moving or be left behind.
The vacation was something of an early birthday present for Gates, who would turn 40 on October 28, a couple of weeks after he returned from China. Before leaving on the trip, Melinda had organized a birthday party for her husband at their still unfinished $50 million home on Lake Washington. Gates had hoped to move in by his 40th birthday, but construction delays had made that impossible. Some of the delays had been caused by Melinda, who wanted significant changes after she and Gates married: she wanted her own bathroom, dressing room, and a study. She also hired a different architect for some of the interior design. The remodeling had pushed back completion until the spring of 1997. (The chief appraiser for King County estimated that once the construction was finished, taxes on the 45,000-square-foot home would run about $500,000 a year.)
So it was a work in progress that Melinda turned into an 18-hole putt-putt golf course. The 80 or so guests came in costume. Bill and Melinda dressed in old-fashioned golf attire. As a surprise, Melinda had four of Bill’s women friends outfitted as cheerleaders, with letter sweaters that spelled out B-I-L-L. The four included old flame Ann Winblad and Heidi Roizen of Apple, both of whom had been high school cheerleaders.
In his 16th-floor office in an aging building at 85 Broad Street in lower Manhattan, New York’s financial district, the software industry’s most respected and influential analyst, Rick Sherlund, was about to do the unthinkable. He was taking Microsoft’s stock off Goldman Sachs’s Priority Recommend buy list for the first time. The Firm, as Sherlund liked to call Goldman Sachs, had been Microsoft's underwriter when the company went public in 1986. In the years since, Microsoft’s stock had never disappointed. Countless investors had grown rich by following the Firm’s simple advice: buy Microsoft.
Just days before Gates’s 40th birthday, the software giant had once again posted an impressive earnings report. The big boost in Windows 95 sales had propelled Microsoft’s profits in the quarter that ended September 30 to $499 million, an increase of 58 percent from a year earlier. Total sales for the quarter surged to $2.02 billion, a 62 percent increase. Microsoft’s quarterly profit of 78 cents per share had handily beat Wall Street estimates of about 70 cents. Since Windows 95 hit the market on August 24, an estimated 7 million copies had been sold, far above the predictions of industry analysts. Dataquest, a San Jose research firm, had recently announced that Microsoft had pushed its share of the $3 billion suites market to an astonishing 90 percent, leaving competitors Novell and Lotus with just 5.5 percent and 4.6 percent, respectively. And Microsoft’s lead in this area was expected to accelerate, since it was the only software company shipping a suites product that ran on Windows 95.
Microsoft was riding high as usual. But Sherlund was taking the long view, and he was concerned. Even though Gates had been preaching in memos that Microsoft had gotten religion about the Internet, his company had yet to publicly announce a strategy for competing with Sun, Oracle, Netscape, and other companies that had embraced the Internet earlier. Thus, on Thursday morning, November 16, 1995, Sherlund lowered the Firm’s rating on Microsoft stock, which had been selling for around $90 a share. And when Sherlund talked, Wall Street listened. He was ranked the number-one analyst by Institutional Investor magazine and was the acknowledged expert in a 15-company group that included all the top software companies. The market responded immediately: the company’s share price plunged 5 percent, which represented a $6 billion loss in Microsoft's market value.
Less than a month later, on December 7, Bill Gates would give the most important speech of his life to reporters and analysts, laying out Microsoft’s Internet strategy and putting Netscape and other rivals on notice that they had awakened “a sleeping giant.” At the time, it appeared that Microsoft had hastily conceived its Internet strategy in response to the negative publicity following Sherlund’s November pronouncement. In fact, long before Sherlund lowered the boom, Microsoft was formulating its strategy, hoping to have it ready in time for Gates to make the big announcement on December 7. Even the “sleeping giant” remark was scripted to sound like a spur-of-the-moment thought.
James Wallace brings readers up to date on the Gates saga to 1997 and reveals the inside story of the struggle to keep Microsoft on top in the World Wide Web game.
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