Microsoft Corp

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MICROSOFT CORP.

Microsoft Corp. is the world's largest software firm, with annual sales of roughly $23 billion and more than 39,000 employees. Its Windows operating system boasts a worldwide personal computer (PC) market share of 92 percent. The firm's word processing, spreadsheet, and presentation software suite known as Microsoft Office brings in roughly $9 billion each year—more than any other Microsoft product. While Windows and Office continue to account for a major portion of Microsoft's revenues, the company has started reshaping its software packages and creating new technology to meet the growing needs of businesses and consumers online. The firm is also starting to focus on Internet-based services. In mid-2001, Microsoft continued to appeal a U.S. district court ruling that ordered the alleged "monopolist" to split in two.

EARLY HISTORY

In February of 1975, nineteen-year-old Harvard University student William H. Gates and twenty-one-year-old Honeywell employee Paul Allen created a version of the computer language known as BASIC (Beginner's All-Purpose Symbolic Instruction Code) for Altair, the world's first personal computer, which was manufactured in Albuquerque, New Mexico, by MITS. Because BASIC had never been copyrighted or patented by its developers—Dartmouth College mathematics professors Thomas Kurtz and John G. Kemeny—several variations had cropped up, including the one developed by Allen and Gates, who had been childhood friends in their hometown of Seattle, Washington. Eventually, Gates also created DiskBASIC, a disk management program. Along with dreaming up new ways to use BASIC, one of Gates' first major innovations was a legal contract by which a hardware developer could utilize and market versions of a software language owned by the creator of the language; this contract became the model upon which future software licensing agreements were based. On April 4th, Gates and Allen officially founded Microsoft. The next year, Gates left Harvard, opting to work full-time at the new company. He established a headquarters office in Albuquerque, New Mexico, and hired four programmers.

Microsoft released a software product based on a version of the Fortran programming language in July of 1977. Roughly one year later, a product based on COBOL-80 was launched. The firm also licensed its BASIC software to Radio Shack and Apple Computer and made its first international move when it established an office in Japan. Sales reached $1 million. When companies like Sirius, Zenith Electronics, Sharp, and Texas Instruments started using Microsoft products in conjunction with the CP/M operating system, Microsoft became the largest U.S. distributor of microcomputer languages.

It was in 1979 that Microsoft left New Mexico to establish its headquarters in Bellevue, Washington. A more sophisticated version of FORTRAN was developed for a new chip that could handle additional memory. With 25 employees and revenues of $2.5 million, Microsoft sold its one millionth copy of BASIC. In November of 1980, IBM Corp. asked Microsoft to develop four languages, as well as an operating system, for its new PCs. That year, the firm also released Softcard, which allowed Microsoft BASIC to operate on Apple II machines.

Gates and Allen incorporated their business on June 25, 1981. Gates was appointed president and chairman of the board, while Allen was named executive vice president. In August, IBM began selling PCs powered by Microsoft's new operating system, known as MS-DOS. Within in several months, more than 50 microcomputer manufacturers had licensed MS-DOS. Microsoft moved into Europe by creating a subsidiary in England in 1982. That year, the firm unveiled Multiplan Electronic Worksheet, which became InfoWorld magazine's "Software Product of the Year." Employees reached roughly 200.

INTENSE GROWTH AS A SOFTWARE MANUFACTURER

Several major products were developed in 1983. Microsoft Mouse, a small hand-held device used to manipulate a cursor on a computer screen was shipped early that year. In September, the firm unveiled its first word processing program, called Microsoft Word. Although the program did poorly in the U.S. at first, European sales were strong. Also, in perhaps its most important product launch ever, Microsoft introduced a new program, called Windows, in November. Based on the MS-DOS operating system, Windows offered users a graphical user interface (GUI). Within one month of its launch, more than 500,000 copies of Windows had been sold. Revenues reached $70 million, and international expansion was fueled with the establishment of units in France and Germany.

Microsoft began developing software, including a version of Microsoft Word, for the Apple Macintosh computer in 1984. By then, roughly 200 microcomputer manufacturers had licensed MS-DOS. Microsoft Word's popularity in the U.S. increased, and the firm began selling nearly 20,000 copies per month. In 1985, Microsoft opened its first international manufacturing plant in Ireland. By the end of the year, the firm had started distributing Windows to retailers for sale to consumers. Microsoft spearheaded an alliance with IBM's competitors—including Compaq, Hewlett-Packard, Texas Instruments, and Digital Equipment—in an effort to undermine IBM's monopoly on PC standards development. As a result, IBM began to work with Microsoft's competitors on software programs. Despite its increasingly rocky relationship with IBM and the fact that several problems had emerged with the earliest version of Windows, Microsoft convinced IBM to use an upgraded version of Windows on its next line of PCs.

In February of 1986, Microsoft moved its headquarters to Redmond, Washington. One month later, the firm conducted its initial public offering, offerings its shares at $21 each. The IPO raised $61 million in capital. Within a year, shares were selling for $84.75, making the 31-year-old Gates a billionaire. A third version of Microsoft Word was released, and it soon became Microsoft's best selling product. The Windows-based spreadsheet software known as Excel was introduced in October of 1987.

Apple Computers filed a lawsuit against Microsoft in 1988, alleging that the firm had used the appearance of the Macintosh operating system as the basis for its Windows program. Apple's lawyers requested that Microsoft either pay royalties or stop simply selling Windows. By then, Microsoft had grown into the leading U.S. maker of PC software and had also diversified into network software. By the end of the decade, revenues had neared the $800 million mark, and more than two million copies of Windows 3.0 had been sold. Employees totaled roughly 4,000.

Revenues exceeded $1 billion for the first time in 1990. The firm's relationship with IBM worsened, resulting in a price war between Microsoft's DOS 5.0 and IBM's competitor to DOS, OS/2. In 1991, in what was viewed by many analysts as a plan to wrest market share back from Microsoft, IBM and Apple forged an alliance to develop a new operating system that would not only make computers easier to use, but also facilitate compatibility between IBM and Apple machines. By then, roughly 90 percent of worldwide PCs used the MS-DOS platform, and Apple had broadened its litigation against Microsoft. In 1992, the firm diversified into desktop publishing software and launched its first television commercial. Microsoft won the case against Apple after a judge decreed that the appearance of the Macintosh operating system was not protected by Apple's copyrights; therefore, Microsoft's Windows platform, though very similar to Macintosh in appearance, was not in violation of copyright law. Apple appealed the decision.

By 1993, Microsoft had a market valuation of $25 billion. The Microsoft Encarta multimedia CDROM, which housed all 29 volumes of Funk & Wagnall's New Encyclopedia, including graphics, was awarded the Consumer Disc Product of the Year. The firm also launched Windows NT, an operating system for the network servers of large corporations. Microsoft's meteoric growth brought with it increased scrutiny and continued legal troubles. For example, after receiving complaints regarding alleged unfair and monopolistic trade practices by Microsoft, the U.S. Department of Justice launched an investigation of the firm. In 1994, to resolve the ongoing antitrust investigation, Microsoft volunteered to change its marketing tactics, a proposal the Justice Department accepted. However, critics of the settlement asserted that it did nothing to address several of the firm's alleged anticompetitive activities. As a result, U.S. District Judge Stanley Sporkin agreed to revisit the settlement.

To compete with Navigator, a World Wide Web browser released by upstart Netscape Communications Corp. in September of 1994, Microsoft licensed technology from Spyglass in an effort to speed its own browser to market. The firm also unveiled its Windows NT BackOffice suite, which bundled various server applications, such as SQL Server. Sony Corp. and Microsoft began jointly developing multimedia software and hardware in early 1995. The Supreme Court refused to hear Apple's appeal regarding the case against Microsoft; however, Microsoft's legal woes continued when Judge Sporkin ruled that the Department of Justice's antitrust settlement with Microsoft failed to address two key issues: licensing policies for computer operating systems and non-disclosure agreements. In response, the Department of Justice and Microsoft both filed appeals. Eventually, the U.S. Court of Appeals reinstated the initial settlement. In April, Microsoft's plan to acquire Intuit Inc. for $2.1 billion was blocked by the Justice Department due to antitrust concerns.

FOCUS ON INTERNET TECHNOLOGY

In mid-1995, believing that it had fallen behind Netscape and Sun Microsystems in the Internet arena while it had worked to develop its long awaited Windows 95 operating system, the company switched its primary focus from PC operating systems to Internet technology. In August, the firm finally released Windows 95, which included software for the Microsoft Network—a new online service competing with the likes of Compuserve, Prodigy, and America Online—and the Internet Explorer browser. The product release was one of the most highly anticipated to date in the technology sector. In November, Microsoft recruited Michael Kinsley to create Slate, an online magazine first published the following June. The firm also introduced Internet Explorer 2.0 to compete with the second version of Netscape's Navigator browser. NBC and Microsoft announced their intent to create an online news source, a plan which eventually culminated in the creation of MSNBC.

In January of 1996, MCI Communications Corp., known as the most competitive advertiser in the telecommunication industry, agreed to promote the Microsoft Network. Two months later, the Microsoft Network secured its one millionth customer; however, its worldwide reach continued to pale in comparison to industry leader America Online. To further facilitate its focus on Internet technology, Microsoft condensed its four platform groups into three divisions. Brad Silverberg was named head of the new Internet Platform and Tools Division. In a major coup against rival Netscape, Microsoft convinced America Online to license its Internet Explorer browser, rather than Netscape Navigator. Internet Explorer 3.0 was released shortly thereafter to complete with upgraded releases of Navigator. When sales of Windows NT, which competed with the UNIX-based servers on which corporate networks operated, surged 86 percent in 1996, Microsoft turned its attention to the network server market, which was being fueled by increased Internet usage and e-commerce activity. "Forget Internet browsers, forget MSNBC, forget multimedia, Slate, and the Microsoft Network," wrote Fortune columnist David Kirkpatrick in May of 1997. "Gates's strategy is to extend Microsoft's hegemony from the desktop into the windowless rooms housing the servers, minicomputers, and mainframes that are still central to business data processing. If he succeeds, Microsoft could dominate information technology well into the next decade."

Despite the manpower and research and development dollars it was devoting to Windows NT, and its BackOffice applications, Microsoft did maintain its other Internet initiatives, albeit at a slower pace for a while. After an eighteen-month acquisition spree, which resulted in the purchase of Vxtreme Inc. and many other upstart Internet technology firms, spending came to a halt in mid-1997. Internet Explorer 4.0 was shipped, resulting in a suit filed by Sun Microsystems, which alleged that Microsoft had violated an agreement with Sun by using incompatible Java source code. Sun asked the courts to force Microsoft to remove the "Java Compatible" logo from the new version of Explorer. Legal pressures mounted when the Justice Dept. began investigating complaints regarding Microsoft's bundling of its Internet Explorer with Windows 95 as a way of stealing market share from Netscape. Allegations also emerged that Microsoft had threatened to pull Windows licenses from computer manufacturers who were unwilling to install Explorer on their machines in place of Netscape's Navigator. After examining the case, a U.S. District Court judge ordered the firm to sell a version of Windows 95 unbundled from Internet Explorer. When Microsoft refused to do this, asserting that it would cause problems for the operating system, the Justice Dept. asked the U.S. District Court to hold Microsoft in contempt. Eventually, to avoid such charges, Microsoft agreed to let PC makers sell Windows 95 without Internet Explorer.

Acquisitions resumed in early 1998 when Microsoft purchased Hotmail, which became the leading free e-mail service on the Web. Sales that year surged by 30 percent, or roughly $3 billion. With a market capitalization of $466 billion, Microsoft was the world's most valuable company. It operated several Web sites, including Carpoint, Home Advisor, the Sidewalk city guides, the Expedia virtual travel agency, Microsoft Investor, and online bill payment service MSFDC. Despite the firm's phenomenal success, however, growth began to slow in the late 1990s. With more than half of its annual sales coming from international operations, recessionary economic conditions in Asia cut growth by three percent in 1999. The firm also faced saturation in two of its major markets: PC operating systems and application suites like Office. In addition, Microsoft's plans to dominate the network server market were hampered by several delays in the release of Windows NT 5.0, one of the most complex programs ever developed by the company. Perhaps most troubling of all was the fact that several of Microsoft's Internet endeavors had simply fallen short of expectations. By 1998, Internet-based technology accounted for only $548 million of Microsoft's $14.5 billion in total revenues, a fact which revealed the firm's continued reliance on the PC industry.

Early in 1999, Microsoft initiated a major reorganization, moving from product segments to five customer-based divisions: corporate systems customers; programmers; knowledge workers; ordinary Windows customers; and consumers interested in digitized content, entertainment, and shopping. The restructuring was spearheaded by Steven Ballmer, a former Harvard classmate of Gates who had been appointed Microsoft's president in 1998. Ballmer recognized that Microsoft needed to pay more attention to its clients in order to attract the large corporate accounts it hoped to secure with Windows NT; these enterprises typically demanded a level of service Microsoft had admitted it wasn't used to providing. According to Fortune columnist Eric Nee, Ballmer also realized that as Microsoft was "trying to reach beyond the desktop and keep pace with the Internet Age," it would need to retool itself to be more like the most successful Internet-based firms, which relied on continually evolving alliances with other businesses. "Witness Amazon.com ., which helped gain dominance and bolster its brand name by signing up 200,000 'associate' Web sites that refer customers to Amazon in return for a share of the revenues. Microsoft, by contrast, has succeeded thus far by building (Expedia), buying (Hotmail), or crushing (Netscape)—the moves of a PC-industry survivor that prefers to go it alone."

One industry in which Microsoft had already attempted to forge various alliances was cable television. In 1997, the firm had invested roughly $1 billion in Comcast, and in 1999, it had dumped $500 million into United Kingdom-based NTL Inc. and $300 million into Netherlands-based UPC Cable Co. Believing that cable television technology would be an integral part of future Internet operations Microsoft also agreed to invest $5 million in AT&T Corp., which was merging with cable behemoth [M|MediaOne]. Consequently, AT&T agreed to purchase Microsoft software for its cable and Internet applications.

Microsoft also began retooling the Microsoft Network, which changed its name to MSN.com, as an Internet gateway that integrated all of the firm's Web sites. In January of 2000, Gates appointed Ballmer CEO, retaining his role as chairman and taking on the additional role of chief software architect. One month later, the firm shipped its long awaited new version of Windows NT, named Windows 2000, which had taken five years to complete. Windows 2000 was designed to serve as the platform on which businesses, including e-commerce companies like BarnesandNoble.com and Buy.com, could operate.

In April of 2000, the longstanding antitrust investigation of Microsoft came to a head when a judge ruled that the firm was a monopoly that dominated nearly all PC operating systems and did, in fact, cause injury to consumers. The Justice Department and 17 states issued a landmark proposal that Microsoft split into two separate companies, one based on the Office software applications, and the other based on the Windows operating system. Microsoft quickly appealed the verdict, and by mid-2001, many industry analysts believed that an appeals court would find in Microsoft's favor.

Despite its legal battles, Microsoft continued to beef up its Internet technology and services. The firm completed its largest acquisition ever, the $1.1 billion purchase of small and mid-sized enterprise management software maker Great Plains Corp. It also launched bCentral, which offers e-business hosting services to small companies lacking the resources to construct their own e-business infrastructure. In June of 2001, the firm unveiled its new version of the Office suite, dubbed Office XP, and also announced its intent to launch Windows XP, the firm's largest new product in five years, in October. According to USA Today writer Byron Acohido, the latest version of Microsoft's operating system is more than just another upgrade. "Microsoft has fashioned XP into its weapon of choice for subjugating the Internet, just as it conquered desktop PCs." The new operating system is a key component of a new Microsoft strategy known as.Net, which the firm envisions as "a framework of software programs and services connecting every computing device to the Internet and to each other. With Windows XP as the dominant operating system, Microsoft could touch virtually every transaction." While the viability of this strategy remains to be seen, most analysts agree that Microsoft will likely emerge as a leading Internet technology and services provider.