Microsoft Faces New Challenge Software Giant Begins Quest For An Encore To Windows 95

It was a heady week for Microsoft Corp., lighting the Empire State Building, using a Rolling Stones song in a TV commercial and, oh yeah, putting Windows 95 on sale.

At rival Sun Microsystems Inc., chief technology officer Eric Schmidt was amused by the spectacle.

“When I saw Bill Gates on Larry King, that’s when I thought, ‘That’s it. That’s the high point,”’ Schmidt said of the Microsoft chairman’s appearance on the CNN celebrity interview show.

While Microsoft was showered with attention this year leading up to the Windows 95 launch, strong forces developed that could erode the dominant role it has had in technology since the late 1980s.

Always watchful for the Next Big Thing, high-tech executives and analysts have been paying close attention to a change in the way personal computers are being used. Instead of simply running programs that reside on the machine itself, the PC has become the gateway to data anywhere.

More importantly, programs are no longer bound to the desktop or laptop device. Instead, they can reside in other computers and be downloaded when a person needs them.

The change threatens to diminish the existing structure of the PC software industry, in which application programs that perform specific functions are built around an operating system, like Microsoft’s Windows, that runs the basics.

The rise of the Internet’s World Wide Web and programs like the Netscape browser and Sun’s Java programming language have shown people a simpler way to find and link data.

The danger for the existing PC software industry, and its leader Microsoft, comes from the corporate systems designers who have realized that such tools can be applied to an internal network and not just a public data network like the Web. Technology magazines Upside and Forbes’ ASAP this month carry articles suggesting Microsoft has fallen behind others in responding to the change.

And rivals are quick to tout their lead.

“The era of huge monolithic applications is coming to a close,” said Michael Doyle, chief executive of Eolas Technologies Inc., a Chicago firm with patents for distributing small programs on-line.

While no one is suggesting that Microsoft will be insignificant in the future, the chance exists that it will lose the mantle of leadership just as IBM, Digital Equipment, and Wang did when technology shifted under them.

“The new paradigm is coming and the question is ‘Will they be like Hewlett-Packard, which managed to make a technology change successfully, or like Digital, which failed to do so?”’ Schmidt said.

Asked if people years from now would look back on the release of Windows 95 as Microsoft’s shiniest moment, Nathan Myhrvold, the company’s senior vice president for advanced technology, said, “I sure hope not! My God, no.”

He continued, “This is clearly a great moment for the company and our marketers have really outdone themselves. But the whole lesson for any technology company is we have to make this thing obsolete. If we don’t, somebody else will.”

And then, he identified the very condition that is both an opportunity and problem for Microsoft.

“The power of personal computers is not just the power of something being on a desk,” Myhrvold said. “It’s the power of connecting to others.”

Microsoft’s top products for a world in which the network is the computer are its Windows NT operating system, which is growing in sales, and The Microsoft Network on-line service, which became available with Windows 95 last week.

But the company was caught flat-footed by the burst of interest in the Web and the concept of jumping from one computer, represented by a Web site, to another.

After initially putting off development of a Web browser to go with Windows 95, Microsoft finally licensed one from Spyglass Inc. and modified it to go on sale last week. Enhancements that will bring it to the level of competitors like Netscape and Spry are months away, though.

Nonetheless, analysts are slow to count Microsoft out of anything.

“I don’t believe this is the high point,” said Aaron Goldberg, analyst at CI-Infocorp, a PC market research firm. “Microsoft still has little to no business outside the personal computer space and at some point that entire triple-digit billion-dollar opportunity has to heat up for them.”

Analyst Robert Rosenberg said Microsoft has won some Windows NT customers among the the telecommunications firms he follows, which traditionally use Unix software for their sophisticated workstations.

“Microsoft is continuously surprising people because their products, while adequate, are certainly never innovative,” said Rosenberg, president of Insight Research Corp. in Livingston, N.J. “But their marketing and ability to price and compete is unparalleled.”

Sun’s Schmidt is sure Microsoft will try to catch up.

“Microsoft is not stupid,” he said. “They understand what I’m saying. Microsoft could do something like Netscape and Java too.”

Unlike previous technology leaders, Microsoft’s executives are quite open about the need to mow down their successful products. But actually shedding their allegiance to Windows, found on more than 100 million PCs, is another matter.

“This whole phenomenon of computers being connected, whether by Internet or internally, is an incredibly powerful thing,” Myhrvold said. “We hope to participate in this. For every way we participate, there’s going to be 100 other ways that other entrepreneurial companies take the lead in.”