United States v. Microsoft Corporation; Public Comments; Notice (MTC-00030631 - MTC-00032327)

[Federal Register Volume 67, Number 86 (Friday, May 3, 2002)]

[Notices]

[Pages 29276-29794]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: X02-140503]

TO APPENDIX TO MEMORANDUM OF AMICI CURIAE IN OPPOSITION TO

PROPOSED FINAL JUDGMENT IN CIVIL ACTION NO. 94-1564

SIGNED BY GARY REBACK

2ND STORY of Level I printed in FULL format. Copyright 1994

Network World, Inc. Network World July 25, 1994 94-1564

FILED FEB 14 1995

SECTION: TOP NEWS; Pg. 4

LENGTH: 724 words

HEADLINE: Microsoft free at last?;

Ruling still lets firm incorporate apps in its OSes.

Clerk, U.S. District Court

District of Columbia

BYLINE: Michael Csenger and adam Gaffin

BODY:

Washington, DC

The antitrust settlement Microsoft Corp. reached with the

Justice Department skirted an issue central to network users, paving

the way for the software giant to continue integrating applications

with its desktop and network operating systems.

The consent decree, announced July 16, focused almost entirely

on the way Microsoft sold operating systems to hardware vendors. But

it does not prevent the company from integrating applications into

the operating system itself.

Competing software vendors such as Lotus Development Corp. had

long alleged that Microsoft's applications division received unfair

information from its operating systems division that gave the

company a leg up on the competition.

Some analysts and users said the decree, which also poses

stricter controls on the royalties Microsoft can collect from

personal computer vendors, leaves the path clear for Microsoft to

mop up competitors that sell stand-alone applications, resulting in

more limited user choice down the road. SKEPTICISM

But others said Microsoft has yet to prove to the market that it

has operating systems and networked applications worth betting a

business on. ``A lot of its networking products are either

futures or first-generation products,'' said Jamie Lewis,

president of The Burton Group, a Salt Lake City consulting firm. The

company faces entrenched and growing user bases for both Novell,

Inc.'s NetWare operating systems and Lotus'' Notes groupware

applications, he said. Users also expressed skepticism.

``Microsoft promises Chicago and Cairo and a whole lot of

networking, but the question is, will it work before they run out of

cities to name these things after?'' quipped a network manager

whose major brokerage house network runs on Unix.

windows NT is not a truly open environment, he said,

``Because if Gates doesn't have it then neither do you, and I'd

rather not put myself in his hands. That's why we've standardized on

Unix for our trading floor.''

Frank Caro, technology transition team leader for Otis Elevator

Co. in Farmington, Conn., cited interoperability problems with

Microsoft's current Windows implementation of Transmission Control

Protocol/Internet Protocol as an example of the company's network

shortcomings.

``We've been trying to get into the networking capability

of Microsoft's products and find there's one con, non theme:

NETBIOS,'' Caro said. Microsoft does not yet support native

TCP/IP, but uses NETBIOS or NETBEUI encapsulated within TCP/IP, he

said.

``we're totally uninterested in any approach like this; it

can't handle a network of more than 50 users and is terrible over

the wide area,'' Caro said.

And Windows NT has proved unable to handle the applications that

Otis wants to take off its mainframe system, because Windows NT is

not a multiuser environment.

But Caro respects Microsoft's ability to change course as

necessary and awaits the promised native TCP/IP support in Chicago.

``That one feature alone is going to cause dramatic change

in network connectivity,'' said Nick Lippis, principal at

Strategic Networks Consulting, Inc. in Rockland, Mass., referring to

Windows'' TCP/IP.

Native TCP/IP support for Chicago could help Microsoft cut into

Novell's installed NetWare client base by providing an alternative

to Novell's Internetwork Packet Exchange (IPX) protocol. If the

desktop operating systems supported TCP/IP directly, ``why

continue with IPX?'' Lippis asked.

NOVELL NOT WORRIED

``I laugh when I hear people say it's all over for Novell

now, we should pack up and go home,'' said David Bradford, vice

president and general counsel for Novell.

``Microsoft has come against Novell [several] now with

their networking products, and we've beat them every time,''

Bradford said.

Bradford also noted that this consent decree does not close

Microsoft's books forever. ``They will be monitored, perhaps

even more so than before,'' he said. ``The industry and

consumers have an ally in the Justice Department.''

Frank Dzubeck, president of Communications Network Architects,

Inc., in Washington, DC, agrees that the case may not yet be closed.

``If Microsoft gets very aggressive and starts burying

things in their operating systems, then this whole issue will be

revisited, he said. But it will require that another company first

go bankrupt.''

LANGUAGE: ENGLISH

LOAD-DATE-MDC: July 27, 1994

TO APPENDIX TO MEMORANDUM OF AMICI CURIAE IN OPPOSITION TO

PROPOSED FINAL JUDGMENT IN CIVIL ACTION NO. 94-1564

SIGNED BY GARY REBACK

Business Day

M??

The New Work Times

Microsoft's Barely Limited Future

By JOHN MARKOFF

??

SAN FRANCISCO, June 17--Rath?? than reining in the

Microsoft Corporation, the consent deeree that the Justice

Department announced over the weekend with Microsoft. the world's

largest software publisher, frees the company to define the computer

mudstry's ground ?? through the rest of the decade.

The agreement leaves ??intouched what many computer in??justry

executives say is Microsoft's ?? advantage--that it devel??ps

both the basic operating-system ??oftware that makes personal

com??ters run, known as MS-DOS. and ??pphactons software, like word-

pro??essing programs or spreadsheets, ??nat perform spec?? ??

``Microsoft s whole empire is based in the interlocking

nature of their ??perating-system and application oftware.''

said William Joy, a ??ounder of Sun Microsystems, and the ??uthor of

one version of the Unix Perating system.

??Vol a Central Issue Microsoft officials said Saturday ??nal

issues related to the relationship ?? their operating software and

their ??ppicaons programs had not been ??ocus of their ??

nego??anons with us??ce Department officials.

MS-DOS and the Windows proram, which makes DOS easier to ?? are

installed in millions of com. ?? worldwide White the Jusuce

??epartiment has decided that Micro?? does have a monopoly in

opera?? ?? systems, it ?? that the ?? changes the c??unsent decree

spells ??ut provide a remedy.

Yet many Microsoft compet??nors ??ce a broader problem, as well:

the ??ne between where the operating system ends and the

applications pro??las start is increasingly being ??lurred by

advances in technology. ??Smaller compe??tors with innovave ideas in

businesses as diverse as ?? man. ?? compression,

?? creates more storage space on disk, and screen savers, which

pre?? ent damage to mounors, are finding ?? their business is

evaporating because Microsoft keeps adding such programs to ??

operating system as ?? periodically brings out an updated version.

A Microsoft's operating system scheduled for release next year,

called Chicago, will acceler?? the process The program will mer??e

DOS and Windows and will include electronic mail, remote access,

filesearching functions and screen savers. Since introducing MS-DOS

in 1981.

Microsoft has continually campaigned to expand the ?? of what

computing functions belong inside the computer operating system.

The early vers?? of DOS were small programs that did ?? more

than control the storage and ?? of data and start and stop

applications programs. But in the 14 years that followed,

Microsoft's ??rating systems have greatly expanded the servtees they

provide to users and programmers The other important issue not

specifically addressed in the consent decree is whether Microsoft

has been able to leverage us virtual monopoly ?? operating systems

into domination of applications software--a far bigger and more

lucrative market This matter is of great concern to companies like

Lotus Development.

Boarland International and Novell, and its recently acquired

Wordperfect--which specialize in applications software. About

half of the 50 million computers that run Windows, for example use

Microsoft's word processor, called Word, and its spreadsheet, Excel.

It was for that reason that lawyers at the Federal Trade

commission toyed two years ago with the idea of breaking Microsoft

into two companies, More recently, Justice Department investigators

are believed to have

[[Page 29277]]

studied ways of creating some sort of ``Chinese wall''

that might limit the information traveling between the two sides of

the business. Anne K. Bingaman, Assistant Attorney General in charge

of annt??rust matters, refused to comment on the issue. But in

response to a question whether, the department had considered trying

to split Microsoft, she said Sa??day that her lawyers, bad looked at

``every possible legal th?? ory ?? Linkage Is Seft-Pedaled??

In an interview today, Ms. Bingsman: acknowledged that the

decre?? was silent about any linkage ?? ?? Microsoft's power in

operating systems and its, growth, in applications software. But she

also said the Justice Department had decided against pursuing a

``second range of issues'' that had been raised by the

F.T.C.'s earlier investigation.

``All I can tell you is we filed the complaint based on

what we decided were the problems that needed to be

corrected,'' she said.

What the consent decree announced on Saturday did achieve was

this: Microsoft agreed to change the way it deals with the companies

that make the hardware for personal computers, freeing them to offer

customrs a choice of operating systems.

Microsoft will also alter its softwarelicensing policies and the

way it gives information to software developers.

The expectation is that personal computer makers like Compaq.

Dell and others will now be more receptive to the operating systems

made by Novell, international Business Machines and Sun

Microsystems.

Software companies will be able to develop versions of their

programs for Microsoft's operating systems without making exclusive

commitments to Microsoft, leaving them free to create applications

for operating systems that other companies have designed.

Yet while the consensus is that Microsoft's influence will

continue to increase, computer industry executives are divided over

whether its power and influence will be good or bad for consumers.

``Microsoft has become the I.B.M. of the 1990's'' said

J. Paul Gravson chairman and chief executive of Mr. crogra??, a

software publisher it Richardson. Tex ``There are issues for

anyone who wants to participa?? in this market because of their size

and scope. Anything the Government does to slow them down would be

welcome.''

Believes Bigger Is Better But others in the industry believe

that Microsoft's strategy is benefiting consumers.

``If you really care about improving the personal computer,

you wan Microsoft to take over all the pieces of the pre,''

said Stewart Alsop, edito?? of Infoworld, a weekly computer-in

dustry newspaper.

Competitors like Novell, which were otherwise pleased by the

agreement obtained by the Justice Department, said they were

disappointed that the Government had not forced Microsoft to

disclose ??formation about new versions of its operating systems in

ways that would level the playing field for developers who are

competing with Microsoft applications.

The company's competitors have argued that Microsoft has gained

a special advantage for its applications programs by using hidden

operating-system features and providing earlier access to technical

information for its programmers.

Microsoft officials said the Government had found no evidence

that such a special advantage existed. ``We don't think this is

market power in the traditional an??trust sense.'' Said William

h. Neukom, the company's vice president for law and corporate

affairs. ``Anyone can come in and upset you with better

technology. We think it's a ferociously competitive business.''

While the agreement may aid some companies like Novell, which

makes a Microsoft-compatible operating system, it will not affect

Microsoft's power with respect to smaller software developers.

``Microsoft will continue to be very powerful,'' said

Martin Goetz, a cofounder of Applied Data Research, the nation's

first software company ``The Justice Department hasn't ?? to

the cries of the software companies.''

Michael J. Miller

The World According to Microsoft FILED

If you think Microsoft is too dominant in today's computer

industry, a quick look at where the Bill Gates juggernaut is headed

may prove disheartening. Already the leading provider of operating

systems and office productivity applications, Microsoft wants to

carry its success over to other areas, ranging from interactive

television to financial services. With its recent announcements,

acquisitions, and introductions. Microsoft is making its goal clear:

It aims to become a ubiquitous part of tomorrow's information

infrastructure.

THE RIGHT TOOLS

While Intel seems to face more competition than ever,

Microsoft's position in the operating-system market has gotten

stronger. The reason for this continued success is twofold.

Confusion and a lack of focus from OS competitors--such as IBM

and Apple--certainly helped, but Microsoft also gave itself

quite a boost by developing tools like Visual Basic and Visual C++.

Not too long ago, Borland surpassed Microsoft in the quality of

its tools. But more and more, the big firms I talk to are moving to

Microsoft tools. This kind of support gives Microsoft the ability to

decide which technologies to push and which platforms to support, as

well as which technologies to license and which to keep for itself.

For instance, Microsoft was first on the market with products that

really supported OLE 2.0. Now that it wants OLE 2.0 to be widely

supported, it has done a very nice job of making OLE support easier

by providing Wizards in its Visual C++ package.

Microsoft wants OLE to be the object standard, and wants to

establish it before OpenDoc or Taligent gets off the ground.

Microsoft even wants to control object standards on other platforms,

hence its introduction of tools that make it easier for developers

to take Windows applications and move them to other platforms, such

as Macintosh, with built-in support for OLE. Not only does this I by

Mans Bishofs kind of accommodation push Microsoft's APIs. it also

makes it easy for vendors to use Windows as their primary

development platform, regardless of what their target system might

be. This will, of course, lead to code that is optimized for

Windows. (Okay. Microsoft is a bit confused here. This is because

part of the company wants to protect the rights of its Word and

Excel teams by insisting on special terms for using the cross-

platform code for people who write word processors or spreadsheets.)

TIE RIGHT NETWORK

The dominance in tools, applications, and operating systems may

be just the beginning. Consider Microsoft's recent announcements,

such as Microsoft Network, a new on-line service that will be

bundled with Windows 95.

Microsoft Network, once code-named Marvel, may well be the first

thing users see when they start the new operating system and it may

be the best way to get Microsoft support. If users choose to

subscribe to Microsoft Network, the company could wind up getting a

steady stream of $4 to $5 a month from everyone on its operating

system, and that could mean several hundred million dollars a year.

Microsoft isn't the only one with this idea. IBM is doing the

same thing with OS/2 Warp by bundling in Internet access through its

Advantis service, which then sets up a continuing monthly fee. In

fact, you can almost view these two operating systems as loss

leaders for their suppliers'' on-line services. Since Microsoft

is in a position where its operating system is dominant, however,

users will be more likely to try its network service first. In order

to be successful. Microsoft Network doesn't even have to be the best

on-line service; it just needs to be good enough and the most

convenient. And including Microsoft Network with windows 95 will

certainly help.

Now take Microsoft's recent plans to acquire Intuit with its

Quicken personal finance program (which links to a check-paying

system), and add that to the likelihood of Microsoft Network's

success. Because of its size. Microsoft is in a better position to

work out relationships with large banks and other financial players.

Imagine how Microsoft could extend electronic banking onto an online

service such as Microsoft Network.

Microsoft could require just a small service charge on each

transaction. Or it could make money on the float--the interest

in the few seconds it takes to move money from one place to another,

or both.

Microsoft's success in one area helps it extend its success in

other areas. Because Windows is so successful, developers must

develop for it. If Microsoft Network becomes successful, more

developers and content publishers will support it. The same

reasoning will apply to Microsoft's Tiger system for delivering

video and other content to set-top boxes, or even to the far-off

plan of developing wallet PCs with access to financial information.

UNCHARTED WATERS

All this may sound inevidtable, but it isn't. First of all, no

one--not even Bill gates--is successful with every product

he introduces. Just think about Microsoft Money. And does anyone out

there remember the first Microsoft Access, the abortive Crosstalk

[[Page 29278]]

competitor? Not too many folks, obviously, or Microsoft couldn't

have recycled the name for use on its database.

Microsoft still has a lot of strong competitors who envision a

different future. Novell, for instance, is still the clear leader in

network operating systems and has recently announced plans with

General instruments, the leader in cable set-top boxes.

To date, Microsoft's track record in communications products is

less than stellar, Lotus's cc: Mail and Notes have a larger

marcompetitor in the world to come. Micro?? is getting into areas

where it will face ?? competition, in addition to its ?? software

competitors, from banks to tel?? sion and cable companies. in many

ca?? these firms have unique relationships ?? customers or content

that Microsoft ca?? easily duplicate.

This more Microsoft focuses on pushi?? its existing platforms

and operating system?? the more likely it is that there will be so??

outside force, some new technology, th?? Microsoft either won't see

or won't comm?? to quickly enough. This would leave roo?? for new

competitors. Remember, it was?? too long ago that IBM. Digital

Equipme?? Corp., and Wang were the dominant infor?? mation

companies, and look what happene?? when the technology changed.

Still, if you're worried about Micros ?? dominance today, you

have good reason. ?? may foreshadow a future where Microsoft has a

hand in every area of your life--from communications to

entertainment to pay?? ing your bills. the road to this future woo??

be easy, but Microsoft is very determined and is certainly in a

better position tha?? inevitable storms.

There are 3,462 chances to make a mistake in this document.

(Typing it in is number one.)

If the ?? office is here. how come people keep handling you

pieces of ?? paper, ?? faxes. photo-cop?? and newspaper ?? for you

to ?? in your report? Even ?? to type if out in is a mistake. But

it's got to be done one way or ??.

That's where WordScan Plus 3.0 from C??ro, can help. You see.

WordScan Plus uses the ?? 32-bit Adaptive Recognition Technology so

its accuracy rate is unparalleted-- ?? when coupled with the

enhanced image capabilities of any Hewlett-Packard scanner.

In fact, Hewteff-Packard's AccuPage 2.0

technology--including ?? image ?? that lets you read text on

colored backgrounds, small text support, and ??-zoning--makes

WordScan Plus ?? for complex mixed-media Input ?? well as straight

forward type recognition And WordScan Plus's ?? features like de-

skew, the Pop-up Proofer. ?? ?? defina?? page set-up and One?? OCRTM

?? its as simple to use as it is accurate, it even integrates ??

with your Windows ?? ?? thanks to ?? Chameleon Tool ??Tm, e-mail and

direct fax Capabilities.

So stop by your local ?? to see for yourself just how quick. ??

and ?? WordScan Plus is.

It could stop mistakes for good.

PCWEEK

THE NEWSPAPER OF CORPORATE COMPUTING ?? JULY 25, 1984 VOLUME 11

NUMBER 29 S3.05

DOJ accord fosters ``too little, too late'' perception

NEWS ANALYSIS ``Chinese wall'' sidestepped, but some

see new opportunities

BY JANE MORRISSEY

The justice Department and the European Commission won ??

concessions from Microsoft Corp., but ?? doubt the consent decree ??

agreed on will ?? much effect on the company or ?? competitors. The

?? got Microsoft to ?? up per-processor ?? and other business ?? ??

and will ?? us compliance for ?? and a half years, bus left ?? its

ability to ?? share opera?? ??lern ?? with its application ??.

The consent decree will be open for public comment within the ??

60 day, after which a federal judge will offer a final ruling. Legal

experts expect the court to uphold the decree.

Although the government could take further action and Microsoft

could face lawsuits from competitors, mo?? observer?? said both are

unlikely because of the time and expense involved. Microsoft com??

ma?? ?? to live with the outcome, ?? mans are not ??.

``Anyone who said this decision went far enough isn't in

touch with the industry.'' said Ed Zander, president of SunSoft

Inc., Sun Microsystems Inc, software unit. ``Of the three or

four issues [the DOJ] could have worked on. they picked the least

contentions. The `Chinese wall'' is more

subtantive.''

But Microsoft officials, citing legal precedents to back them

up. said ?? were able to convince the government that such

exclusionary sharing ?? ?? is managers take sides; desplts?? the

agreement, the government's Anne Bingaman and Microsoft's

Will??am Neukom still don't sea eye-to-eye; Microsoft financ??als,

meanwhile, are strong. in their rights. ``We encourage our

systems people to talk with the apps people about potential new

operating-systems fea??'' said Chairman Bill Gates

Operating-system makers such as IBM. Novell Inc.. Taligent inc..

(?? and Sun Soil said they were were encouraged that Justice took

the actions it did on per-processor licensing practices,

``We're going to jump all over Otis,'' said Lee

Reiswing president of IBM's Personal Sof??are Prod?? division, in

Austin. Texas. ``It means a level playing field for us for the

first time. We have the op?? to hit the OEMs.

``It will help us in the future in not disadvantaging us

with a pricing mechanism,'' said .Joseph (??. chairman anti CEO

of Taligent, in Santa Clara, Calif.

But some said it is too little, too lair''. ``To the

extent [Microsoft's behavior] prevented other operating systems from

succeeding. that war is over,'' said Mitchell ??, chairman of

Powersoft Corp., in Concord, Mass. ``DOS is it and Windows is

it: The ?? has close to zero impact

Novell. one of the insugaors of tile government ??. the decree

is a good first step m addressing its concerns. The Provo. Utah.

firm will discuss at an upcoming board meeting whether to submit

objections or ?? litigation.

``Sure. I am somewhat disappointed.'' said Novell (??

Counsel David Bradford. ``Nevertheless. I understand how the

justice Department and the EC got to where they did .... They did

all in their power, wen the political and legal environment.''

Bradford expects the decree to help Novell fight the

nextgeneration operating-system battle. ``The 32-bit OS market

has not been won by anybody.'' he argued. ``This decree

will al. low for freer competition.''

A major disincentive, to bringing its own charges against

Microsoft is Novell's recent desire to forge a better relationship

with Microsoft. Novell CEO Bob Frankenberg met earlier this month

with (ales to re-establish ties that had broken off under Novell

Chairman Ray Noorda.

``Noorda called us Nazis and. so far. Frankenberg hasn't

engaged in that type of thing.'' (axes said. declining to ??

rate on any new accords. ``We're not going to conduct this

phase in a fishbowl.''

Additional reporting ?? Mary Jo Fol??. Norvin Leach. and Sam W??

OEM licensing practices

?? no per-processor licensing deals

?? no minimum volume commitments required from OEMs

?? no contracts longer than one year: no penalty for non-renewal

?? no restrictions on OEM's licensing or sale of non-Microsoft

operating systems

?? no requirement mat OEMs license DOS to gain a license for

Windows

Non-disclosure agreements

?? duration not to exceed the products release, public

disclosure by Microsoft, . or one year, whichever comes first

?? cannot restrict third parties from developing software that

runs on competing operating systems.

THE CONSENT DECREE DOES NOT ADDRESS:

?? Microsoft benefiting from operating-system knowledge to

develop applications, such as Microsoft applications group getting

advance notice on operating-system advancements, and the use of

undocumented APIs

?? Microsoft acquiring technology from third Datives under guise

of making a deal

BUSINESS

Jesse Berst

Berst

Mode

Behind the smoke, Microsoft wins again

I know you've all heard about the settlement between Microsoft

and the justice Department. But I thought I'd tell ?? some made

information that hasn't made it into the press releases and official

statements.

?? ?? MICROSOFT REALLY DECIDE TO SETTLE? Because the Justice

Department and the European Commission both said they would ??ue

unless Microsoft agreed by July 11.

W?? DID THE JUSTICE DEPARTMENT REALLY DECIDE TO SET- TI.E.?

Because it got to wave the flag and talk in its most grown-up voice

about protecting consumers without the risk of lengthy

litigation--litigation it probably would have lost.

DOES THE AGREEMENT REALLY CHANGE ANYTHING? No, Microsoft has

always let hardware manufacturers make other kinds of deals. But the

price for those deals was so much higher that no one could afford to

use them. Everybody ended up

[[Page 29279]]

making per- processor arrangements whereby they ultimately paid

Microsoft rovalues for every machine shipped. There were always

escape clauses. It's just that nobody could afford to take them. Now

those escape clauses have been codified into the agreement. Because

of the economics, however, few will use them, at least not in the

short term. As for non-disclosure agreements. Microsoft was in the

middle of creating a new standard agreement an??.

How pathetic to see Janet Reno prattling on about ``lower

prices immediately.''

WILL CONSUMERS REALLY SEE LOWER PRICES? How pathetic to see At-

Torne?? General Janet Reno prauling on about lower prices

m??ed??cly. If the decree had come five years ago, when there were

viable MS-DOS clones, it might have had some immediate impact. Now,

in a world where MS-DOS is on the way out and Windows has no real

clones, it will have no short-term effect.

WHAT CHANGES WILL REALLY COME ABOUT BECAUSE OF THE SETTLEMENT?

Very few. It will be slightly easier for computer firms to sell

Net- Ware-rea?? s??ers without incurring financial penalties from

Microsoft. In the long term, it may be slightly easier for a firm to

introduce a new operating system.

WHO'S THE REAL WINNER? Microsoft. It gets two governmental

bodies off its back. And it does so without admitting that it was

wrong, without being forced to divest or break up, and without

paving a cent in fines or restitution.

Best of all, it has the opportunity to restore us mage just when

it needs it most. Microsoft wants to be a dommant plaver in the

c??terpri??e market. To do that, it must convince global

corporations that it is a trustworthy long-term partner. That job

would have been much harder it governments on two contments were

filing lawsuits. The company might as well have changed its slogan

to ``Microsoft--the most antitrusted name in the

business.''

HOW DO MICROSOFT'S COMPETITORS REALLY FEFL ABOUT THE SETTLEMENT?

They feel like schoolboys who complained about a bully stealing

their lunch money and the teacher let the bully keep taking money

for four more years while ``investigating''--and then

?? him off with a token promise to be a good boy from now on. And

the even got to keep the money he had collected.

Still, I think the announcement will ??mately benefit the rest

of the m??ustry. It frees them from their silly fantasy that the

government was going to come riding to their rescue. Now they can

get back to competing on the basis of better products and features,

not better lawyers and lobbvis??s. ??

?? ??SSF BEFST IS DIRECTOR OF THE WINDOWS SOLUTIONS CONFER-

?? EXPOST??. IF YOU WANT ?? TO YOUR ?? CREES. CONTACT ??

(JBERST?? OR ??

PC WEEK JULY 25, 1994

NOVEMBER 7, 1994 PC WEEK NEWS ??

Microsoft's Marvel beta leverages Win 95 desktop ?? ?? ?? AND ??

??

The Microsoft Network. Microsoft Corp.'s new on4ine service. is

taking the first steps toward ??ing the ranks of more established

services such as CompuServe and America Online by tv- ??g itself

into Windows 95's navi- ??tional tools.

Also known by the code name Marvel. Microsoft Network will reach

beta testers in large numbers as part of the sec- and major beta

version or Windows 95. due this week PC Week L??bs took a look at

the on-line service on a late-release candidate of the second beta.

Microsoft Network's on-line services are well-integrated into

the Windows 95 user interface. The content is very sparse at this

??ge. but once populated with ??rmation service providers.

Microsoft Network may prove to be a valuable information source

for Windows 95 users. The information that is available is well-

organized into a hierarchy of folders and icons.

Navigating discussion groups and chat areas was similar to

navigating local titles and folders. Windows front ends to America

Online and CompuServe, in contrast. are separate applications. With

Microsoft Network, we were able to create a link (called a Shortcut)

to a discussion group and place the link on the Windows 95 desktop,

where it appeared like any other folder. When we double-clicked on

the discussion group. Windows 95 automatically re-established our

connection before opening the icon.

Shortcut icons can be embedded as Object Linking and Embedding

2.0 objects, allowing usors to distribute them.

Messaging services are just as well-integrated. We could use the

standard Microsoft Exchange E-mail client included with Windows 95

to compose and send messages. ??

PCWEEK

THE NATIONAL NEWSPAPER OF CORPORATE COMPUTING * NOVEMBER 21,

1994

VOLUME 11, NUMBER 95 ??.95

PC vendors allege undue pressure from Microsoft

?? IBM, OEMs contend strong-arm tactics

BY MANY JO FOLSY AND LISA DICARLO

LAS VEGAS--IBM and other major hardware OEMs are

complaining that Microsoft Corp. is unfairly pressuring PC vendors

to refrain from bundling OS/2 and PC-DOS with their PCs.

Also last week. Microsoft disclosed to hardware OEMs at Comdex

here the Windows 95 MDA (Market Development Agreement), outlining

proposed licensing fees, incentives, and compliance criteria.

Concerning OS/2, the hardware makers claimed that Microsoft

officials threatened to delav, if not withhold entirely, delivery of

Windows 95 code: reduce market-development funds: and withhold sales

and support training for vendors that offer IBM's OS/2 or PC-DOS

preloaded on their systems, sources said.

Sources said IBM and the hardware vendors have held periodic

discussions with the Department of Justice about the alleged unfair

Microsoft practices. IBM, the Justice Department, and the vendors

declined official comment.

``The [Justice Department] has turned into a Better

Business Bureau for anvone who wants to shoot off a complaint

against Microsoft.'' said David Williams, group manager of

Microsoft's Personal Operating Systems Division, in Redmond, Wash.

``We've got some salespeople who sometimes can go too

far.'' Williams said he was unaware of any new filings

regarding Microsoft with the Jusuce Department.

``The playing field is not level.

SEE BUNDLJNC, PAGE 138

Bundling from page ??

and we have a problem with that.'' said an executive with a

hardware maker, who requested anonvmity. Other hardware vendors,

fearful of reprisals from Microsoft, also requested an?? nymity.

One Microsoft customer said further complaints to the Justice

Department against the company would not affect any business

dealings. ``We've been through this DOJ stuff with the ?? IBM??

said Pete Bavoso, vice president of information systems with The

Darby Group Co., a medical supplier and PC Week Corporate Partner in

Westbury, N.Y.

As for the MDA, several hardware makers complained about the

high rovalties that could hike PC prices as well as the stiff

provisions for preloading.

However, they also said the licensing figure is a mere trial

balloon floated by Microsoft, with Windows 95 not scheduled to ship

until mid-1995.

Also at Comdex, several PC vendors claimed to have been

discouraged by Microsoft from demonstrating IBM's OS/2 Warp at the

show. Hewlett-Packard Co. and Packard Bell were among the companies

that decided at the last minute against showing OS/2 as a result of

implied and suggested retaliation from Microsoft, according to

several sources close to the companies.

Officials with HP, of Palo Alto, Calif., and with Packard Bell,

in Chatsworth. Calif., declined to comment. Dell Computer Corp. and

Toshiba America Information Systems Inc. showed OS/2 Warp in their

booths.

``Microsoft has been very aggressive about staving off the

IBM assault,'' said another OEM source. ``There were

indications that the smoothness and flexibility of bundling Windows

95 would have been jeopardized'' if the vendor showed systems

running Os/2 Warp, said the source.

``There's about 15 things in there where you get $3, $2, or

$1 off if you do things like put the Win 95 logo in national

advertising,'' said another OEM.

``There are strong merchandising incentives [in the

MDA],'' said Steve Lair. Toshiba vice president of marketing,

adding that he didn't see anything in the agreement that overtly

demanded exclusivity to Microsoft's products.

In the weeks leading up to Comdex. Microsoft made it clear to

OEMs that it could make the transition to Windows 95 a costly and

bumpy move, according to one of the sources.

Hardware and operating-system vendors complained privately that

despite the proposed justice Department consent decree--which

required Microsoft to alter its OEM licensing and non-disclosure

agreement practices--Microsoft has done little to modify its

behavior.

With the MDA, ``we are not doing per-system incentives for

OEMs. That would be in violation of the consent decree,'' said

[[Page 29280]]

Microsoft's Williams. ``Instead, we're offering incentives for

OEMs who go that extra mile in marketing Windows 95,'' he said,

specifying financial, training, and joint promotional incentives. ??

Additional reporting by Neal Boud??. Dan Farber, and John Dodge

BUSINESS

Jesse Berst

Berst

Mode

Microsoft's on-line rivals could end up in `cyberia''

Microsoft has promised to bundle an on-line service called The

Microsoft Network ?? Windows ?? next summer on tall. If that

occu??s, I pre?? that competing on-line services will be sentenced

to a long, cold w?? of discontent. Microsoft's service will

have an ??beatable edge over Comp??Serve. Prod?? America Online, and

other rivals.

I'm no an export ?? an?? law, so I don't know whether this ??

??. But I do know it feels unfair. It feels like Microsoft is ??ing

a monopoly in one area to gain a monopoly in another, Microsoft may

change its terms and conditions before the final tele??. But as I

understand it right now. OEMs will be ?? to include MSN What's more

?? will not be informed they have a??

Let's ?? XYZ Co. makes a deal to ?? ??pecial Pro?? package w??

?? computer. It even goes to the trouble of ??ing for a Pro?? sign-

on screen to appear the first time the ?? book up.

When XYZ ships its Win 95 PCs, it will have to include The

Microsoft Network sign-on XYZ may not ?? to ?? MSN. It may have

given money ?? consideration to Pro?? in ?? not the bundle. Yet, as

far as I know, XYZ won the able to turn off the built-in MSN screen.

In essence. OEMs will be forced to distribute MSN if they want

to access Windows 95--even it that distribution is to the OEM's

detriment.

I also worry that consumers won't real??e they have options.

It's as if your local phone company were to automatically sign you

up for AT&T's long-distance service without letting you know

that you have other choices. And I worry that Microsoft will use the

MSN ``registration'' procedure to read information about

customers computer configurations and send that information to a

Microsoft da??base. At least one other compa??s (Delrina) has used

on-line registration to scan and store configuration info.

Now, that would be a competitive advantage--if Microsoft

knew the names of millions of Windows users and knew exactly what

hardware and software they owned

GULAG ??IBROGLIO. I have no evidence that Microsoft intends to

secretly capture and store contiguration info. But the fact that I

worry about it points up how Microsoft creates problems for itself.

These fears are feeding the mounting opposition to Microsoft's

Int?? purchase and to The Microsoft Network. The Justice Department

is being press??ed to open another investigation--pressured by

the same competitors that Microsoft cavalierly dismisses is

``wh??ers'' ?? quote a Microsoft exec). Luck??ly for

Microsoft, it has no much money in can alford to waste millions in

legal fees. It looks like it will get a chance to do just that very

soon.

RESPONSE OF THE WEEK: From system Anal??st Jim Ga??nor of

Columbus. O??io:

``The likelihood of a Big Crash on the Internet decreases

??ail??. Links between one portion of the net and another may

tempora??y go down, but the Internet is genes??s was in a Department

of Delense project to create a data network capable of withstanding

a ??clear attack. Truly crashing the Internet for an extended period

would require a bankrolled effort on the level of the most

professional modern terrorism. However, I agree that the tourists

will start leaving. While Mosa?? may be pretty, interaction requires

both action and thought, foreign concepts to the pas??ve??

entertained masses.'' ??

?? JESSE BERST IS THE ?? ?? FOR

OF W?? WA?? ?? ??

C??

?? MCI (JBERST OR ??

??66), Go?? (713372032), ??

FAX ??

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Top of the News

Microsoft Settles: Business as Usual

Now that Microsoft's licensing agreements for MS-DOS and Windows

have been deemed ``unfair'' and ``monopolistic''

by the Department of Justice, will other operating systems have a

fighting chance on the desktop?

According to computer manufacturers. industry analysts, and end

users, the outtook is grim for Novell's DOS and IBM's PC-DOS and OS/

2. They say there's not much motivation for PC manufacturers to

preinstall a competing product, since Windows has millions of users

and thousands of software applications. And since Microsoft's

upcoming version of Windows Code-named Chicago) won't require DOS,

the demand for all flavors of DOS is likely to plummet.

Has the train for Chicago already left the station? ``I

think the world of OS/2.'' says Jerry Williams. vice president

of data operations for Eglin Federal Credit Union in Fort Walton

Beach. Florida. ``It's a good operating system. However, I

think the momentum has swung in Windows favor. If you go with OS/2.

you're kind of stepping off the ladder.''

``DOS is starting to go away and Windows is taking over

everything.'' says Gary Shurman, president of the New Orleans

Personal Computer Club. ``Unless somebody comes up with

something earthshattering. I don't think there's a serious

challenger to Microsoft.''

Despite the skepticism. Microsoft's competitors may have their

best chance in years to challenge Bill Gates's desktop domination.

After a lengthy investigation by the U.S. Department of Justice and

the European Commission (the executive body that governs the

European Community), Justice Department officials announced in July

that Microsoft had agreed to end its ``illegal monopolistic

practices'' and stop using ``unfair contracts that choked

off competition and preserved its monopoly'' in the PC

operating system market.

Terms of the Decree

Under the terms of the consent decree, Microsoft must change its

licensing contracts with PC manufacturers (called OEMs). It can no

longer make ``per processor'' agreements that require OEMs

to pay a royalty to Microsoft for each PC shipped--regardless

of whether the preinstalled operating system is from Microsoft or a

competitor. The company also can't require OEMs to purchase a

minimum number of Microsoft operating systems or sign a license with

terms longer than one year (although the OEM can renew the license

for an additional year).

Perhaps most optimistic about the Justice Department ruling is

IBM. Which little success in convin??ing OEMs to preinstall its OS/2

operating system. ``This has really opened the door. We've ??ut

proactively, contacting, hundreds of PC manufacturers

already.'' says John ?? detector of IBM's Personal Software

Products division in Austin. Texas. While So??ing expects some

``major North American manufacturers'' to pre??stall OS/

2?? so far Big Blue's ??tories have been in Europe. Soyring says

that

[[Page 29281]]

German PC makers Vobis and Escom already preinstall OS/2--and

Escom expects to ship 440.000 ??tems with OS/2 over the next 12

months.

Despite the ruling from Justice, Micro soft's influence over PC

manufacturers remains immense. Most of the leading OEMs contacted

for this article had little or no comment on the Justice Department

ruling, other than to say that their relationship with Microsoft

would stay the same (in other words, they'd still preinstall

Windows). And many industry pundits sec the consent decree as a weak

slap on Microsoft's wrist. ``I think Microsoft is thrilled with

the settlement.'' says Tim Bajarin. president of Creative

Strategies in San Jose, California. Of course, if Microsoft is too

aggressive, it is likely to find itself in the sights of regulators

once again. That's a position even Bill Gates wants to avoid.

Jeff Bertolucci

Jan ??rancisco ??ronicle

THE ?? DAILY CIRCULATION IN HO??THE?? CA??FORMIA

MONDAY, JULY 18, 1994

Microsoft Unscathed By Settlement

Antitrust pact a slap on wrist for software giant

By Da??id E??ste??

Ch?? Staff Writer

Although the government claimed victory in its antitrust battle

against Microsoft, it appears as if the world's largest software

maker suffered little damage and in fact should continue to

steamroller the rest of the industry.

By agreeing to halt some supposedly monopolistic practices, Bill

Gates'' giant company has left the door open ever so

&lightly for competitors to grab some piece of the market for

operating systems that run moat of today's personal computers. It is

a market Microsoft dominates with its MS-DOS and Windows programs,

currently installed on more than 120 million computers worldwide.

But sometime late this year of early next. Microsoft intends to

brush away its rivals once again when it introduces Chicago, the

next generation of Windows. If PC users flock to Chicago as

expected.

Gates actually could increase hit hold on the industry he helped

create in the early 1990s.

There had been speculation that the Justice Department, which

took over the Investigation from the Federal Trade Commission last

year, might have gone so far as to break up Microsoft Just as

AT&T was split up In 1984.

But ns the government closed the case late Friday, however, it

was with a mere slap on the wrist. Microsoft admitted no guilt over

allegations of monopolistic practices, and faces no fines or

financial penalties. Its revenues, now over $4 billion a year,

probably will not suffer.

No wonder Microsoft officials were happy with the terms of the

settlement. ``It preserves our ability to do business In a way

that IS effective,'' said Bill Neukom, vice president of law

and corporate affairs.

But Attorney General Janet Reno professed satisfaction with the

outcome of the first major antitrust case of the Clinton

administration, saying the settlement ``levels the playing

field and opens the door for competition'' by curbing

Microsoft's ``monopollstic practices.''

Reno talked tough, adding that ``while the company fairly

and lawfully climbed to the top of the industry ladder, It used

unfair and illegal practices to maintain its dominant

position.''

But the settlement did not address what many competing companics

consider the real antitrust issue. Microsoft, they say, has used its

control of DOS and Windows to extend lb hold on the software sector.

In fact. during the nearly four years the government

Investigated Microsoft, the Redmond, Washbased behemoth managed to

be the major player In the market not only for operating systems,

but also for major applications such as word processing and

spreadsheet software. And even as the consent decree goes Into

effect, Microsoft is trying to tighten the screws on its major

competitors by asking smaller software developers to adopt a

standard that would make their programs dovetail with Microsoft's

best-selling ``Office'' suite of applications. U??

Friday's consent decree, which steers the company and the

government clear of the courts, includes an agreement to change the

way Microsoft licenses its operating system. That Issue the

government felt was its best chance to beat Microsoft had the

antitrust case gone to court.

Microsoft no longer will offer PC makers steep discounts on

volume purchases of DOS and Windows In return for royalities from

every PC said--whether or not the Microsoft system was actually

Installed on them. That ``per-processor'' licensing

strategy had discouraged manufacturers from buying rival products

such a Novell's version of DOS or IBM's OS/2 operating system, since

they already were paying for Microsoft's version.

Novell's general counsel, David Bradford, saw the consent decree

as a clear victory. ``This has been a long effort by many

companies for many years.'' he said, ``and this decision

will provide consumers with Increased choices and more innovative

products.''

But the euphoria may wear off quickly. Microsoft's Chicago

program reportedly will not require an underlying operating system,

leading Industry experts to predict the irrelevancy or death of DOS

once Chicago catches on. Industry Standard P??ts

Competitors may benefit more from Microsoft's agreement

to'' loosen restrictions on its nondisclosure

agreements--Industry. standard pacts that software companics

must sign to get advance copies of new products such as Chicago.

Microsoft In the past has forced companies to agree not to work with

other operating systems in return for access to lb programs.

That may help large companies like Novell, which is updating its

popular WordPerfect and Quattro Pro programs. But smaller companies

still may find themselves ti??t- ing at windmills in trying to take

on Microsoft.

Ernie Simpson. president of The Wizard Co. in Denton, Texas,

called the settlement ``a waste of time.''

``Microsoft will continue to do as they have been doing,

only they'll word their contracts a little differently.'' said

Simpson, whose company develops software for some major Windows

programs. ``Microsoft Is the de facto industry standard for

operating systems, and they will continue to control the industry to

the advantage of Microsoft and the detriment of everyone

else.''

Microsoft had Insisted It would never settle antitrust charges

out of court. Gates was positively adamant about it, complaining

that the Justice Department was hounding him unreasonably, in the

end, however, with antitrust charges looking more and more possible,

the company decided to cut a deal. Judging from the first reviews,

Gates appears to have done quite well by It.

Chronicle wiry ser??c?? to this report.

Sunday, July 24, 1994 C-5

San Francisco Examiner

COMPUTERS & TECHNOLOGY

Microsoft deal: too little, too late

A few days after the Department of Justice announced the

settlement of its antitrust investigation of Microsoft, Bill Gates

told the Wall Street Journal, ``I intend to defy

gravity.''

Thanks to the nature of that settlement, it is likely that he

will.

The Justice Department press release announcing the settlement

quoted Attorney General Reno as saying, ``Microsoft's unfair

contracting policies have denied other U.S. companies a fair chance

to compete, deprived cop- ??mers of an effective choice ??ong

competing PC operating systems, and alowed innovation.'' True

enough.

She went on to state, ``Today's settlement levels the

playing field and opens the door for competition.''

Unfortunately, it is unlikely to do either.

It is telling that in describing the harm caused to competition

and innovation by Microsoft's practices, the attorney general used

the past tense. The particular practices the settlement addressed

were unquestionably key factors in Microsoft's rise to dominance in

the 1980s.

Among other things, Microsoft required PC manufacturers to pay a

license fee for its MS-DOS and Windows operating system software on

every PC shipped with an Intel microprocessor under long-term

agreements--whether or not those PCs actually contained that

software--and unreasonably restricted independent software

companies from working with Microsoft compatitors. In so doing,

Microsoft managed to insinuate its technology into the heart and

soul of 85 percent of the world's PCs.

By 1985, these practices had already had their intended effect:

making Microsoft's operating system the de fact?? PC standard. The

present source of Microsoft's domination in the PC world derives

from the status as the standard-holders, not the practices the

Justice Department condemned and which will now be prohibited under

the settlement.

Microsoft, understands this perfectly well, which, of course, is

why Bill Gates let the settlement happen. Nothing in the proposed

settlement is likely to have anything other than the most marginal

effect on Microsoft's future.

Inherent in the nature of software technology is the concept of

dependence.

[[Page 29282]]

Operating systems are useless without application programs and vice

versa. Neither has discrete, stand-alone value.

But of the two, operating systems software must come first and

clearly provides the most potential for leverage. To its credit,

Microsoft understood this earlier than everyone else and exploited

its insight relentlessly. So technically dependent in the PC

industry on Microsoft operating system software, that Microsoft

could afford the luxury of a five-year period in which to perfect.

Windows after its initial introduction in 1986.

When Apple introduced the Macintosh ``graphical user

interface,'' which replaced ob??cure and hard-to-remember

keyboard commands with easy-to-learn and easy-to-use screen icons

and a mouse, it marked a watershed in the development of consumer-

friendly computing. In response, Microsoft introduced Windows, which

was supposed to provide Macintosh-like ease-of-use.

[See VIEWPOINT, C-6]

??VIEWPOINT from C-1

Too little, too late

But the first several versions of Windows were so poorly

designed that very few people wanted them, preferring even the

archaic DOS with its incredibly difficult keyboard commands. It

wasn't until 1990, five years after its introduction, that Microsoft

finally produced a version of Windows that was ready for prime.

Now, one would think that if genuine competition existed in PC

operating systems, this five-year gap would have been exploited by

one or more competitors of Microsoft. Indeed, it's hard to conceive

that any company could have taken as long as Microsoft did to get a

basic technology right and still survive.

Yet, Microsoft not only survived during this period, it

prospered. The reason is that it was virtually impossible to shake

free of MS-DOS, even when clearly better alternatives were

available. The consumer investment in application programs that

could only run on the Microsoft system was too large and the cost of

switching to an alternative technology--even a clearly better

one--too great.

While this was obvious to everyone by 1985 or 1986, Bill Gates

understood it in 1980.

Almost 10 years later, PC manufacturers, consumers and software

developers are even more tightly bound to Microsoft operatins system

technologies. The ties that bind are not contractual, they are

technical, which is why the Jus- rice Department settlement will be

ineffective.

And while controlling this standard, Microsoft is free to

compete on applications based on the standard. Companies that

develop competing spreadsheet, word processing and other such

programs have complained for years that Microsoft programmers have

the unfair advantage of knowing changes to the operating system

specifications well before anyone else.

The fact is Microsoft owns-- and closely guards--the

de facto standard for desktop computers, a critical part of our

information infrastructure. And at least three steps could be taken

to ensure fair competition. Microsoft could be required to:

??Publicly disclose its operating system interface

specifications so that designers of competing operating systems

could have assurance that application programs written for MS-DOS or

Windows would run efficiently with their operating systems.

Microsoft should update its specifications in a periodic and timely

manner.

San Jose Mercury News

Se??ng Northern Cal?? Since 1851

?? NOVEMBER 13, 1994

Microsoft, Intel set to define technology

?? Duopoly: Apple, IBM, Motorola mounting last-ditch attempt to

make PC alternative. BY RORY J. O'CONNOR

Merr??ry News Staff Writer

Tomorrow, when Silicon Valley's brain trust arrives in Las Vegas

as part of a 200,000-strong crowd at the computer industry's largest

trade snow, conversation will almost certainly center on one topic:

Can anything stop Microsoft and Intel from controlling everything?

Some fear that as the digital future of the information

superhighway emerges, an unchallenged Microsoft and Intel will wind

up in total, undisputed control of the technology upon which the

country's citizens and economy will depend. And few believe that a

recently announced alliance between Apple and IBM will prove an

effective roadblock.

Who will control COMPUTING'S FUTURE? First in an occasional

series.

Today, Microsoft Corp. makes the world's most popular software

for personal computers, operating systems that control 85 percent of

the machines in use. Intel Corp.'s microprocessor chips are the

brains in 75 percent of all the computers made.

But the personal computer is rapidly becoming a home appliance,

and the PC is poised to expand from word processing and spreadsheets

to controlling a myriad of other jobs in our everyday work and

personal lives. The companies that control personal- computer

technology are in a position soon to dominate much, much more.

From video telephones to intelligent fax machines, from office

to home, from providing digital information and entertainment to

managing credit-card and other financial transactions, Microsoft and

Intel are already extending their reach far beyond traditional

personal computing.

Both companies have deep pockets to back the technology--

and their unofficial partnership is an effective duopoly that could

let the companies dictate the price of technology, minimize consumer

choices and slow the pace of technical progress.

In short, many believe, little stands between the two comparoes

and technical control of the future.

``Increasingly, I'm believing it's all over, and we're

going to be locked into Microsoft and Intel forever.'' said

Dataquest analyst Kimball Brown.

In the 13 years since IBM transformed the PC from hobbyist toy

to business tool. control of the industry has shifted from IBM and

Apple to their once-tiny corn- petitors. Now, Apple and IBM, despite

their combined annual revenues of nearly $75 billion, are the

underdogs.

Except for Apple, whose research and development spending

remains large despite a $100 million cutback in the past year, few

PC companies invest significant sums in new technology research. The

bulk of such money is spent by Intel to develop chips and Microsoft

to further its lead in software.

Many people in the industry decry this state of affairs, but

lack the money, the marketing or the technology to force meaningful

competition. Even the federal government has declined to step in,

punishing Microsoft with a slap on the wrist after a four-year

investigation into what Attorney General Janet Reno called

``illegal, monopolistic'' practices.

Perhaps the only force large enough to change anything is an

infant agreement announced last week by Apple, IBM and Motorola to

build a new kind of personal computer, one that would neither use

Intel microprocessors nor fea ture Microsoft operating systems.

The timing of their agreement, one week before the largest

annual gathering of technology power brokers in the world, is no

accident.

Even though the alliance will not produce a product until 1996,

IBM and Apple need every ounce of momentum they can muster for what

is probably the last- ditch attempt to topple Intel and Microsoft t

or even to hope to play a role in defining the technical future.

But most analysts insist that Apple and IBM are waging the wrong

war. ``The desktop operating system war is over,'' said

venture capitalist Ann Winblad, whose Emeryville firm specializes in

software companies. ``Microsoft has won.''

Instead. Apple and IBM should be looking to the information

superhighway for opportunities to sell new technology, expand their

business and regain the power to force technical competition, said

Richard Shaffer, publisher of the Technologic Letter in New York.

That's because there is a potentially more lucrative market in

the future, one that uses both the personal computer and its

technology.

It goes by the catch-all term of information superhighway, but

it encompasses a host of major changes in the role of personal

computers at work and at home.

Some of the latest home, computers are already touted as being

able to replace nearly everything in a small office except the

coffee pot.

Phones and fax machines are becoming smarter, thanks to more-

powerful computer brains. And when people are away from their home

or office in the future, they may well carry portable devices that

combine today's cellular phone with ready information access,

offering yet another umbilical cord to the PC.

Over the next decade, even television is poised to become

interactive, offering far more choices, two-way video and fountains

of information on demand--activities that require heavy use of

computer chips and sophisticated operating systems and other

software. Computers will manage nearly all financial transactions,

and will even be a citizen's primary conduit to the government.

Some experts envision a single intelligent box in the home, one

that would use the

[[Page 29283]]

functions of a personal computer to connect the home to information

and communications lines through phone-company wires or cable-

television hookups.

There's little doubt that each of these areas will be the site

of intense competition. In almost every case, Microsoft and Intel's

dominance of the PC business would give them a crucial advantage.

If they succeed in controlling key technology in any or all of

these areas, they will be able to determine much of how the devices

work, and could even control how people receive information or make

purchases. And the closer the digital world moves to merging control

into just one or two boxes connected to monolithic networks, the

better the chance Intel and Microsoft have to dominate them as they

have PCs.

But Apple insists it is not blind to the digital future, despite

initial failure in one new market-- that for personal digital

assisrants--and a very slow start for its E-World on-line

service.

``Clearly, there's a feeling at Apple that these other

technologies are very exciting areas,'' said Rick LeFaivre, the

head of the company's Advanced Technology-Group. ``But at the

same time we're making sure not to take our eye off the PC and say

it's dead. ... The PC side of our business will be by far the

dominant side for a long, long time.''

At the same time, Apple's partner is struggling to regain power

it has lost in nearly every area of its business. Internally, it is

replacing top managers, revamping its structure, changing key

technology, laying off workers and trying to figure out how it fits

into a world it once controlled. Externally, critics say they can't

fathom the company's strategy, especially in personal computing,

where it is unclear what software and hardware technology IBM

considers strategic--and, there, fore, safe for customers to

buy.

The problem for Apple and IBM, according to analysts, is that

they probably have little'' hope of competing effectively in

the digital future unless they can quickly establish their new

computer as a viable mauve.

But to become a PC alternative. the companies must overcome a

host of difficulties, from wrenching changes in their corporate

cultures to damaged balance sheets to the improbability of the

partnership they began with Motorola more than three years ago.

``The whole plan in 1991 was daring, kind of like

chemotherapy,'' stud Shaffer. ``The therapy might kill the

patient, but the al ternative is certain death.''

Few believe that Apple, IBM and Motorola can thrive against the

Microsoft-Intel duopoly short of a move even more unlikely than the

original IBM-Apple partnership.

``Without the merger of Apple and IBM into one corporate

entity, they are executing separate strategies, no matter what they

say,'' Winblad said. ``So while some people have called

this the David and Goliath story, with Microsoft as Goliath, there

is no David--perhaps a Tom, Dick and Harry.''

Not everyone believes that a world where two companies control

most of the technology is a cause for alarm, however. ``What's

wrong with there being just one operating system? It's supposed to

be transparent to the user,'' said analyst Doug Kass of the

Viewpoint Group in Aptos. ``I don't think that will lead to

huge increases in price. It's not competition among vendors, but

what the market will bear in terms of price. Consumers look for what

works, not the cutting edge. If some new (software) is priced beyond

the glass ceiling of what consumers are comfortable paying, it won't

sell.''

Not surprisingly, Microsoft officials share that view

``Things are very competitive now,'' said Brad Chase,

general manager of Microsoft's personal operating systems division.

``Apple is certainly not an uncompetirive company. IBM is a

very aggressive company. And the thing about technology is you can't

rest on your laurels. If you don't keep aggressive, your leadership

will melt like butter.''

Tomorrow in Business Monday: How far can Microsoft go?

San ``Jose Mercury News,'' Wednesday, December 21,

1994

MICROSOFT'S DOMINATION

Microsoft's revenues in the world market for personal computer

business grew more in 1994 than revenues in the market as a whole,

according to preliminary estimates by Dataquest Inc. Total revenues

grow by more than $550 million, while Microsoft's related revenue

grew by more than$650 million. ``Lotus 1-2-3.

WordPerfect. dBase.

Paradox and Harvard

Graphics once dominated their respective categories.'' said

Dataquest analyst Karl Wong. ``Today, Microsoft products have

replaced each of these one-time product category leaders.''

(Figures are in millions.)

``94 1993 ``93-'94 ``94 ``94 market

Rink Company Revenue % chg. ,Revenue, share (%)

1 Microsoft $2.221 +29.4 $2.873

34.7 District of Columbia.

2 Lotus 986--1.8 968 1

I. 7 3 Novell 698 -11.6 617

7.5 4 Adobe 197 +28.1 253 3.1 5 Symantec 207 +15.2 238

2,9 6 Clans 160 -t-9.3 175

2.1 7 Borland 360 -52.8 170

2.1 8 Intuit 104 +56.9 163

2.0 9 Corel 105 +41.6 148

t.8 I0 Delrina 65 +43.1 94

1.1 Others 2.617 -1.7 2.573

31.0 Total 7.720 +7.2 8.272

100.0

Source: Dataquest Inc

MERCURY NEWS

Positive Feedbacks

in the Economy

A new economic theory elucidates mechanisms whereby small chance

events early in the history of an industry or technology can tilt

the competitive balance Conventional economic theory is built on the

assumption of diminishing returns. Economic actions engender a

negative feedback that leads to a predictable equilibrium for prices

and market shares. Such feedback tends to stabilize the economy

because any major changes will be offset by the very reactions they

generate. The high oil prices of the 1970's encouraged energy

conservation and Increased off exploration, precipitating a

predictable drop In prices by the early 1980's. According to

conventional theory, the equilibrium marks the ``best''

outcome possible under the circumstances: the most efficient use and

allocation of resources.

Such an agreeable picture often does violence to reality. In

many parts of the economy, stabilizing forces appear not to operate.

Instead postitive feedback magnifies the effects of small economic

shifts; the economic models that describe such effects differ vastly

from the conventional ones. Diminishing returns imply a single

equilibrium point for the economy, but positive

feedback--increasing rerums--makes for many possible

equilibrium points. There is no guarantee that the particular

economic outcome selected from among the many alter-

W. BRIAN ARTHUR is Morrison Professor of Population Studies and

Economics at Stanford University. He obtained his Ph.D ??om the

University of California. Berkeley, In 1973 and holds graduate

degrees In operations research, economics and mathematics. Until

recently Arthur was on leave at the Santa Fe Institute, a research

institute dedicated to the study of complex systems. There he

directed a team of economists, physicists, biologists and others

investigating behavior of the economy as an evolving. complex

system. by W. Brian Arthur natives will be the ``best''

one. Furthermore. once random economic events select a particular

path, the choice may become locked-in regardless of the advantages

of the alternatives. If one product or nation in a competitive

marketplace gets ahead by ``chance.'' it tends to stay

ahead and even Increase its lead. Predictable, shared markets are no

longer guaranteed.

During the past few years I and other economic theorists at

Stanford University, the Santa Fe Institute in New Mexico and

elsewhere have been developing a view of the economy based on

positive feedback. Increasing-returns economics has roots that go

back 70 years or mote. but Its application to the economy as a whole

is largely new. The theory has strong parallels with modem nonlinear

physics (instead of the pre-20th-century physical models that

underlie conventional economics), it recluses new and challenging

mathematical techniques and it appears to be the appropriate theory

for understanding modem high-technology economies.

The history of the videocassette recorder furnishes a simple

example of positive feedback. The VCR market started out with two

competing formats selling at about the same price: VHS and Beta.

Each format could realize Increasing returns as its market share

Increased: large numbers of VHS recorders would encourage video

outlets to stock more prerecorded tapes in VIIS format, thereby

enhancing the value of owning a VIIS recorder and leading mote

people to buy one. (The same would, of course, be true for Beta-

format players.) In this way, a small gain in market share would

Improve the competitive position of one system and help it further

increase its lead.

Such a market is initially unstable. Both systems were

introduced at about the same time and so began with roughly equal

market

[[Page 29284]]

shares; those shares fluctuated early on because of external

circumstance, ``luck'' and corporate maneuvering.

Increasing returns on early gains eventually tilted the competition

toward VHS: It accumulated enough of an advantage to take virtually

the entire VCR market.

Yet it would have been Impossible at the outset of the

competition to say which system would win, which of the two

possible'' equilibria would be seleered. Furthermore, if the

claim that Beta was technically superior Is true, then the market's

choice did not represent the best economic outcome.

Conventional economic theory offers a different view of

competition between two technologies or products performing the same

function. An example is the competition between water and coal to

generate electricity. As hydroelectric plants take more of the

market, engineers must exploit more costly dam sites, thereby

increasing the chance that a coal-fired plant will be cheaper. As

coal plants take more of the market. they bid up the price of coal

(or trigger the imposition of costly pollution controls) and so tip

the balance toward hydropower. The two technologies end up sharing

the market in a predictable proportion that best exploits the

potentials of each, in contrast to what happened to the two video-

recorder systems.

The evolution of the VCR market would not have surprised the

great Victorian economist Alfred Marshall one of the founders of

today's conventional economics. In his 1890 Principles of Economics,

he noted that if firms'' production costs fall as their market

shares Increase, a rum that simply by good fortune gained a high

proportion of the market early on would be able to best its rivals;

``what. ever firm first gets a good start'' would corner

the market. Marshall did not follow up this observation, however.

and theore??cal economics has until recently largely ignored it.

Marshall did not believe that mcreasing returns applied

everywhere; agriculture and mining--the marestays of the

economies of his time-- were subject to diminishing returns

caused by limited amounts of fer??le land or high-quality ore

deposits. Manufacturing, on the other hand. enjoyed increasing

returns because large plants allowed improved organization. Modern

economists do not see economies of scale as a reliable source of

increasing returns. Sometimes large plants have proved more

economical; often they have not.

I would update Marshall's insight by observing that the parts of

the economy that are resource-based (agriculture. bulk-goods

production, mining) are still for the most part subject to

diminishing returns. Here conventional economics rightly holds sway.

The parts of the economy that are knowledge-based, on the other

hand. are largely subject to increasing returns. Products such as

computers, pharmaceuticals, missiles, aircraft, automobiles.

software, telecommunications equipment or fiber optics are

complicated to design and to manufacture. They require large initial

investments in research, development and tooling. but once sales

begin, incremental production is relatively cheap. A new airframe or

aircraft engine, for example. typically costs between $2 and $3

billion to design, develop, certify and put into production. Each

copy thereafter costs perhaps $50 to $100 million. As more units are

built, unit costs continue to fall and profits increase.

Increased production brings additional benefits: producing more

units means gaming more experience in the manufacturing process and

achieving greater understanding of how to produce additional units

even more cheaply. Moreover. expenence gained with one product or

technology can make it easier to produce new products incorporating

similar or related technologies. Japan-for example, leveraged an

initial investment in building precision instruments into a capacity

for building consumer electronics products and then the integrated

circuits that went into them.

Not only do the costs of producing high-technology products fall

as a company makes more of them. but the benefits of using them

increase.

Many items such as computers or telecommunications equipment

work m networks that require compatibility; when one brand gains a

significant market share, people have a strong incentive to buy more

of the same product so as to be able to exchange information with

those using it already.

If increasing returns are important. why were they largely

Ignored until recently? Some would say that complicated products-

high technology-for which increasing returns are so Important. are

themselves a recent phenomenon. This is true but is only part of the

answer. After all, in the 1940's and 1950's. economists such as

Gunnar K. Myrdal and Nicholas Kaldor identified positive-feedback

mechanisms that did not revolve technology. Orthodox economists

avoided increasing returns for deeper reasons.

Some economists found the existence of more than one solution to

the same problem distasteful--unscientific. ``Multiple

equilibria.'' wrote Joseph A. 5chumpeter in 1954, ``are

not necessarily useless, but from the standpoint of any exact

science the existence of a uniquely determined equilibrium is, of

course, of the utmost Importance. even if proof has to be purchased

at the price of very restrictive assumptions; without any

possibility of proving the existence or [a] uniquely determined

equilibrium-- or at all events, of a small number of possible

equilibria--at however high a level of abstraction, a field of

phenomena is really a chaos that is not under analytical

control.''

Other economists could see that

ALL A

RANDOM WALK on a convex surface illustrates increasing-returns

competition between two technologies. Chance determines early

patterns of adoption and so influences how fast each competitor

improves. As one technology gains mort adherents (corresponding to

motion downhill toward either edge of the surface), further adoption

is increasingly likely.

SCIENTIFIC AMERICAN February 1990 93

FLORENCE CATHEDRAL CLOCK has hands that move

``counterclockwise'' around its 24.hour dial When Paolo

Uccello designed the clock in 1443. a convention for clockfaces had

not emerged. Competing designs were subject to increasing returns:

the more clockfaces of one kind were built, the more people became

used to reading them. Hence. it was more likely that future

clockfaces would be of the same kind. After 1530.

``clockwise'' designs displaying only 12 hours had crowded

out other designs. The author argues that chance events coupled with

positive feedback. rather than technological superiority, will often

determine economic developments. theories incorporating increasing

returns would destroy theft familiar world of unique, predictable

equilibria and the notion that the market's choice was always best.

Moreover, if one or a few firms came to dominate a market, the

assumption that no firm is large enough to affect market prices on

its own (which makes economic problems easy to analyze) would also

collapse. When John R. Hicks surveyed these possibilities in 1939 he

drew back in alarm. ``The threatened wreck. age.'' he

wrote. ``is that of the greater part of economic theory.''

Economists restricted themselves to diminishing returns, which

presented no anomalies and could be analyzed completely.

Still others were perplexed by the question of how a market

could select one among several possible solutions. In Marshall's

example, the firm that is the largest at the outset has the lowest

production costs and must inevitably win in the market. In that

case. why would smaller firms compete at all? On the other hand. if

by some chance a market started with several identical firms, their

market shares would remain poised in an unstable equilibrium

forever.

Studying such problems in 1979, I believed I could see a way out

of many of these difficulties. In the real world, if several

similar-size firms entered a market at the same time, small

fortuitous events--unexpected orders, chance meetings with

buyers, managerial whims--would help determine which ones

achieved early sales and, over time, which firm dominated. Economic

activity is quantized by individual transactions that are too small

to observe, and these small ``random'' events can

accumulate and become magnified by positive feedbacks so as to

determine the eventual outcome. These facts suggested that

situations dominated by increasing returns should be modeled not as

static, deterministic problems 94 SCIENTIFIC AMERICAN February 1990

as dynamic processes based on ??ndom events and natural positive

feedbacks, or nonlinear??ties

With this strategy an increasingreturns market could be re-

created in a theoretical model and watched as its corresponding

process unfolded again and again. Sometimes one solution would

emerge, sometimes (under identical conditions) another. It would be

impossible to know in advance which of the many solutions would

emerge in any given run. Still, it would be possible to record the

particular set of random events leading to each solution and to

study the probability that a particular solution would emerge under

a certain set of initial conditions. The idea was simple, and it may

[[Page 29285]]

well have occurred to economists m the past. But making it work

called for nonlinear random-process theory that cud not exist in

their day.

Every increasing-returns problem need not be studied in

isolation; many rum out to fit a general nonlinear probability

schema. It can be pictured by imagining a table to which balls are

added one at a time; they can be of several possible

colors--white, red, green or blue. The color of the ball to be

added next is unknown, but the probability of a given color depends

on the current proportions of colors on the table. If an increasing

proportion of balls of a given color increases the probability of

adding another ball of the same color, the system can demonstrate

positive feedback. The question is. Given the function that maps

current proportions to probabilities, what will be the proportions

of each color on the table after many balls have been added?

In 1931 the mathematician George Polya solved a very particular

version of this problem in which the probability of adding a color

always equaled its current proportion. Three U.S. probability

theorists, Bruce M. Hill of the University of Michigan at Ann Arbor

and David A. Lane and William D. Sudderth of the University of

Minnesota at Minneapolis. solved a more general nonlinear version in

]980. In 1983 two Soviet probability theorists. Yuri M. Ermoliev and

Yuri M. Kaniovski, both of the Glushkov Institute of Cybernetics in

Kiev, and I found the solution to a very general version. As balls

continue to be added, we proved, the proportions of each color must

settle down to a ``fixed point'' of the probability

function--a set of values where the probability of adding each

color is equal to the proportion of that color on the table.

Increasing returns allow several such sets of fixed points.

This means that we can detern the possible patterns or soluti??

of an increasing-returns problem by solving the much easier

challenge of finding the sets of fixed points of its probability

function. With such tools economists can now define increasing-

returns problems precisely, identify their possible solutions and

study the process by which a solution is reached. Increasing returns

are no longer ``a chaos that is not under arialytical

control.''

In the real world, the balls might be represented by companies

and their colors by the regions where they decide to settle. Suppose

that firms enter an industry one by one and choose their locations

so as to maximize profit. The geographic preference of each firm

(the intrinsic benefits it gains from being in a particular region)

vanes; chance determines the preference of the next firm to enter

the industry. Also suppose, however, that firms'' profits

increase if they are near other firms (their suppliers or

customers). The first firm to enter the industry picks a location

based purely on geographic preference. The second firm decides based

on preference modified by the benefits gained by locating near the

first firm. The third firm is influenced by the positions of the

first two firms, and so on. If some location by good fortune

attracts more firms than the others in the early stages of this

evolution, the probability that it will attract more firms

increases. Industrial concentration becomes self-reinforcing.

The random historical sequence of firms entering the industry

deter. mines which pattern of regional setdement results, but the

theory shows that not all patterns ate possible. If the

attractiveness exerted by the presence of other firms always rises

as more firms are added, some region will always dominate and shut

out all others.

If the attractiveness levels off, other solutions, in which

regions share the industry, become possible. Out new tools tell us

which types of solutions can occur under which conditions.

Do some regions in fact amass a large proportion of an industry

because of historical chance rather than geographic superiority?

Santa Clara County in California (Silicon Valley) is a Likely

example. In the 1940's and early 1950's certain key people m the

U.S. electronics industry--the Varian brothers, William Hewlett

and David Packard. William Shockley-set up shop near Stanford

University; the local availability of engineers, supplies and

components that these early firms helped to create made Santa Clara

County extremely attractive to the or so firms that followed. If

these eatly entrepreneurs had preferred other places, the densest

concentration of electronics in the country might well be somewhere

else.

On a grander scale, if small events m history had been

different, would the location of cities themselves be different? 1

believe the answer ]s yes. To the degree that certain locations are

natural harbors or junction points on rivers or lakes, the pattern

of Ones today reflects not chance but geography. To the degree that

industry and people are attracted to places where such resources are

already gathered, small early chance concentrations may have been

the seeds of today's configuration of urban centers. ``Chance

and necessity,'' to use Jacques Monod's phras??ract. Both have

played crucial ro?? the development of urban centers ?? the U.S. and

elsewhere.

Self-reinforcing mechanisms other than these regional ones work

in international high-tech man. ufacturing and trade. Countries that

gain high volume and experience in a high-technology industry can

reap advantages of lower cost and higher quality that may make it

possible for them to shut out other countries.

For example, in the early 1970's, Japanese automobile makers

began to sell significant numbers of small cats in the U.S. As Japan

gained market vol. tune without much opposition from Detroit. its

engineers and production workers gained experience, its costs fell

and its products improved. These factors, together with improved

sales networks, allowed Japan to increase FERROMAGNETS AND REGIONAL

RAIL GAUGES become ordered in much the way. As a disordered magnetic

material is cooled (left% the atomic dipoles inside it exert tortes

on one another, causing neighboring dipoles to align. Eventually all

the dipoles in a sample line up, but the direction they all take (up

or down) cannot be predicted beforehand. Similarly, as Douglas

Puffert of Swarthmore College has shown, neighboring private

railroads (right) ha the past century adopted the same gauge to

extend their range mole easily. Eventually all (or most) railroads

used the Same gauge. Similar equations describe the behavior of

these two system.5. SCIENTIFIC AMERICAN February 1990 95 its share

of the U.S. ?? as a resuit. workers gained ?? expert. ence, costs

fell further and quality improved again. Before Detroit responded

seriously, this posture-feedback loop had helped Japanese companies

to make serious inroads into the U.S. market for small cars. Similar

sequences of events have taken place m the markets for television

sets. rotegrated circuits and other products.

How should countries respond to a world economy where such rules

apply? Conventional recommendations for trade policy based on

constant or diminishing returns tend toward lowprofile approaches.

They rely on the open market, discourage monopolies and leave issues

such as R&D spending to companies. Their underlying assumption

is that there is a fixed world price at which producers load goods

onto the market, and so interference with local costs and prices

means of subsidies or tariffs is unp?? ductive. These policies are

appropriate for the diminishing-returns parts of the economy, not

for the technology-based parts where increasing rerums dominate.

Policies that are appropriate to success in high-tech production

and international trade would encourage industries to be aggressive

in seeking out product and process improvements. They would

strengthen the national research base on which hightech advantages

are built. They would encourage rums in a single industry to pool

their resources in joint ventures that share up-front costs,

marketing networks, technical knowledge and standards. They might

even foster strategic affiances, enabling comparues in several

countries to enter a complex industry that none could NONLINEAR

PROBABILITY THEORY can predict the behavior of systems subject to

Increasing terns, in this model, balls of different colors are added

to a table; the probability that the next ball will have specific

color depends on the current proportions of colors (top). increasing

term-ns occur in A (the graph shows the two-color case: arrows

indicate likely directions of motion): a red ball is mote likely to

be added when there is already a hi fib proportion of'' red

halls. This case has two equilibrium points: one at which almost all

balls are red; the other at which very few are red. Diminishing

terns occur in B: a higher proportion or red balls lowers the

probability of adding another. There is a single equilibrium point.

A corn. bination of increasing and diminishing returns (C) yields

many equilibrium points. 98 SCIENTIFIC AMERICAN February 1990 tackle

alone. Increasing-returns theory also points to the Importance of

timing when undertaking research initiatives in new industries.

There is little sense in entering a market that is already close to

being locked-in or that otherwise offers Little chance of success.

Such policies are slowly being advocated and adopted in the U.S.

The value of other policies, such as subsidizing and protecting

new industries--bioengineering, for example-to capture

[[Page 29286]]

foreign markets, Is debatable. Dubious feedback benefits have

sometimes been cited to justify goveminent-sponsored white

elephants. Furthermore, as Paul R. Krugman of the Massachusetts

Institute of Technology and several other economists have pointed

out, if one country pursues such policies, others will retaliate by

subsidizing their own high-technology industries. Nobody gains The

question of optimal industrial and trade policy based on increasing

returns is currently being studied In. tensely. The policies

countries choose will determine not only the shape of the global

economy in the 1990's but also its winners and its losers.

Increasing-returns mechanisms do not merely tilt competitive

balances among nations; they can also cause economies-even such

successful ones as those of the U.S. and Japan-to become locked into

inferior paths of development. A technology that improves slowly at

first but has enormous long-term potential could easily be shut out,

locking an economy if. to a path that is both inferior and difficult

to escape.

Technologies typically improve u more people adopt them and

firms gain experience that guides further development. This link is

a positive-feedback loop: the more people adopt a technology, the

mote it improves and the more attractive it is for further adoption.

When two or more technologies (like two or more products) compete,

positive feedbacks make the market for them unstable. If one pulls

ahead in the market, perhaps by chance, its development may

accelerate enough for it to comet the market. A technology that

improves more rap. idly as mote people adopt it stands a better

chance of surviving--it has a ``selectional

advantage.'' Early superiority, however, is no guarantee of

long-term fitness.

In 1956, for example., when the U.S. embarked on its nuclear,

power program. a number of designs were proposed: reactors cooled by

gas, light water, heavy water, even liquid sodi

COMPANIES CHOOSE LOCATIONS to maximize profits, which are

determined by intrinsic geographic preference (shown by color) and

by the presence of other companies, in this computer-generated

example, mast of the first few companies set. de in the green

region, and so all new companies eventually settle there. Such

clustering might appear to imply that the green region is somehow

superior. In other runs of the program, however, the red and blue

regions dominate instead. urn. Robin Cowan of New York University

has shown that a series of trivial circumstances locked virtually

the en??e U.S. nuclear industry into light water. Light-water

reactors were originally adapted from highly compact units designed

to propel nuclear submarines. The role of the U.S. Navy in early

reactor-construction contracts, efforts by the National Security

Council to get a reactor--any reactor-- working on land in

the wake of the 1957 Sputnik launch as well as the predilections of

some key officials all acted to favor the early development of

Light-water reactors. Construction experience led to improved light-

water designs and. by the mid-1960's, fixed the industry's path.

Whether other designs would, in fact, have been superior in the long

run is open to question, but much of the engineering literature

suggests that high-temperature, gas-cooled reactors would have been

better.

Technological conventions or standards, as well as particular

technologies, tend to become locked-in by positive feedback, as my

colleague Paul A. David of Stanford has documented in several

historical instances. Although a standard itself may not improve

with time, widespread adoption makes it advantageous for newcomers

to a field--who must exchange information or products with

those already working there--to fall in with the standard, be

it the English language, a high-definition television system, a

screw thread or a typewriter keyboard. Standards that ate

established early (such as the 1950's-vintage computer language

FORTRAN) can be hard for later ones to dislodge, no matter how

superior would-be successors may be.

Until recently conventional economics texts have tended to

portray the economy as someflung akin to a large Newtonian system,

with a unique equilibrium solution preordained by patterns of amoral

resources, geography, population, consumer tastes and technological

possibilities. In this view, perturbations or temporary

shifts--such as the oil shock of 1973 or the stock, market

crash of 1987--are quickly negated by the opposing forces they

elicit. Given future technological possibilities, one should in

theory be able to forecast accurately the path of the economy as a

smoothly shifting solution to the analytical equations governing

prices and quantities of goods. History, in this view, is not

terribly important; It merely delivers the economy to its inevitable

equilibrium.

Positive-feedback economics, on the other hand, finds its

parallels in modern nonlinear physics. Ferromagnetic materials, spin

glasses, solid-state lasers and other physical systems that consist

of mutua?? elements show the same properties as the economic

examples I have given.

They #phase lock'' into one of many possible

configurations; small perturbations at critical tunes influence

which outcome is selected, and the chosen outcome may have higher

enerr/(that Is, be less favorable) than other possible end states.

This kind of economics also finds parallels in the evolutionary

theory of punctuated equilibrium. Small events the mutations of

history) are often averaged away, but once in a while they become

all-important in tilting parts of the economy into new structures

and patterns that ate then proserved and built on in a fresh layer

of development.

In this new view, initially identical economies with significant

increasing. returns sectors do not necessarily select the same

paths. Instead they eventually diverge. To the extent that small

events determining the overall path always remain beneath the

resolution of the economist's lens, accurate forecasting of an

economy's future may be theoretically, not just practically,

impossible. Steering an economy with positive feedbacks into the

best of its many possible equilibrium states requires good fortune

and good timing--a feel for the moments when beneficial change

from one pattern to an. other is most possible. Theory can help

identify these states and times, and it can guide policymakers in

applying the right amount of effort (not too little but not too

much) to dislodge locked-in structures.

The English philosopher of science Jacob Bronows??d once

remarked that economics has long suffered from a fatally simple

structure imposed on it in the 18th century. I find it exciting that

this is now changing. With the acceptance of positive feedbacks,

economists'' theories are beginning to portray the economy not

as simple but as complex, not as deterministic, predictable and

mechanistic but as process-dependent, organic and always evolving.

FURTHER READING MARKET S'TRUCTURE AND FOREIGN TRADE. Elhanan

Helpman and Paul Krugman. The MIT Press. 1985. PATH-DEPENDENT

PROCESSES AND EMERGENCE OF MACRO-STRUCTURE W. Brian Arthur, Yu M.

Ermoliev and Yu M. Kaniovs?? in European Journal of Operational

Research, Vol. 30. pales 294-303; 1987.

SELF-REINFORCING MECHANISMS IN ECDNOMICS. W. Brian Arthur in The

Economy as an Evolving Complex System. Edited by Philip W. Anderson.

Kenneth J. Arrow and David Pines. Addison. Wesley Publishing Co.,

1988.

PATH-DEPENDENCE: PUTTING THE PAST INTD THE FUTURE OF ECONOMICS.

Paul David. I.M.S.S.S. Tech Report No. 533, Stanford University;

November, 1988.

COMPETING TECHNOLGIES, INCREASING RETURNS, AND LOCK-IN BY

HISTORICAL ??TS. W. Brian Arthur in The Economic Journal. Vol. 99.

No. 394, pages 116131; March. 1989.

SCIENTIFIC AMERICAN February 1990 99

BYLINE: From LARRY CAMPBELL in Atlanta District of Colum??ia

BODY:

NETWORK computing industry leader Novell is bailing out of a

number of its existing markets and terminating several product

lines--including Novell DOS 7 to concentrate on new

``technology initiatives'' and usher in an era of

``pervasive computing''

Novell is initially pulling out of the personal computer

operating system business by stopping production of Novell DOS 7, a

product it acquired as part of its take-over of Digital Research.

``The battle for the office desktop is over and MS-DOS and

Windows have won,'' Novell chairman and chief executive Robert

Frankenberg said at last week's Networld+Interop ``94

conference in Atlanta, Georgia, in the United States.

``We will support Novell DOS, but we will not enhance

it.''

``Novell has as much DOS marketshare as Microsoft has

network marketshare,'' said Novell executive vice-president

John Edwards.

``we are focusing on strong areas.''

Novell used Networld+Interop ``94 to introduce these strong

areas, which are part of its vision of the future of computing.

Novell sees networking as it is today evolving to encompass a

much wider, global concept. It envisages everyone now owning a

computer will use networking technology--through the global

information superhighway, among other things.

[[Page 29287]]

It also expects a growing number of people using computers for

the first time in future will also need to connect to information

hubs to share and exchange information.

``Our goal is to take people one step at a time,'' Mr

Edwards said.

``The future is pervasive computing: connecting people to

allow them to work anytime they want--any way.''

The term ``Pervasive computing'' is one Novell has

chosen to define its

South China Morning Post, September 20, 195 vision for the

future. To usher it in, the company is turning its attention to a

range of new products--encompassing operating systems and user

interfaces--and services.

Top of the list is SuperNOS, a planned killer operating system

that will see the best of Novell's existing NetWare network

operating system being combined with the best of UnixWare--its

UNIX counterpart.

There are an estimated 40 million NetWare users on four million

local area networks (LANs) worldwide--more than double the

number of users of all other network operating systems combined.

In addition, there are about 30 million users of UNIX

applications around the world.

It is this formidable market that Novell aims to capture with

SuperNOS, according to Mr Frankenberg.

``The time has come for NetWare NOS to provide all the

services of an operating system,'' he said.

``This is why we are evolving a SuperNOS with NetWare and

UNIXWare on a common Novell microkernel.

``We have left the world of the mainframe. Organisations

have many servers. By ensuring that NetWare and UNIXWare work

perfectly together, we allow our customers to chose which technology

they need on which servers.''

Novell planned to make both products run on a single set of

hardware, or ``as a single system image on multiple hardware

sets'' on a network.

``You get the best of both and a progressive, evolutionary

path from today's specialised, robust backend,'' he said.

``All applications, trained programmers, tools,

interoperability, support, and network services continue on without

change. Perhaps best of all, we build on success, adding

functionality rather than simply re-writing the old.'' SuperNOS

is still a ``concept'', according to Mr Edwards.

``(It is a) codename for a technology initiative to bring

the best of UNIX and NetWare together in a common system''

When complete, the system would be open to licensing and would

be provided on a wide range of platforms, he said.

In addition to its focus on the network operating system market,

Novell is also looking at the client side of the business.

Last week Mr Frankenberg unveiled plans for an ``advanced

Novell client interface that will make it compelling to be connected

networks''

Featuring a graphical three-dimensional user interface with a

``world metaphor'', the system would make network

navigation simple for the first time, he said.

South China Morning Post, September 20, 199.,

However, it would not be a new operating system in its own

right, Mr Edwards said.

Instead, it would be built on existing systems such as Windows

95.

``We will see over four to six months of demonstrating and

customer testing of this system (before it is brought to

market),'' he said.

``It will browse the Internet, NetWare and NCS networks and

live in MS Windows, Chicago, UNIXWare and other desktop operating

systems,'' Mr Frankenberg said.

``It will bring not only these end user services, but also

compelling consistent NAPIs (network application programmer

interfaces) for Windows, UNIX and other developers to unlock the

power of the network from client applications.''

These new areas of focus do not just see Novell pulling out of

the desktop operating system market--which was itself a move

the market ``welcomed'', Mr Frankenberg said.

In addition, Novell is pulling out of the database business, up

to a point. Having sold off Btrieve, its database product, the

company is now only working with partners in the database area.

It will steer clear of creating vertical applications and, while

working with information service providers as part of its networking

technology initiative, it will not become an information service

provider itself, or attempt to provide communications

infrastructure.

``This frees up a considerable number of people who are now

making the network fulfil our vision,'' Mr Frankenberg said.

Hardware would also be an area that Novell would abstain from

dabbling in, he said.

``(Former Novell chairman and chief executive) Ray Noorda

got us off hardware in the ``80s. I will keep us on the wagon

in the ``90s,'' he said.

Microsoft's Operating System and Application Strategy for

Servers Fine-Tuning Microsoft's Server Strategy

Microsoft competitors have taken great pleasure in the slow

acceptance of the much hyped NT. Some of this gloating is certainly

well deserved. After a long period of anticipatory eulogies for

competitive operating systems, NT barely shipped 400,000 units in

its first full year of availability. This is one-sixth the number of

OS/2 shipments and only marginally higher than Solaris'' 1993

shipments (see Figure I). Moreover. the majority of NT shipments axe

either free copies or axe being used for development or evaluation.

2.400

4OO*

Figure 1: Licenses of 32-Bit Operating Systems Shipped in 1993

(thousands of units)

Are competitive OS vendors beginning their celebrations too

soon? After all, consider how much solace Apple took in the slow

acceptance of Windows. Just as importantly, many NT cynics are

finding their evidence in the wrong places. They axe looking at the

small number of total NT units, the minimal acceptance on the

desktop and the technical deficiencies of the operating system. Many

of those competitors who view NT as a server operating system are

focusing on comparisons with and difficulties in displacing NetWare.

Those who want to objectively assess the prospects for NT should

instead examine the positioning, capabilities and increasingly high-

profile endorsements of NT as an application server operating

system. While NT's acceptance as a desktop and file server OS has

been slow. a growing number of large, leading-edge corporate

customers see tremendous potential for NT as an application server

in department-sized environments. More importantly, Microsoft has

optimized NT's server capabilities by segmenting its development

focus between desktop and server versions and by introducing a broad

range of complementary server offerings.

Meanwhile, most of the leading server application

vendors--including those introducing client/server versions of

applications that had been available only on minicomputers and

mainframes-- have selected NT as one of their first server

operating systems, and the one offering the largest market

potential. What are NT's real prospects as a server operating

system': How can one capitalize on its potential without making

their company's future too dependent on Microsoft and ,'OT?

Windows NT: The Rumors of its

Death Are Premature

Make no mistake. Windows NT and its successors are Microsoft's

strategic operating system. As Microsoft Executive Vice President

Mike Maples states. ``by the end of the 1990s there will be one

Microsoft operating system--NT-- but there will be three

of them: NT Advanced Server, NT Advanced Workstation and Windows

NT'' (see Figure 2) Microsoft views the slow initial acceptance

of NT as only a relatively minor delay in its quest for global

software domination.

As discussed in Summit Strategies'' report, Profiting from

the Transition from Personal Desktops to Enterprise Desktops,

initial NT desktop acceptance will Figure 2: Future of the Windows

Architecture be limited primarily to engineering, publishing,

software development, trader workstation and a few other specialized

applications with particular performance. security and reliability

requirements. This will begin to change as developers write

applications to Win32. Most of these applications will be optimized

for Chicago. but they also will provide hative performance on NT

Workstation and. then, on Cairo.

The story is very different for NT Server. NT Server is

Microsoft's future. It is THE FOUNDATION of all of Microsoft's

target growth markets-- workgroup, department, enterprise.

advanced consumer and information highway. Microsoft, however, has

little or no experience or credibility in those markets. It must

develop them essentially from scratch.

Microsoft recognizes these limitations and is dedicating

extensive commitment and resources to its efforts to establish NT as

a standard server operating system. It has carefully studied the

factors that made other enterprise and server operating systems

successful and has developed a strategy that combines some of the

most important of

[[Page 29288]]

these factors with Microsoft's own unique twists. NT Server as the

Foundation for Microsoft's Solution Platform Microsoft's most

obvious work on NT is in the form of Daytona. which will be more

formally known as Windows ,NT 3.5. Daytona will deliver higher

performance with smaller memory and will provide better reliability,

robustness. SMP support and connectivity than version 3.1.

It will be divided into two optimized versions--one for

advanced desktop users (NT Workstation) and one for servers (NT

Server). This division will mark the beginning of separate, but

still binary compatible code bases that are targeted at separate

markets. Daytona also will provide a migration path to Cairo I NT

version 4.0), the scaleable, object-oriented OS that Microsoft plans

to release by the end of 1995.

However. as important as all of these operating system

enhancements may be. they are only the foundation of a much broader

Microsoft server strategy. This strategy is based on a broad range

of server applications that Microsoft is developing to run on top of

NT Server and which will tailor the OS for use in specific

functions.

Microsoft plans to ship five server applications that will run

on top of NT Server. some of which are already shipping: SQL Server.

SNA Server. Systems Management Server. Exchange Server. and

``Tiger'' Video Server.

These server applications will likely be joined by others,

including a search and navigation engine, server versions of many of

its client-based Microsoft Ofrice applications and. possibly, some

``diagonal'' server-based business applications, such as

accounting, human resources management and sale, automation.

Microsoft is also developing an online service t code-named Marve??

that ,a ill generally compete with Prodigy and America Online.

Although these server applications are very different from each

other, all share at least two important factors: They are designed

as general, extensible frameworks on which partners are encouraged

to write their own specialized applications: and each is available

on and optimized for use with NT Server and is designed to work

seamlessly with all other Solution Platform tools and applications.

The combination of these factors will make NT Server a unique,

very formidable server operating environment. Creating a Consistent,

Universal Server Environment Each Microsoft server applications

competes with some third-party offerings. SQL Server. for example.

competes with Oracle7 and Sybase System 10. Exchange competes with

Lotus Notes and Novell GroupWise.

,Microsoft. however, is positioning each of these applications

as generalized. extensible platforms on top of which smaller, more

specialized and verticallyfocused applications can be when.

Like Oracle and Sybase. Microsoft is attracting third-party

developers to write specialized applications on top of its own

generalized platforms. Unlike Oracle and Sybase, however, Microsoft

will not develop these applications itself. It will leave this add-

on market exclusively to third-party partners and has developed a

number of large, well-funded cooperative technical, marketing,

distribution and consulting programs to help these partners enter

and expand their markets. .Microsoft has already attracted more than

600 partners to write applications on top of SQL Server. more than

25 to write for Systems Management Server. and 70 partnets to write

for Exchange Server. SQL Server applications, for example, range

from diagonal accounting and document management through vertical

applications for insurance and health care.

This base of third-party applications will help make the

generalized Microsoft Server Platform a viable foundation for a

broad range of highly specialized applications. In and of itself,

however, this is not different from what is provided by competitive

OSs (i.e., NetWare and Unix), databases (such as Oracle7) and

groupware environments (such as Notes). Microsoft. though, takes a

giant step beyond these competitive environments by:

Optimizing its applications for, and integrating them closely

into its OS to provide fast performance, permit the application to

take full advantage of all operating system capabilities (without

duplicating them) and provide the basis for integrating important

application capabilities directly into future versions of the OS.

Providing a common set of development tools and integration

protocols that allow third-party applications to be easily

integrated into and take full advantage of the operating system and

all Microsoft server applications and to integrate closely with

Microsoft desktop OSs and applications.

This integration is critical to Microsoft's entire server

strategy, it provides developers with a single set or'' APIs

and communications protocols with which they can develop to all

Microsoft desktop and server OSs and integrate with all compliant

Microsoft and third-party applications. It provides customers with a

modular, comprehensive. ``easy-toown'' server environment.

Microsoft also is laying out a road map under to make this

integration closer and deeper. As a result, data semantics and query

technology will be common across both desktop and server components

and communications will be facilitated between them.

More importantly, the OLE object model--already supported

by all Microsoft and a small, but growing number of third-party

applications--will form the foundation of Microsoft's next-

generaLion Cairo operating system. In addition. many new Microsoft

products are based on a technology that will be used in Cairo. This

will simplify the upgrade path to Cairo and will allow the new OS to

take over many of the capabilities of previously distinct

applications.

Since Cairo will be a pure object-based OS, it will be highly

modular. Components will be easily added, deleted or replaced,

making it relatively easy for resellers or customers to customize

the operating system and incorporate traditionally distinct

functions into it. In fact, since all Microsoft server applications

will fit into a single, integrated Cairo model, it will be almost

impossible to distinguish between the operating system and the

applications.

Redefining Server Industry Rules to Match Microsoft Strengths

Microsoft's approach promises to make NT Server a much more

comprehensive. integrated server environment than is available from

any other client/server operating system, relational database or

messaging backbone vendor. In fact. NT Server will approach the

level of integration that previously had been available only in

proprietary mainframe and minicomputer environments.

In and of itself, this integration will be attractive to large

numbers of customers. application developers. OEMs and resellers,

but Microsoft plans to go even further. It will offer these

capabilities in a new way that no other competitor can directly

match. It will combine capabilities that had traditionally been

available only as high-priced, customdeveloped solutions on

expensive platforms with price levels and distribution channels that

were available only for basic PC-level solutions. In other words.

Microsoft plans to redefine the rules of competition in the server

operating system and applications market.

It will rewrite these rules in a way that builds on its existing

business model and makes it difficult, if not impossible, for other

vendors to follow.

Summit Strategies believes that Microsoft will execute this

strategy gradually and in a way that permits the incremental

extension of its traditional low-overhead, product-oriented, virtual

company business model.

It will establish this presence in a niche in which there is

very little entrenched competition--department-level, decision

support application servers (see Figure 4). It will position the NT

server environment as a more functional, scalable application

platform than NetWare and a less expensive, easier-to-own

alternative to Unix. While Microsoft plans to ultimately replace

NetWare and Unix, initially it will coexist with them by emphasizing

connectivity with Unix and its use as an application server within

existing NetWare file server environments.

Enterprise Application Server

??

File/Print

Workgroup Application Serve,

Unix Core Market

?? Server

Core Market Core Market

1993

2000

Source: Su?? Strategies, Inc.

Figure 4 : Microsoft's Trojan Horse Strategy

Microsoft will use this market as a beachhead from which to

expand gradually into complementary segments, such as department-

level and branch transaction servers, workgroup application servers.

file and print servers and eventually, into some division-level

environments. Summit Strategies expects this strategy to allow

Microsoft to grow NT's position in the network server operating

system market from about 2.5 percent in 1993, to almost 15 percent

by 1997. It will play much larger roles in the application server

market and. especially, in the lowend to midrange of that

[[Page 29289]]

market. Obstacles to Microsoft's Dominating the Application

Server--

Part I

Microsoft is certainly well-positioned to establish a strong

position in the application server market. Its success, however, is

far from assured. The company still faces a number of strong

competitors and must overcome a number of self-imposed obstacles.

These obstacles fall into two primary categories: some are product-

based while the others are a result of the company's business model.

Microsoft's productbased obstacles are:

The perceived unreliability of

Microsoft server solutions Everybody recognizes the limitations

inherent in the Windows desktop environment. Most customers are

willing to put up with these Limitations in return for the benefits

of low cost, application availability and standardization.

Customers, however, are much less willing to accept such limitations

in application server environments, particularly when they are using

the servers to run business-critical applications that had

previously been entrusted only to mainframes and mini-computers.

On one ban''. NT is relatively robust for a Version 1.0

operating system. However. it is still immature, unproven and lacks

many of the complementary tools that will be required for acceptance

in business-critical environments. Microsoft does promise more

robust upgrades to its operating system. RDBMS and communications

software, new versions of needed system management and messaging

software, and improved fault tolerance and recoverability. However.

its continual missed shipment deadlines do not instill great

confidence.

The limited openness and scalability of the Microsoft solution

Although Microsoft operating systems may be standards, they are

not open. This creates a risk, since customers who adopt them will

have a difficult time migrating to another operating systems, should

the need arise. This problem will be particularly acute for

customers who buy into Microsoft's server applications. since these

applications will be available exclusively on NT Server and will be

integrally linked to it.

This lock-in could be particularly dangerous for customers who

require that their applications be highly scaleable, up through

enterprise environments. Microsoft solutions currently support

symmetric multiprocessing and will support clustering and be

portable to all major processors. However, NT Server is currently

tuned for single and dual processing. Its next implementation is

only likely to scale to four processors. which is far below the 16-

to 30-CPU tuning of a number of versions of Unix. There are,

however, mitigating factors for each of these concerns. Consider

robustness. While Microsoft has missed deadlines in shipping

virtually all of its key products, once they do ship. they are

reasonably stable and deliver on most of the company's promises.

When push comes to shove, most customers would prefer to receive a

stable product late. than a buggy product on time. But. regardless

of when Microsoft ships. computing environments with overwhelming

needs for proven, reliable server environments are unlikely to

select Microsoft products, at least for the next several years.

As for openness and portability, it is largely a question of

target markets and tradeoffs. Generally speaking, large corporate

MIS departments are most likely to demand that their server

environments be open, flexible and scalable. Most of these MIS

groups have the capabilities or the resources required to configure.

develop for and administer these solutions. In contrast, many small

businesses and department-level customers will be willing to trade

off such benefits in return for solutions that are easier and less

expensive to buy, configure and manage, and for which off-the-shelf

applications are generally available.

The percentage of the market that will fall into each camp is

certainly debatable. While everyone says that they want open,

scalable and robust solutions, when it comes time to make a final

decision. Summit Strategies believes that many more customers will

choose easy, cheap and standard.

Obstacles to Microsoft's

Dominating the Application

Server--Part II

The other, and more difficult obstacles to Microsoft's success

in the server market are more dependent on the company's business

model and style of operation, than on its technology. Summit

Strategies sees three primary. obstacles in this category.

Microsoft's penchant for making enemies

Microsoft has always had a way of making enemies due to such

factors as its sheer market power, position as industry upstart,

cockiness, and the ruthless way in which it often deals with

competitors and partners alike. On one hand. vendors have no choice

but to cooperate with a company that is dominant in the market in

which they wish to participate (as Microsoft is on the desktop). On

the other hand. vendors can avoid, or actively help to defeat those

companies which do not yet have market dominance.

Microsoft's lack of an enterprise marketing and support

organization Microsoft developed its business model around a

product-focused, low-overhead. indirect sales and support model.

This model was well-suited to the company's initial goal of selling

high volumes of low-cost, non-mission-critical products into low

levels of business organizations.

However, Microsoft is now targeting with its server products

towards the business solutions market, which developed around a

totally different business model. Its customers, therefore, have

very different requirements. Microsoft does not have or plan to

develop the type of direct sales. Implementation consulting or 7124,

heterogeneous, on-site support capabilities that many business

customers expect from their key system software vendors. While

Microsoft is enhancing its direct marketing, consulting and support

capabilities, it will rely on third-party partners to provide most

of these capabilities. There is no evidence to suggest that its new

target market is ready for this type of ``virtual

company'' model.

Microsoft's confusing market messages

Microsoft doesn't seem to know what it wants to be when it grows

up. On one hand, it insists that it is preparing to become an

enterprise solutions vendor.

It claims that NT Server and its accompanying applications will

provide the robustness, scaleability, reliability, capabilities and

features of traditional enterprise solutions. On the other hand, its

product releases, actions and distri bution and support programs

suggest that Microsoft is really targeting department- level

markets. These mixed messages are extremely confusing to customers

and partners, and damages Microsoft's credibility as a business

systems provider. Summit Strategies believes that Microsoft will

ultimately recognize that its most natural and responsive customer

base, its partner franchise, and its largest potential, most

strategic market lies in department-level and branch environments.

It will focus its product development, its marketing resources and

its partnership programs at this segment.

Once it captures a dominant and sustainable position in this

core market, it will expand in both directions--downward into

file server and workgroup markets and upward into enterprise-level

markets.

Microsoft, however, must address a number of other issues before

it can nope to effectively address even these department-level and

branch application server markets. It must build the type of in-

house infrastructure required to establish credibility in these

markets and attract the type of application, distribution,

integration and support partners that can address these

customers'' real needs.

As fully discussed in the next report m this series, Microsoft's

Market. Channel and Partner Development Strategy for Servers.

Microsoft recognizes many of these requirements and is making more

progress in addressing them than is generally recognized.

In summary, Microsoft will certainly be a force to be reckoned

with in the application server market. Anyone who hopes to play in

this market must understand where Microsoft is going and how the

company will change the rules of competition to its own advantage.

Only by understanding these critical factors can a company decide

whether they will partner or compete with Microsoft and what they

must do to survive this competition or premiership.

SUMMIT STRATEGIES. INC 360 Newbury Street, Boston. MA 02115

1o17) 266-9050 Fax (617) 266-7952

This executive briefing contains a summers, or Summit Strategies

report. In-depth information is in the actual report. This material

?? righted and cannot be reproduced ?? written ??remission from

Summit. Additional copies can be obtained through Summit.

How Microsoft's Server Strategy Will Change the Industry Part II:

Microsoft's Market, Channel and Partner Development Strategy for

Servers

Microsoft's goal is to establish NT Server as the AS/400 of the

client/server world. It is developing a seamless, optimized, easy-

to-use and administer environment that will provide access to a

broad range of packaged, business-critical applications.

The server platform will be sold to the same types of customers

who have bought

[[Page 29290]]

IBM's AS/400-based business solutions-- a combination of small

and midsized businesses and departments of larger corporations.

Similar to the AS/400 which comes stan- dard with its own

specially tuned and optimized operating system, database and

management tools, Microsoft is developing a complete suite of base-

level server applications that axe available exclusively on and

optimized for bit Server. Microsoft, however, cannot provide the

type of bundled solution that IBM is offering. NT Server must run on

multiple off-the-shelf servers and must accommodate databases.

communications, management and other tools from a large number of

competitive vendors.

Novell is another network operating system vendor who has

successfully sold into small and midsized business and departments

of larger corporations. As with Microsoft, Novell relied on partners

and third-party partners for distribution and support and had to

integrate NetWare into heterogeneous environments. However,

Microsoft will face more difficult challenges than Novell did since

NetWare is primarily a file server operating system. In general,

file server LANs are easier to configure and manage and do not

require the level of integration, earring or solutions- oriented

sales capabilities that client/server networks do.

Although Microsoft must provide the value of supporting a broad

range of platforms and accessory software, it recognizes that too

many options lead to the same type of confusion that has restrained

the growth of Unix. Microsoft. therefore, is taking something of a

middle path by providing customers with the choice to purchase its

server operating system and applications either as:

Separate, standalone products that can be integrated with any

other vendors'' NT Server products or as

A single, integrated bundle (called Back Office), which includes

the server operating system and Microsoft server applications as a

preconfigured, integrated set of tools designed to work together.

Pricing for this package is 40 percent less than if all packages

were bought separately. As discussed in the first report of this

series, Microsoft's Operating System and Application Strategy for

Servers, all Microsoft server products share a number of important

factors. Each is:

Available exclusively on, and optimized for use with NT Server,

Designed for use with a common set of Microsoft development

tools and integration protocols;

Designed to work seamlessly with all other Solution Platform

tools and applications:

Positioned as a generalized, extensible framework on which

partners are encouraged to write their own specialized applications.

This commonality and integration is critical to Microsoft's

server strategy. The goal is to attract large numbers of developers,

resellers and administrators to the broad Microsoft environment,

facilitate the availability, of hundreds of specialized, packaged

server applications and to provide customers with a modular,

comprehensive, easy-to-own server environment. Microsoft plans to

offer capabilities that have traditionally been available only as

high-priced, custom- developed solutions on expensive platforms, at

price points and through channels that were previously associated

with PCs. The company also will provide migration paths from PCs.

Thus, Microsoft will redefine the rules of competition in the

server operating system and applications market. If it succeeds,

many of Microsoft's competitors will find it difficult--if not

impossible--to compete.

Building a Business-Critical Solutions Infrastructure Microsoft

faces a number of challenges in its bid to enter these new markets.

Its corporate infrastructure was well-suited to the marketing and

support needs and the economic mandates of the PC industry. It had a

small direct marketing organization to promote desktop productivity,

products to storefront computer dealers and a small telephone-based

support staff to answer questions. It did not have, however, a large

customer direct sales force, a consulting or integration group, or

comprehensive support capabilities to which MIS managers and CIOs

are accustomed. It could not hope to compete with vendors such as

IBM, Hewlett-Packard and Oracle in selling bet-your-business server

products to large corporations. Microsoft, therefore, has begun to

build new marketing, integration and support infrastructures that

are intended to improve its credibility and more effectively address

the needs of new customers. The company built a:

3,000-person direct marketing organization, 40 percent of whom

are dedicated to addressing the needs of large corporate customers:

500-person consulting and systems integration group to help

large corporate customers plan, design and implement sophisticated

client/server business solutions around Microsoft products:

3,000-person, around-the-clock support group, 400 of whom are

trained specifically on the complexities of server operating systems

and heterogeneous networking, Premier customers get access to

higher-level support people, an accelerated escalation procedure, a

dedicated manager who will help them with proactive planning and,

in, some instances, access to on-site support capabilities.

Microsoft also formed a new marketing group, the Organization

Customer Unit, that is responsible for developing and managing

ongoing relationships with business organizations. This unit is

divided into two primary groups: one to manage large cor- porate

customers, the other to build sales into small and midsized

companies. The Organizations Unit is responsible for: Managing the

company's Select volume licensing program, which is intended to make

it easier for large corporations to buy from Microsoft and to build

ongoing relationships with them;

Recruiting and managing relationships with client/server

application developers and systems integrators who will be most

important to Microsoft's efforts to sell client/server solutions

into large corporate accounts;

Responsibility for the Microsoft's value-added Solution

Providers programs. It recruits and manages resellers who will be

capable of selling Microsoft server products and client/ server

solutions and other partners who are specially qualified to train

customers on and support these new implementations.

The Organization Customer Unit also owns Microsoft's Industry

Marketing group which targets vertical markets that can potentially

generate large sales of Microsoft-based client/server solutions.

Defining a New Client/Server

Business Model

Microsoft's direct work with corporate accounts, through its

newly enlarged direct sales force, consulting services and support

arm, is somewhat similar to that provided by traditional enterprise

system and software vendors. But there are two major differences

between Microsoft's approach and those of enterprise vendors. Under

the Microsoft program:

Third parties handle all product delivery and much of the

implementation and actual support requirements. All Microsoft

product sales, even those under the Select program, are fulfilled by

third parties. Microsoft's consulting and support groups will

typically refer customers to third-party partners or bring these

partners into a project themselves, with the goal of having the

partner handle the implementation and most of the follow-up work.

The primary goal in working directly with customers is to

transfer Microsoft's knowledge to its customers, not to actually do

the work themselves. For example, the company generally confines

consulting work to fast-in/fast-out projects where it defines

architectural requirements, plans transitions and trains or

supervises customer employees and third parties to provide the

actual implementation work and to fully handle future projects

themselves.

Virtually all aspects of these services have the ultimate goal

of helping third-party partners address the needs of corporate

customers without direct involvement by Microsoft. While all product

fulfillment is handled exclusively through third parties. Microsoft

is trying to involve appropriate partners directly in the demand

creation process.

Microsoft's consulting and support organizations have even more

formal structures for training and for bringing partners into

accounts. MCS consultants. for example, dedicate approximately ten

percent of their total billable hours to helping Microsoft Solution

Providers (SP) and count on partners for providing more than half of

all their billable hours in some of its practices.

This cooperation with SP partners also carries through

Microsoft's support and training organizations. For example,

Microsoft Education Services no longer deliver training directly to

end users. The company has two new channels, Authorized Training

Centers and Technical Education Centers, that it established

specifically to deliver courses on Microsoft products and to certify

partners who have completed specialized training.

The company's support group, meanwhile, provides only very

limited support for

[[Page 29291]]

Microsoft products'' connections into heterogeneous

environments. One class of partners, Authorized Service Centers,

have been authorized to provide such capabilities. Furthermore, the

company provides very little on-site work and will not even go on-

site without a Solution Provider. If the customer does not have an

SP, Microsoft will help it select one and then bring the Solutions

Provider up-to-speed on the customer's environment.

Developing Partnerships to Enable Microsoft's Virtual Company

Model: Phase One

Every vendor, irrespective of the degree of its horizontal

integration, relies on partners to help sell its products.

Microsoft's virtual company model will require much closer

partnerships with many more types of partners than most other

companies'' models.

Various partners will play different roles in the Microsoft

server business model, but these roles will change significantly as

the market for client/server solutions matures. During the earliest

stages of the market, Microsoft must work most closely with

solutions-oriented systems vendors, systems integrators and software

developers. After all:

Systems vendor partners such AT&T GIS and Digital Equipment

and systems integrators such as Andersen and Business Systems Group

work directly with large corporate customers to help define the need

for, develop, implement and support custom solutions;

Infrastructure software developers will provide the capabilities

required for more demanding and sophisticated applications such as

enterprise transaction processing;

Application vendors develop the solutions that will be required

to attract customers who cannot or do not want to develop their own

applications. Microsoft has already gained commitments from vendors

of leading client/server accounting, MRP, groupware, document

management, and customer management applications;

Relational database vendors will play particularly important

roles in the early stages of this market. RDBMSs are critical

client/server infrastructure technologies and most of the vendors

have their own solution-based sales, consulting, application

development and support capabilities. Moreover, once an RDBMS is

ported to an operating system, it is relatively easy for all of the

applications written to these RDBMSs to be ported.

Microsoft will always want to play a role in the type of large,

corporate, custom implementations that are handled by large system

vendors SI. RDBMS and application partners. Therefore, it will have

a continuing need to work with these first- generation client/server

partners. However, Microsoft will be ready to shift its primary

emphasis to a new group of partners once client/server computing

(especially Microsoft's approach to it) becomes more widely

understood and accepted and a critical mass of applications become

available for NT Server.

Developing Partnerships to Enable Microsoft's Virtual Company

Model: Phase Two

Microsoft's primary strength is in selling large quantities of

standard products to smaller companies and individual customers

through large numbers of third-party channels. It will attempt to

apply this same business model to its server business.

A number of Microsoft partners are already established in and

committed to this type of business.

Microsoft is encouraging current server vendor partners

(everyone from AST through Tricord) to bundle NT Server and the Back

Office application suite with some of their servers. Some partners

such as Compaq and Informix will play critical roles as

``bridge vendor'' partners, helping to

``repackage'' the capabilities developed and lessons

learned from direct sales of client/server solutions into third-

party channel programs. (Summit Strategies'' report, The New

Age of Client/Server Applications, contains a full examination of

the roles of bridge venders.)

Microsoft already has signed up almost 6,000 third-party

Solution Provider resellers, and plans to grow this number to about

15,000 resellers by rind- 1995. The company is focusing SP

recruiting efforts primarily at established, successful resellers of

products including the AS/400.

Novell NetWare. Sun workstations, Unix RDBMSs and vertical and

diagonal applications. It is targeting resellers who are best

situated to address Microsoft's targeted verticals in geographies

that lack adequate coverage. Microsoft also is devoting extensive

efforts to training and generating business for these partners. For

example, it is:

Establishing large, formal programs (e.g., DevCast, BusCast,

TechNet and Microsoft Partner Network) to educate and train these

channels:

Passing large numbers of leads to these channels, and is

developing vehicles (e.g., trade shows, road shows and seminars) to

generate demand;

Using Microsoft consultants and support engineers to train

partners to perform functions currently provided by Microsoft

personnel, and to actively bring these partners into accounts;

Actively helping high-end, traditionally direct sales system vendors

(e.g., AT&T GIS and Digital), database vendors (e.g., Oracle and

Sybase) and application vendors (e.g., SAP and D&B Software) to

develop and offer their own products through third-party channels;

Encouraging distributors and aggregators to provide built-to-

order, custom-configured server bundles (that combine Back Office

back-end, Vertical Office front-end, and specialized third-party

applications) to their resellers.

Microsoft plans to use its market position, vendor partnerships

and aggressive channel development programs to build a broad, third-

party, client/server distribution and support channel well before

its competitors. It will then try, to lock these channels into

Microsoft solutions by ensuring that they are familiar and

comfortable with Microsoft products. Microsoft will do this by

providing the best technical and marketing support, by using its

marketing muscle to generate more sales than competitors (with less

effort and resources from SPs), and by promising never to directly

compete with its partners (as proprietary and Unix vendors often

do).

Microsoft's Prospects for Success in the Client/Server

Server Market

Unix vendors will most likely offer client/ server server

solutions that are more open, robust, flexible and scalable than

those offered by Microsoft IBM will most likely offer AS/400

solutions that are more turnkey and easier to manage. Novell will

most likely offer solutions that are lower priced. Microsoft,

however, will combine some of the best of all of these capabilities

with a number of its own unique advantages. For example, it will

offer:

The largest base of binary compatible servers and off-the-shelf

applications of any server environment;

Access through the broadest range of distribution channels in

the industry;

Probably, the lowest cost, best price/ performance application

servers in the industry (due to a combination of Microsoft's

aggressive software pricing, availability on all hardware platforms

and broad distribution);

A turnkey solution (based on Back Office and Vertical Office) in

which all of the components will integrate seamlessly with each

other and support the same APIs (e.g., OLE, ODBC and MAPI);

A strong development platform to which custom and packaged

application developers can write using a broad range of Microsoft

and third-party tools:

Strong scalability ranging from uniprocessor 486-based PC

servers to 30 CPU Sequent servers and a broad range of uni- and

multiprocessor RISC servers; and

Systems and software that provide reliability, availability,

manageability, security and robustness that will be suitable for all

but the most demanding applications and environments.

Given the strategic importance of the server market to

Microsoft's future, the company can be expected to compete

ferociously, and offer the largest, best- funded partner

recruitment, training, advertising and marketing programs in the

industry. However, as discussed in the first report of this series

on Microsoft's NT Server strategy. Microsoft's Operating System and

Application Strategy for Servers, the company will still be hampered

by factors such as:

Novell's strong established position in the channel and in the

file server and low-end database server markets;

Unix's perceived (and in many instances, real) advantages in

areas such as reliability, scalability and openness;

Microsoft's reputation for ruthlessness and for competing with

its software partners in a segment of the market in which

partnerships are critical; and

Whether the market or channel is prepared for the virtual

company model on which Microsoft is staking its future. Summit

Strategies views this last issue as the single most important, most

open question in assessing Microsoft's prospects for success in this

new market. Will customers who are accustomed to a single vendor

solution really accept such a diffuse, nontraditional chain of

responsibility for support of mission-critical, line-of- business

solutions?-Will Microsoft's partners be able to address the demands

that this model will place on them?

As discussed in a number of our previous reports. Summit

Strategies believes that this

[[Page 29292]]

model will work and that Microsoft is building the type of

infrastructure that is required to support it. But even if the

virtual company model works, there is still a question as to when it

will work.

While the virtual company model will almost certainly succeed

when client/ server technologies and markets become more mature, how

suitable is it during the early stages of the market? After all, few

people currently understand how to design, develop or maintain

client/server solutions, the tools are immature and most

configurations are still custom developed.

Microsoft's initial reliance on the virtual company model has

the potential of effectively locking the company out of the market

before its business model has a chance to prove itself. This,

however, is not likely to occur. After all, Phase One partners such

as AT&T GIS, Digital Equipment Sequent, Andersen, EDS and SAP

typically assume full responsibility, for their solutions.

Ultimately, customers anti partners must rely on Microsoft

rather than on system vendors for the stability of the operating

system and the foundation server applications. However, this should

not be much of a problem since no systems integrator or vendor

(including IBM) assumes full responsibility for every component of a

solution. Although it may cause some consternation, everybody uses

some type of third-party products. While the risk may still be

greater for a Microsoft- based solution than for a vendor-specific

Unix system, the level of risk will decline as Microsoft's server

products mature (as with bit Server 3.5) and as implementations of

leading reference accounts become proven.

Overall. Summit Strategies is quite optimistic about the

prospects for NT Server. As fully discussed in the first report Of

this series, we expect NT Server to account for a rapidly growing

share of the network operating system market, growing from about 2.4

percent in 1993 to 14 percent in 1997.

More important than the raw numbers, are the segments in which

NT Server will experience its greatest acceptance.

Penetration will be relatively low in file server and enterprise

application server markets, yet NT Server is likely to dominate the

large, highly strategic midrange (large workgroups, departments and

branch office) application server markets. As shown in Figure 1,

this entry, will provide a perfect vehicle by which Microsoft will

be able to extend its penetration downward into the file server and

workgroup application server markets, and gradually upward into the

division and enterprise application server markets.

Opportunities and Threats for- Microsoft Partners and

Competitors

Microsoft's likely success in the application server market

presents some significant opportunities for partners. Each phase of

the market will offer significant revenue and profit opportunities,

but the opportunities will vary greatly by type of partner and over

time.

During Phase One, turnkey solutions partners who can define,

develop, implement and support custom applications will have a great

advantage. In Phase Two, as NT Server and applications become more

es- tablished in the market, and as client/server solutions become

poised to enter broader markets and channels, Microsoft will shift

its attentions to ``bridge vendors'' who can help

translate the capabilities and lessons of Phase One-implementations

into the type of ``cookbook'' approaches and solutions

that will spur broad market, third-party sales. When the market

enters Phase Three, the lowest cost producers with access to the

broadest, most effective distribution channels will be best

situated.

Divisional Application Server Unix Core Market

Enterprise Application Server

Source: Summit Strategies, Inc.

Figure 1: Microsoft's Server Market and Expansion Strategy

By this time. Phase One partners will have to either:

Evolve their business models to play by Phase Three rules:

Adapt their value-add to ever more specialized, demanding, and

narrower segments of the market such as distributed, object-based

transaction processing environments;

Find another market such as global, enterprise Unix solutions;

or

Go out of business.

All types of partners--hardware vendors, software vendors

and resellers--will be susceptible to this type of shake-out.

Microsoft is using its unique product line and market position

to change the rules of competition in these markets. It is

optimizing its applications for its NT Server operating system,

providing the type of bundling incentives and using the type of

pricing approaches that few, if any, competitors will be able to

follow.

Even though Microsoft currently is competing only with vendors

of the broadest server foundation applications, all partners need to

beware. As the client/server market grows, previously specialized

applications will become increasingly mainstream. As discussed in

previous reports such as Developing and Leveraging Client/Server

into Broad Markets and Channels. Summit Strategies believes that

diagonal applications such as accounting and sales automation will

become just as broad and strategic in the client/server age as data-

base and presentation graphics were in the personal computer age. If

Microsoft decides to enter these markets, some server application

vendors may face the same types of options in competing with

Microsoft that server operating system vendors will face over the

next several years,

If Microsoft does succeed in changing the rules of competition,

few will be able to go head-to-bead with Microsoft products.

They will be faced with a choice of one of two primary

strategies: either focus their product and market development

efforts on segments of the market m which they have a clear

advantage and can establish a reasonably defensible position; or

introduce highly focused products that are optimized for a market

niche that is too narrow to attract the direct (or at least focused)

attention of Microsoft.

In summary,, partnering with Microsoft may be as dangerous as

competing with it. Partners can protect themselves by continually

adapting their value-add to provide capabilities that Microsoft will

require during different stages of its server products'' life

cycle.

Vendors still have about a three-year window of opportunity

before Microsoft establishes the level of market power that will

make it difficult or impossible to compete head-to-head in its core

market.

Even after Microsoft attains this level of power, competitors

will have many opportunities to ``hit Microsoft where it

isn't'' by targeting segments where Microsoft and its solutions

are weak or by focusing on niches that are too small or specialized

to draw Microsoft's focus (future Summit Strategies'' reports

will address this and related issues in greater detail).

Although partners and competitors will al- ways have plenty of

opportunities. every vendor and reseller in the server mar- ket will

have to learn to play by new rules.

These rules will be generally defined by Microsoft, around the

vendor's own capa- bilities, channel strengths and business model.

For better or worse, the rules of the application server market will

come to look increasingly like those that currently shape the

personal computer market.

SUMMIT STRATEGIES, INC.

300 New bur','' Street. Boston. MA 02115

(617) 206-4050 Fax (617 266-7932

This executive briefing contains a summar?? of Summit Strategies

report, in-depth information is in the actual report. This material

is copy-righted and cannot be reproduced without written premission

from Summit. Additional copies can be obtained through Summit

NEWS RELEASE

CONTACT: Albert Coacia

Visa

615/432-2039

Shelly alien or

Michele Bourdon

Waggener Edstrom

206/637-909??

MICROSOFT AND VISA TO PROVIDE SECURE TRANSACTION TECHNOLOGY FOR

ELECTRONIC COMMERCE

Secure Transactions Across Networks Mean Lower Costs, Expanded

Markets

PARIS, France, November 8, 1994--Microsoft Corporation and

Visa International today announced that the have signed a letter of

intent to jointly provide a standard, convenient and secure method

for executing electronic bankcard transactions across global public

and private networks. Their secure solution will held expand the

market for electronic commerce by providing new opportunities for

consumers, merchants and Visa member financial institutions.

The secure transaction technology will consist of software that

supports both the cardholder and merchant sides of a transaction and

works with the visaNet payment system to authenticate buyers and

sellers and to secure transactions for clearing and settlement.

Microsoft and visa wil1 publish specifications that make secure

transaction technology available to other software vendors and card

systems to implement themselves or license from Microsoft.

[[Page 29293]]

The technology will be developed initially for the Microsoft??

Windows TM operating system family and is scheduled to be available

in 1995. It will include extensive encryption capabilities based on

technology from RSA(r) Data Security, Inc.

``The technological leadership of Microsoft, along with the

global financial reach of visa, allows :he consumer to make payments

over networks worldwide as easily and safely as payments made in

person.'' said William L. Chenevich, group vice president. Visa

International. ``Our relationship with Microsoft will held to

accelerate the growth of commerce over electronic networks and will

open up new opportunities for our member institutions, merchants and

cardholders worldwide. As the information highway becomes defined,

we must look at a variety of alliances and a variety of ways to

protect :he financial relationships of our members and their

cardholders.'' Chenevich also indicated that the two companies

welcomed the interest and support of other parties.

``Right now, we're all street people on the information

highway; we can't protect our privacy and information: we can't

prove who we are; we can't buy anything,'' said Nathan

Myrhvold, senior vice president of Advanced Technology at Microsoft.

The Microsoft-Visa technology solves these problems by using public-

key technology Co assure safety and privacy, and easy-to-use client

software which allows consumers to use their existing bankcards co

pay for goods and services across multiple applications and

merchants.''

Will F. Nicholson, Jr., chairman of the board of directors of

Visa U.S.A. and president and CEO of Colorado National Bankshares,

Inc., added that U.S. financial institutions were facing new

challenges in a changing payments environment to provide their

customers with service and support, ``with Microsoft, we have

an opportunity to bring together :ethnology and banking, as

consumers explore alternative methods of purchasing at new points of

transactions.'' he said.

Founded in 1975, Microsoft is the worldwide leader in software

for personal computers. The company offers a wide range of products

and services for business and personal use, each designed with the

mission of making it easier and more enjoyable for people co cake

advantage of the full power of personal computing every day.

Microsoft is headquartered in Redmond, Washington, U.S.A.

Visa, the world's largest consumer payment system, has more than

I1 million acceptance locations. Visa member financial institutions

have issued more than 357 million cards worldwide including more

than 185 million in the U.S. Visa also has the leading global ATM

network. Visa, headquarters in the U.S., has offices An London

(Europe region), Tokyo (Asia Pacific region), Toronto, (Canada

region) and Miami (Latin America region). Microsoft is a registered

trademark and windows is a trademark of Microsoft Corporation.

RSA is a registered trademark of RSA Data Security, Inc.

... THE WALL STRRET JOURNAL MONDAY. DECEMBER 5.

1994,

Trade Group's Board Cancels Hearing

On Microdot's Plan to Acquire Intuit

BY VIVECA NOVAK

And DON CLARK

Staff Reporters of THE WALL STREET JOURNAL

WASHINGTON-An unusual trade-group hearing on Microsoft Corp.'s

pending acquisition of Intuit Inc., scheduled to take place today,

was canceled after Microsoft successfully'' pressed for an

eleventh-hour meeting of the group's board.

Mike Maples, a Microsoft executive vice president, said the

Information Tech- nology Association of America board voted

overwhelmingly Friday to cancel the hearing, after he invoked his

right as a director to call a board meeting. ``It wasn't a

Microsoft-driven decision,'' he said.

But he complained in an interview that scheduled speakers at the

hearing were all opponents of the Intuit deal who are believed to be

talking to the Justice Department's antitrust division. That

division is reviewing the transaction.

News of the cancellation reverberated. ``It's pretty

apparent that Microsoft squelched it,'' said Dan Schley, former

lead of a tax software firm who was ??cheduled to give his views at

the session. The Industry is clearly up in arms about this.''

ITAA's 325 members include such giants as International Business

Machines Corp. and General Motors Corp.'s Electronic Data Systems

Corp., as well as Microsoft.

``I'm very disappointed,'' said Bernard Goldstein, a

former chairman of ITAA, ``It was very obvious Microsoft was

unhappy with this process, but this really is, for the industry, a

very large issue. It's worthy of venting...''

ITAA chairman Jim Mann, who formed the committee last month,

said he believed the group's diverse membership would make for a

range of opinions.

Instead of holding today's hearing, the committee will broaden

its inquiry to evaluate Microsoft's overall impact on the

information technology industry.

Rick Crandall, an ITAA board member and chairman of Comshare, a

software company in Ann Arbor, Mich., said a larger look is needed.

``The question is, where does the industry stand with regard to

Microsoft, what are its competitive ``tactics, and are they

illegal or unhealthy for the industry?''

The latest developments add to the intensity surrounding the

review. Justice Department staff are being inundated with The views-

mostly negative-of companies and individuals about the impact of the

deal beyond the ?? software market that it most directly affects.

Stephen Case, chief executive of America Online, was to speak at

the ITAA event today. Two on-line service pro-

viders--Compuserve Inc., a unit of H & R Block Co.; and

Prodigy Services Co., a joint venture of International Business

Machines Corp. and Sears, Roebuck & Co.--have talked to the

antitrust division about the Microsoft deal.

Mr. Schley has been a key source of information about the

personal financial software indu

This text is long and has been trimmed here. Open the source document for the complete record.