Imagine if the browser wars were taking place in a market where there’s real money involved.
In the $30 billion corporate software market, a battle is brewing over the server operating system–the software equivalent of the heart and arteries of big businesses. Microsoft Corp. is luring corporations to its products by integrating crucial applications directly into its evolving Windows NT operating system. Customers benefit from lower costs and ease-of-use from this “everything-but-the-kitchen-sink” package, among the most elaborate Microsoft has ever offered.
“I think the kitchen sink actually is in it,” said Mitchell Kertzman, chairman of Sybase Inc., an Emeryville, Calif.-based maker of database software.
Does this approach sound familiar? In the desktop arena, where Microsoft’s Windows 3.1 and 95 run up to 90 percent of the world’s PCs, the software giant similarly turned browsing into just another feature of the operating system. The move triggered a Justice Department investigation and lawsuit.
Microsoft’s competitors say NT is the same story all over again, and they’re howling that the company isn’t playing fair. Problem is, Microsoft has nowhere near a monopoly in the server operating system market–though its share is increasing rapidly, it had just 36 percent of shipments in 1997.
But that’s not keeping government investigators from poking around. The Justice Department and the Senate Judiciary Committee are conducting inquiries into Microsoft’s business practices concerning Windows NT.
The money at issue dwarfs the stakes in the browser brouhaha. Since Netscape Communications Corp. began giving away its Web access software this year, the two leading browsers–Netscape’s Navigator and Microsoft’s Internet Explorer, which has long been free–generate no direct revenue for their makers.
In contrast, Microsoft is projected to receive $3.9 billion– about a quarter of its revenues– from NT over the next year, and there are many more sales to be made. NT Server led its rivals in 1997 with 36 percent of units shipped, up 73 percent from the prior year, according to International Data Corp. of Framingham, Mass. Novell’s Netware had 26.4 percent of the server operating system market and Unix–made by a variety of vendors including Sun Microsystems–20.7 percent.
Moreover, the applications Microsoft is integrating with NT are enormous markets in their own right.
For example, middleware–the term for software that helps bridge the gap between applications and operating systems–was a $1.7 billion market last year; by 2002, International Data expects more than $7 billion in middleware to be sold. Transaction services and message queuing–two hefty and expensive pieces of software that will be part of NT 5.0, a major revision due early next year–are a sizable subset of the middleware market.
NT 5.0 also will include a facility to host videos that can be streamed to desktop PCs, another quickly growing market now dominated by smaller third parties, including RealNetworks Inc. of Seattle, founded by Microsoft alum Rob Glaser.
It’s by no means certain that Microsoft’s combine-and-conquer strategy will guarantee dominance. Ed Acly, director of middleware research for International Data, argues that the world of servers is too heterogeneous for Microsoft to recreate its desktop monopoly. “Everybody recognizes no matter what the success of NT, the enterprise will always be multivendor,” Acly said.
And some companies whose products compete with parts of the NT bundle say–publicly, at least–that Microsoft’s involvement actually increases the market for them. That’s the story from @Backup Inc., which makes software for archiving data; Citrix Systems Inc., whose software provides multiuser access to NT, and Tibco Software Inc., a maker of enterprise middleware.
Other competitors maintain that such talk is borne of fear of Microsoft, not confidence in the free market.
“The politically correct thing to say is that it doesn’t make any difference. Everyone says that because they’re scared,” said Ed Scott, one of the founders of BEA Systems Inc., of Sunnyvale. “The truth is when Microsoft puts stuff in the operating system, even though NT doesn’t have the dominant share . . . all this bundling is going to be fatal to people who try to compete at the same level of the market.”
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From the standpoint of competition in the server OS market, Microsoft’s move to add more functions to its product makes perfect sense. If you want to win new customers, offer more–for less–than your rivals.
“There is a seductiveness to the Microsoft argument,” said John McFarlane, president of Solaris Software at Sun Microsystems. “They are catering to the wishes of their customers, but it’s a trap in the sense you’re going to be stuck in that model forever.”
Microsoft says its competitors, including IBM and Sun, are also integrating third-party products into the server operating system. McFarlane conceded Sun may “have to” add some similar features to its Solaris operating system to be competitive: “But the difference is, wherever possible, we’ll give customers choice.”
The notion that corporate software customers may ultimately lose choice is what piques the interest of government regulators in the NT battle. But despite some early expectations that the Justice Department would move swiftly to enter the dispute, investigators so far are treading carefully.
Their caution appears to reflect both the difficulty of making a case under U.S. antitrust law–as even Microsoft’s opponents concede, it is possible to build a monopoly without violating the law–and the sense that the company’s fiercest critics have huge financial interests at stake.