Microsoft: On the Ropes!

Guilty verdict sends Microsoft reeling; distractions intensify

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Microsoft Corp. is guilty. And vulnerable.

U.S. District Judge Thomas Penfield Jacksons guilty verdict last week in the antitrust suit the government brought against the Redmond, Wash., company two years ago was expected, even by Microsoft. What wasnt, however, was the possibly more damaging toll the legal proceedings have taken on the company. According to many close to Microsoft, the company has been driven to major distraction by the trial, which has resulted in the delay of at least one of the companys major forthcoming product initiatives, Next Generation Windows Services.

In addition to the ruling last week, more than 110 class action suits have been leveled against the company since Jacksons findings of fact were issued last November; archrival Sun Microsystems Inc. has intimated the possibility of launching its own antitrust lawsuit against the company; Microsofts stock value dropped a total of 15 percent since the verdict was announced; and at least a half-dozen key executives have been forced into double duty, splitting their time between their regular jobs and assisting with the case.

"It just has to sap resources," said an administrator with an IT services company who works on-site at an aerospace company and who asked not to be named.

The administrator said he plans to go ahead with a 20,000-seat, 1,000-server Windows 2000 deployment, but "we have what if meetings now. Investing in future Microsoft technologies? Thats another matter. The problem is, theyre techies. Theyll never admit they cant do it all. I think Bill [Gates] has to realize whats happening here. Its not good."

If comments and actions by Gates, Microsofts chairman and chief software architect, and company President Steven Ballmer over the past several weeks are any indication, it seems clear where their priorities have been.

In describing his companys efforts to create a reasonable settlement, Ballmer last week said Microsoft had "poured its heart and soul" into a settlement. At the same time, Gates said he had spent "hundreds of hours" on a settlement and that the company "went the extra mile" in trying to end the case.

Also last week, Gates—the man charged with creating a framework for the companys future software—was in Washington, D.C., not Washington state, to lobby Republican leaders in Congress about the case. Gates also rubbed elbows with President Bill Clinton and Federal Reserve Chairman Alan Greenspan, among others, while in D.C. during his scheduled appearance at the White House Conference on the New Economy.

But the PR push didnt end in Washington. Thursday evening, Microsoft began running a national 30-second TV spot featuring Gates. Smiling and speaking directly into the camera, he reminded viewers of the positive impact and influence his company has had on the computer industry and the economy.

Mike Sax, president of Seattle-based Sax Software Inc. and a Microsoft partner, admitted that such actions and statements take time away from the business of software but defended Microsofts devotion to the cause as necessary.

"This will majorly affect the entire industrys future," Sax said. "They need to devote themselves to this. And I believe they have that second layer of executives, the Paul Maritzes, to take care of the business."

Microsoft maintains that the trial has in no way affected the companys ability to do business, but thats becoming more difficult to believe.

"[Microsoft] admitted being distracted, and we sort of expected it," said Steve Chazin, marketing manager at Bowstreet Inc., a Portsmouth, N.H., partner in the directory services area that is trying to cooperate on NGWS. "Weve tried to ramp up discussions, but its clear its going to take awhile. Were just finally getting people to return phone calls."

The most pressing delay the trial has imposed may be on Next Generation Windows Services, the companys vague term for how it will transform its flagship platform to the services model of doing business.

When Microsoft unveiled NGWS in January, the company had few specifics. Microsoft would not say if NGWS replaced or was part of another large Microsoft initiative, Windows DNA 2000.

But Ballmer, who said he believes NGWS will be as significant a corporate change as Windows 95 was, said in January NGWS would be outlined in a three-year road map that would be unveiled this month—a date that has slipped until late next month, sources said. A spokeswoman for the company said no date for the NGWS announcement has been set and would not comment further.

While a few months slippage may not sound like much, it is in the services world, according to Jerry Walters, manager of Road Runner Business Services at Time Warner Inc.s Time Warner Communications, in Columbus, Ohio.

Walters is building an application services business for 30,000 home and 1,500 business users using little Microsoft technology.

"Were already running into situations where competition is fierce because whoever gets the customer first will likely keep him," Walters said. "Theres so little value in changing your application service once you have it. If Microsoft is late getting NGWS explained, and deployed, it will hit them hard."

Further agitating the NGWS launch is the "vaporware" issue, a major factor in the antitrust lawsuit Caldera Inc. filed against Microsoft in 1996. (The suit was settled earlier this year.) Announcing NGWS before it exists could embolden others to file suit on those grounds.

Its certainly within the realm of possibility: Already more than 110 class action suits are pending against Microsoft, and legal experts expect the faucet to remain wide open.

"The class actions will be a major headache," said Hillard Sterling, an antitrust attorney at Gordon and Glickson LLC, in Chicago. "Theres just no efficient process to consolidate all of these. It will be a multifront battle for years to come regardless of the outcome of this trial. Theres no hope of getting rid of these expeditiously."

Sterling added that the myriad suits will affect how Microsoft develops its products.

"Its inevitable that Microsoft will have to carefully consider any future products, marketing and promotion, as plaintiffs lawyers are waiting for any opportunity to allege anti-competitive behavior," he said. "Every Microsoft competitor has a legal department poring over the public record."

Indeed, competitor Sun already hinted last week in published reports that it may file an antitrust suit against Microsoft for its efforts to stall the advances of the Java language. More are guaranteed to follow, several lawyers said.

Such legal wrangling has IT weary. For the first time since the trial began, some users are voicing their displeasure about Microsofts inability to settle.

The uncertainty that the guilty verdict brought forced at least one IT organization to halt its Windows 2000 deployment. Others will continue with Windows 2000 deployments but are holding back on future products, such as NGWS.

So far, Starbucks Coffee Co. Senior Vice President and CIO Ted DellaVecchia said he is not "jumping out the window," yet. Starbucks, in Seattle, is testing Windows 2000 for a possible large-scale deployment on terminals in about 2,800 stores.

"If they are forced to break up ... or if the technical talent starts leaving, then Id get worried," DellaVecchia said.

"Im sure at the highest level, [the legal problems] have a strategic impact," said Al Williams, director of distributed systems at Pennsylvania State University, in State College. "Im trying to stay tactical with Windows 2000."

More than just sad, the inability of Microsoft and the government to settle could hurt Microsofts ability to retain or attract employees.

When Wall Street took in the guilty verdict last week, it panicked, sending the NASDAQ plummeting 7 percent in a single day. Microsoft itself lost more than 12 percent of its stock value that day. Some say events such as that have a direct effect on the companys development efforts.

"For employees at Microsoft, everything depends on their stock," said Sax Softwares Sax. He added that the trials impact is tangible at the company. "The trial is holding the stock down. I believe the company is motivated to get this over with, even if its just to keep developers from leaving."

Another development partner agreed with the "golden handcuffs" theory that stock options keep employees motivated.

"I will tell you that people I know inside Microsoft are very distracted day to day because of the [stock situation]," said the developer, who requested anonymity. "When these events in the trial happen, it distracts people for a few days, but the whole business and motivation for employees is predicated on the stock going up. They lose developers when this sort of thing happens. They are losing developers now."

Microsoft declined to comment for this story.