What’s a Microsoft Rival to Do Now?

By the time the antitrust case against Microsoft Corp. ended with a whimper on Nov. 1, the guys who started it all had long since
given up the fight. Marc Andreessen, whose Netscape Communications Corp. was
trounced by Microsoft in the Internet browser wars, steers well clear of his
former nemesis. Indeed, for his startup, Opsware Inc., he purposely chose a
business that Microsoft isn’t yet chasing–server-automation software.
"Everybody should compete with Microsoft once in their lifetime," says
Andreessen, "so they have stories to tell their grandchildren. And then don’t
do it anymore."

It’s hard to fault Andreessen for feeling that way. During the half-decade
that Microsoft has been under intense government scrutiny, the Redmond, Wash.,
behemoth has become more powerful than ever. Now, unconstrained by the court’s
slap-on-the-wrist settlement, Microsoft is free to spend its $40 billion cash
hoard to enter new markets or acquire companies practically at will. Anybody who
was counting on the Feds to rein in Microsoft is flat out of luck. Their only
remaining hope is that an antitrust probe by the European Union could take it
down a peg.

So how are tech rivals and customers adjusting to the prospect of living with
an unfettered Microsoft? For many companies, survival means figuring out when to
accommodate the giant and when to fight. For corporate customers, it’s about
making sure they have viable alternatives to Microsoft products.

In the wake of the court verdict, Microsoft says it’s going to be a good
citizen. "We’re committed to moving forward as a responsible leader in an
industry that is constantly, constantly changing," says CEO Steven A.
Ballmer. But Ballmer also has said there’s no business that he will rule out
entering. Analysts expect the company to plow into new corporate-software
markets and perhaps even to greatly expand its technology-consulting services.

Already, Microsoft is attacking new worlds. Among them are "smart"
mobile phones for Web surfing and run-the-business applications for small and
midsize companies. In each case, the company will leverage its monopoly
products, Windows and Office, to get a leg up on the competition. In the
business-application market, Microsoft is building links between its accounting
programs–and its Office word-processing and spreadsheet programs.

When Microsoft eyes the competition these days, it sees a ragtag band, not an
army. AOL is still No. 1 in online services, with a 31% U.S. market share vs.
10% for Microsoft’s MSN. But a steep advertising decline has AOL on the
defensive. Sun Microsystems Inc.’s one-third revenue drop over the past two
years curbs its ability to stay ahead of Microsoft in high-end computer
software. Meanwhile, Apple’s share of the U.S. PC market fell from 4.5% to
3.9% in the third quarter, says Gartner Dataquest. In their weakened state,
these foes can’t put up a fierce fight when Microsoft plows into new markets.

The juggernaut’s No. 1 counterbalance is not a company but a technology:
the free Linux operating system. It’s catching on for server computers with a
market share of 26%, up from 6% five years ago. Now, thanks to a clumsy move by
Microsoft itself, Linux adoption could quicken. Microsoft’s new licensing
rules, which went into effect on Aug. 1, raised prices for at least 20% of its
corporate customers. That prompted 7% to look for alternatives, according to a
survey by Goldman, Sachs & Co. For corporations, choosing Linux is about
protecting themselves from too much dependency on Microsoft.

To hold their own against Microsoft, rivals will have to be more nimble–and
just as aggressive. Intuit Inc. beat Microsoft in the tax business by creating
both a software product and a successful online tax service before the Redmond
giant entered as a software-only player. While other pioneers eventually
succumbed to Microsoft, Intuit stays ahead by targeting just a handful of
markets and pricing even more aggressively than Microsoft does.

The same could be said for rivals in the world of mobile gizmos. Microsoft
has had its eye on wireless phones for years, but mobile-phone giant Nokia Corp.
is fighting back with relentless innovation and a willingness to take risks.
Today, more than a million new Nokia-powered phones have been shipped.
Meanwhile, Microsoft has virtually zero share. And its showcase client, British
phone maker Sendo Holdings PLC, is switching to Nokia’s software. While many
venture capitalists won’t invest in companies that compete with Microsoft, a
few do so–judiciously.

Ignoring Microsoft won’t work. Tech companies understand that it’ll jump
into any software business where the opportunities are large. So the smart ones
try to ensure at least a level field. That’s how IBM approached the
just-emerging market for so-called Web services. IBM forged a sometimes uneasy
partnership with Microsoft to develop standards to give the nascent industry a
boost. Now that standards are in place that don’t favor any one company, IBM
believes it can outdistance Microsoft.

Still, most tech companies aren’t capable of standing up against the
software giant, so their best bet is to avoid a pitched battle. SONICBlue Inc.
is aiming for the high end of the market where Microsoft doesn’t yet play.

The drawback with that tactic? If most everybody does it, eventually there
will be few alternatives, and we’ll be seeing Windows just about everywhere
for a long time to come.

By Steve Hamm in New York, with Jay Greene in Seattle, Andy Reinhardt in
Paris, and bureau reports in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc