07/15/96 INSIDE MICROSOFT (Part 2) 2/7/04 2:30 PM INSIDE MICROSOFT (Part 2) The untold story of how the Internet forced Bill Gates to reverse course (Continued from Part 1) BABY STEPS. In one breakout group, Allard tangled with Russell Siegelman, who was heading Marvel, the code name for what's now the Microsoft Network online service. Allard argued that instead of being proprietary, Marvel should be based on Web standards. Siegelman held his ground--and won. It was a decision that would later cost millions to reverse. Still, Net progress was made: TCP/IP would be integrated into Win95 and Windows NT, the version of Windows that runs network-server computers. The sales team was told to use the Web to dispense marketing information. The applications group agreed to give Word, the word-processing program, the ability to create Web pages. Next, Gates jumped deeper into the process by devoting much of his April Think Week--a semiannual retreat--to the Internet. His Apr. 16 memo, ``Internet Strategy and Technical Goals,'' contained the first signs of a growing corporate commitment. ``We want to and will invest resources to be a leader in Internet support,'' wrote Gates. It was a first step, albeit a measured one. ``I don't think he knew how much to bet yet,'' says Allard. But board member David F. Marquardt did: He recalls that he was ``amazed'' that Microsoft was putting so little into the Net. ``They weren't in Silicon Valley. When you're here, you feel it all around you,'' says Marquardt, a general partner at Technology Venture Investors in Menlo Park, Calif. He broached the subject at the April board meeting that year. Gates's response? ``His view was the Internet was free,'' says Marquardt. ``There's no money to be made there. Why is that an interesting business?'' To an increasingly important group of competitors, it was clear there was a http://www.businessweek.com/1996/29/b34842.htm Page 1 of 9 07/15/96 INSIDE MICROSOFT (Part 2) 2/7/04 2:30 PM huge opportunity--and if Microsoft didn't pursue it, they might be able to undo the behemoth's software dominance. Sun, Netscape, Oracle Corp., IBM, and others saw their chance to reset the rules on the Net. So did the Net startups that were multiplying like cells. Yahoo!, Lycos, InfoSeek, PointCast--dozens were rushing into the vacuum where Microsoft wasn't. The most high-profile of these was headed by James H. Clark, who resigned as chairman of the company he founded, Silicon Graphics Inc., and latched on to the Internet opportunity. He had the goose that laid the golden egg: Marc Andreessen, that 23-year-old University of Illinois programmer. Netscape Communications (originally Mosaic Communications) was founded on Apr. 4, 1994, the eve of the Shumway retreat. By October, it was downloading its Navigator browser across the Internet. In the spring of 1994, the Net was exploding. Millions of PC users were logging on. There were some 21,700 commercial Web sites, up from 9,000 in 1991. Even IBM had a home page, complete with a greeting from Chairman Louis V. Gerstner Jr. So did General Electric, Tupperware, Volvo, and Hyatt Hotels. Time Warner had Pathfinder, which featured electronic versions of its magazines. Increasingly, the Net, not interactive TV, looked like the route to the Info Highway. Grasping that, Sun Microsystems began adapting a software language for interactive TV into what would become Java. That April, at the spring Comdex trade show, Sinofsky saw BookLink, a browser owned by CMG Information Services. He showed it to Brad A. Silverberg, then head of Microsoft's Win95 business. Execs began negotiating to license the technology. But as the talks dragged on, AOL swooped in and bought BookLink for $30 million in November. Says Silverberg: ``That woke us up. We had to be a lot more aggressive, a lot more lively. Time was ticking faster in this new world.'' During this period, Gates was crafting a strategy for Microsoft in the emerging wired world. But as outlined in his October, 1994, memo, ``Sea Change,'' the approach was to use existing Microsoft products. Other Microsoftians were becoming convinced that the Internet was the way. One was Benjamin W. Slivka, now 35 and project leader for Internet Explorer, Microsoft's browser. In mid-1994, he and three other programmers were looking into what features to plan for the successor to Win95. He got his Internet hookup and soon knew the answer: On Aug. 15, he sent E-mail to his small band, saying they needed a browser and might even get one ready for Win95. When Netscape's Navigator hit the Net that fall, Slivka checked it out, then grabbed six people and mapped out the browser features for Win95. To get the work done faster, one of his programmers took a shopping trip--to Spyglass Inc. in Naperville, Ill., a Netscape rival. It was an ironic moment for Spyglass CEO Douglas P. Colbeth. Six months earlier, he had come calling on Microsoft--only to be rebuffed. ``Typically, they said, `We'll build it ourselves,''' says Colbeth. But by late 1994, Netscape was beginning its ascent and Microsoft was eager to deal. It signed a Spyglass license on Dec. 16. http://www.businessweek.com/1996/29/b34842.htm Page 2 of 9 07/15/96 INSIDE MICROSOFT (Part 2) 2/7/04 2:30 PM NETWORK NEWS. Still, going into 1995, Microsoft management was focused on Chicago. Originally scheduled for December, 1994, it had been pushed back to mid-1995 and would emerge, finally, as Win95 that August. The company was scrambling to complete Windows NT for the corporate market, too. ``Those were the focus,'' says Gates, ``and the Internet was like an underlying rumble.'' Gates had also ordered that Microsoft Network should make its debut with Chicago. The MSN story is loaded with might-have-beens. In December, 1992, when Siegelman started the planning, the Net was hardly a showstopper. The real star was AOL, a Windows-based online service that was gaining members at a rapid clip. So in May, 1993, Gates approved Siegelman's plan for a rival service that would have a big advantage--the software needed to use it would be included in Win95. In the fall of 1993, the MSN team ramped up to get done in time to come out with Chicago. But, heeding the Net rumblings, Gates agreed to let Rob Glaser, a longtime Microsoft exec who had pioneered the push into multimedia, do an analysis of how the Net affected MSN. His conclusion: Microsoft should ``radically change'' the strategy and make the online service part of the Net. Then, fate stepped in. In November, 1993, Siegelman, now 34, suffered a brain hemorrhage. He would recover, but his absence prompted the normally relentless Glaser to ease up. He presented his plan to Siegelman's staff, but with the boss away and the team already stressed out, he didn't push hard. ``We just couldn't afford to spend a lot of energy changing our plan,'' says Jeffrey Lill, a former MSN team member. Adds Glaser: ``I felt the stars were not aligning for Microsoft to really understand the Net early.'' Besides, MSN was a high-profile project. Gates unveiled the planned service in a keynote speech at Comdex in November, 1994, and within weeks persuaded Tele-Communications Inc. to pony up $125 million for a 20% stake in MSN. TCI chief John C. Malone had been on the verge of investing that amount in rival AOL. But, says AOL CEO Steven M. Case, ``in the final hour, Gates persuaded him--implored him--not to invest in AOL.'' Three weeks later, Microsoft paid $16.4 million for 15% of UUNet Technologies Inc., which now carries MSN traffic. Despite MSN, by May, 1995, Gates was sounding the Internet alarm. He issued ``The Internet Tidal Wave,'' a memo that hit on the themes that had been reverberating throughout Silicon Valley. He declared that the Net was the ``most important single development'' since the IBM PC. ``I have gone through several stages of increasing my views of its importance. Now, I assign the Internet the highest level,'' he wrote. On May 27, Slivka issued his own alarm, titled ``The Web Is the Next Platform.'' He warned that the Web had the potential to supersede Windows. Says Slivka: ``I don't know if I actually believed that would happen. But I wanted to make a point.'' There was a growing sense among Microsoft execs that the Internet http://www.businessweek.com/1996/29/b34842.htm Page 3 of 9 07/15/96 INSIDE MICROSOFT (Part 2) 2/7/04 2:30 PM opportunity had to be seized--before it slipped to others. On June 1, 40 of them gathered at the Red Lion Inn in Bellevue, Wash., to brainstorm Net strategy. Gates gave a 20-minute talk on the ``Internet Tidal Wave.'' Slivka's scheduled 15-minute talk ended up lasting more than an hour. ``I got some people riled up,'' he says. At one point, Slivka proposed that Microsoft give away some software on the Net, as Netscape was doing. Gates, he recalls, ``called me a communist.'' Executives also went through every Net project that Microsoft had in the works and got their first peek at Java. The reaction? ``Like the early reaction to my memo, it was lukewarm,'' says Allard. Only after Win95 was shipping in August did Microsoft put full force into the Net. ``In the three or four months before, there were symptoms that this thing was really accelerating,'' says Gates.