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April 9, 1999

NEWS ANALYSIS

Behind Microsoft's Shift on Windows


A Fear That Consumers May Go Somewhere Else Tomorrow
By JOHN MARKOFF

SAN FRANCISCO -- Microsoft's decision not to blend its consumer and business Windows operating systems into a single product reflects profound changes in the consumer personal computer marketplace that have surprised both the software giant and its partner, Intel.



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Almost overnight the PC market has moved from a business defined by office products to one that is increasingly delineated by both consumer prices and features.

Microsoft's shift became apparent on Wednesday at a Los Angeles hardware developers' conference, when Steven A. Ballmer, Microsoft's president, announced that the company was abandoning plans to tailor its long delayed Windows 2000 operating system to desktop PC's as well as more powerful corporate machines. Instead, it plans at least one more release of its aging Windows operating system for desktop computers. A version, based on Windows 98 that is scheduled to ship this fall, will fix software flaws and add some new consumer-oriented features.

Then the company, based in Redmond, Wash., plans "sometime in 2000" to release a new consumer version of Windows that will offer an as-yet-unannounced set of easy-to-use consumer features, such as "instant on."

Ballmer said the changes arose from listening to Microsoft's customers -- PC makers and software developers -- who contended that the Windows 2000 combined product was not appropriate for consumer markets increasingly focused on games and entertainment and not office applications.

The shift, industry analysts said, may indicate that Microsoft has found itself at a crossroads as significant as the one it faced in 1995 when it abruptly shifted direction and embraced the growing Internet.

By redefining the computer marketplace and acknowledging the failure of its strategy to use a single operating system for desktop machines, Microsoft is leaving itself vulnerable to competition -- just as Intel is being successfully attacked at the low end of the chip market by companies like Advanced Micro Devices and Cyrix.

Moreover, consumer electronics companies like Sony are investing in software and operating systems and refining consumer products like its Playstation line so they will increasingly serve as Internet computers.

"This is an explosive problem," said Mark Anderson, president of Technology Alliance Partners, a research and consulting firm based in Friday Harbor, Wash. "The consumer market will be the largest market in the world for operating systems," and Microsoft does not have a product.

Ballmer's strategy shift included an acknowledgment that the company's "Simple PC" initiative, intended to clean up the increasingly complex design of the PC, had not gone far enough. That effort, in connection with Intel has now been renamed "Easy PC," and Microsoft's president said that it would remain a multiyear effort.

Moreover, Ballmer, by announcing Microsoft's intent to add the new consumer operating system between its Windows 98 and Windows CE product lines, is in effect admitting that the company's CE strategy has been a disappointment.

In its recent corporate reorganization, the Windows CE consumer product line was divided between set-top box and hand-held and portable groups. The shift raised questions about the future of Windows CE, which has so far had only lukewarm support among consumers.

At the same time, Anderson said, while Intel's failure to respond quickly enough to the threat at the low end was a billion-dollar mistake, Microsoft may not pay such a price if it responds promptly because there are not yet viable competitors in the consumer space.

For example, the Linux operating system remains at least a year away from being simple enough to install and having a meaningful number of consumer applications. And the Be operating system, developed by Be Inc., of Menlo Park, Calif., has yet to take off.

And although Apple Computer has gained some market share and been revitalized since the return of its co-founder, Steven P. Jobs, it still remains at a price disadvantage to PC's in consumer markets.

Still, the competitive situation at the low end of the PC market is likely to become more volatile because the Windows 98 operating system is increasingly the wrong product for consumers who are oriented toward entertainment and away from Microsoft's Office productivity suite.

"This is just the tip of the iceberg," said Jeffrey Tarter, the editor of Softletter, an industry newsletter based in Watertown, Mass. "The real problem is the more you look at the innards of Windows the more complicated and more flaky it gets. I don't see any way that they can fix the mess they created without going back to the beginning."

Lots of systems for the business user; nothing for the low-end market.


That appears to be exactly what Microsoft is doing in announcing a new consumer operating system that may appear in the year 2000 or 2001. Ballmer said the new operating system would include advances in digital media handling, home networking, Internet technologies and improvements in the ease of installation and use. That product outline has evoked a skeptical response from competitors.

"At a risk of being called sexist, ageist and French," said Jean Louis Gassee, chairman of Be, "if you put multimedia, a leather skirt and lipstick on a grandmother and take her to a nightclub, she's still not going to get lucky."

Even with its consumer plans in a state of flux, Microsoft also announced plans for its corporate Windows 2000 operating system, raising new concerns that by fragmenting its product line the company may inadvertently sew confusion among customers.

"This raised a red flag for me," said Louis J. Mazzucchelli Jr., a financial analyst at Gerard Klauer Mattison, a New York investment firm.

He said that the company now had as many as four or more versions of its high-end Windows 2000 operating system (formerly Windows NT) in the works.

"Remember when Apple had more than 17 different product lines?" he said. "I have trouble understanding how Microsoft is going to keep customers from becoming confused."

In addition to Windows Server Appliance, which Ballmer announced on Wednesday, he said the company was working on Windows 2000, Windows 2000 Professional, Windows 2000 Server, Windows 2000 Advanced Server and Windows 2000 Data Center.

Conceivably, this could leave the software developer at a disadvantage against Linux and other versions of the Unix operating system, which have been growing rapidly among both Internet server and software developer markets.




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