January 14, 2000

Gates Steps Aside as Chief of Microsoft but Will Remain Chairman

By JOHN MARKOFF with STEVE LOHR

EDMOND, Wash., Jan. 13 -- William H. Gates stepped aside today as chief executive of Microsoft after a quarter-century of running the company day to day and gave that role to his longtime partner Steven A. Ballmer, the company's president.

Mr. Gates will remain as chairman and said he would take on a new role as "chief software architect," declaring his conviction that "in the revolution ahead of us, software will be at the center."

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That vision is in contrast to the thinking behind this week's merger announcement by America Online and Time Warner, a gamble that content will play a paramount role in a digital era.

Mr. Gates said that in his new role he would seek to create a new kind of software system harnessing large computing systems, desktop personal computers and a proliferating array of consumer electronic devices, all connected to the Internet.

Mr. Gates, upbeat and intense, offered no hint that fatigue or weariness had weighed in the decision. He said the shift, in effect, completed an evolution begun a year and half ago when he named Mr. Ballmer president of Microsoft.

"At the end of the day when you go home you're thinking, thinking, thinking about how the different pieces of the company come together," Mr. Gates said in an interview, and the move will free him to devise strategy without worrying about day-to-day business.

It is the close relationship between Mr. Gates, 44, and Mr. Ballmer, 43, forged in their Harvard days, that will make the organizational changes work, Mr. Ballmer said.

Mr. Ballmer dropped out of business school at Stanford University to join Mr. Gates at Microsoft in 1980 and has played a variety of roles at the company, frequently driving its marketing and sales efforts. He was named president in July 1998.

"On a personal level, the kind of relationship that Bill and I have must be totally unique in the business world," Mr. Ballmer said. "The times Microsoft has been faced with challenges is the time we have done our best work."

At one point in the news conference, Mr. Ballmer went to some lengths to emphasize the challenge from competitors, citing Sun Microsystems, I.B.M., Oracle, the free Linux operating system, and pointedly including AOL and Time Warner.

Later in the conference, he was asked whether he thought Microsoft needed to seek a big merger partner itself, as America Online had. "Our business is focused in on software, and I don't anticipate the need for megamergers to accomplish what we want to do in software," Mr. Ballmer said.

Then he added jokingly, "Half of you guys want to break us up and the other half wants us to do a megamerger."

Whatever the competition, Mr. Gates sketched a world view revolving around the company's software in a variety of guises. In that world the personal computer will be the most important platform, but Microsoft software will extend both upward toward large computing services and down to home appliances.

"We're bold enough to think that even reading e-books will be part of the next generation," he said.

The new strategy as outlined by Mr. Gates and Mr. Ballmer is in essence a bet on creating an Internet operating system, integrating the disparate parts of the Internet in somewhat the way programs are now integrated in a single PC.

Engaged in a titanic tug-of-war with its Internet competitors, many of whom are trying to build similar strategies.

For consumers, that may hold the promise of ease of use; for Microsoft, it offers the prospect that its software will be at the center of the Internet universe as it already is in the PC world.

In doing this Microsoft is engaged in a titanic tug-of-war with its Internet competitors, many of whom are trying to build similar strategies. For example, last week Steven P. Jobs, the chief executive of Apple Computer, outlined a similar strategy, introducing a range of new Internet services that will be delivered to Macintosh computer users from the company's Web site.

At the same time, the new software strategy sketched out by Mr. Gates and Mr. Ballmer also aims to capture an increasing share of the most rapidly growing part of the Internet: software that connects businesses to other businesses.

In that sense the new strategy is a second generation of the turn that Microsoft made in 1995 when it rapidly reorganized itself to address the first stage of the Internet challenge, when the advent of the Web browser threatened the primacy of the Windows operating system.

Now the company is responding to a growing set of smaller competitors that are using Internet standard software based on a next-generation Web technology known as XML to develop systems that link businesses and their applications.

Mr. Ballmer said the strategy would revolve around a new set of applications and centralized services he referred to as Next Generation Windows Services. He gave examples in the health care and travel industries, where software would let people change the way they interact with medical providers and get many automated information services to help them with their travel planning and actual travel.

Mr. Ballmer, who will also join the board, said that the new focus for Microsoft would permit the company to continue the rapid growth that it has achieved since Mr. Gates founded Microsoft with his childhood friend Paul G. Allen in 1975.

Richard Sherlund, an analyst for Goldman, Sachs, said elevating Mr. Ballmer was an "evolutionary step." And Mr. Sherlund said he took Mr. Gates's explanation at face value -- that Mr. Gates intends to be fully committed to Microsoft, though in a different role.

"For Gates, I believe that this is about making the Internet work for Microsoft," Mr. Sherlund said. "That's where his heart is."

Microsoft shares closed up $2, at $107.8125, and rose a bit more in after-hours trading.

Asked whether he actually intended to write software code, Mr. Gates said he would probably only "threaten" to do so.

But he said he would work closely with the company to better understand the challenge of programming.

Friends of Mr. Gates said they believed that he would have no trouble stepping away from his day-to-day management duties.

"I think I'd be genetically unable to back away from running my business," said the renowned investor Warren E. Buffett, a friend of Mr. Gates.

"But Bill will do it. He is just that sort of a fellow. And Microsoft will get much more value from him. He will spend his time thinking while Steve marshals the troops and charges ahead."