As Microsoft Corp. appeals its loss in the landmark antitrust trial, a big question looms for employees: If the Redmond software company should fail to reverse the verdict splitting it in two, which company will they join?
And where will chief software architect Bill Gates and chief executive Steve Ballmer go?
An informal poll taken by one former Microsoft executive had employees, by a margin of 6 to 1, choosing the company that would make and market Microsoft applications. Indeed, many analysts and ex-Microsoft employees say the applications company, dubbed “Apps Co.” by some, would be the more exciting and potentially more lucrative option.
But a minority suggest that the operating systems company, while hobbled by the restrictions ordered by Judge Thomas Penfield Jackson, still would have tremendous potential for growth.
And some observers speculate that Gates and Ballmer might not want to run either branch. “The question might not be who’s the logical one, but the desire of the men to do it,” said Scott McAdams, president of McAdams Wright Ragen, a Seattle brokerage. “If you took Microsoft away from them, they might not be interested.”
The split — if it ever occurs — will create two companies, one focused upon operating systems and the other on applications.
The company making operating systems will supply manufacturers the underlying software for running computers, advanced televisions, and handheld devices. Last year, the operating system side of Microsoft’s business brought in $8.5 billion, a figure that analysts expect to grow rapidly due to the release earlier this year of Windows 2000. Operating systems bring less than half of Microsoft’s revenues, but generate the bulk of the its profits.
The second company would produce the Office Suite, BackOffice, Internet Explorer and online offerings such as MSN, among other things. The applications business brought in $11.25 billion in sales in the fiscal year ended June 1999. While its Office business is profitable, the company’s varied Internet products are huge money losers.
All but one person interviewed for this story strongly believes that Microsoft will never be broken up. They prefaced their comments with a litany of reasons why Microsoft will ultimately prevail. Only Rob Enderle, lead Microsoft analyst for the Giga Information Group, thinks otherwise.
Nearly all said that an unfettered applications company, loaded with Office, developer tools, Internet Explorer and the various Internet sites, has the stronger prospects. This is where the company is staking its future with Web-based applications and non-PC Internet appliances. Rather than dealing with computer makers, this company would cater to consumers and developers.
The operating system company would probably have the smaller work force, since about 2,000 developers currently work on Windows while Microsoft as a whole now employs more than 30,000. The operating systems company faces huge challenges operating under several of the proposed government restrictions.
However, many people seem to be overlooking the potential of the operating system company, which would gain control of Windows CE. While badly in need of an overhaul, and still a distant second to Palm Inc.’s Palm OS in the market for handheld devices, Windows CE is the company’s bet on wireless devices and interactive television.
Those are two areas that Mark Anderson, publisher of online newsletter Strategic News Service in Friday Harbor, believes represent a vast opportunity for Microsoft.
“The greatest lift is going to be in the hundreds and millions of cell phones,” he said in a recent newsletter. “I’m predicting sales of 250 million cell phones in 2001 and 340 million in 2002. By that time, 1 billion phones will be out there, and that becomes the most dynamic platform for technology.”
“There’s a substantial upside to the Windows company if they break it up crisply, and retain the people and rebuild the OEM relationships” added Enderle, who advocates a split of the company. “If they can’t (retain and rebuild) then there will be a serious long decline.”
For some employees, choosing sides might depend upon who’s in charge. And any speculation on that subject must presume that Gates and Ballmer don’t retire. Both men are certainly wealthy enough, Gates with some $51.9 billion in Microsoft stock, and Ballmer with $16.7 billion.
Both have young families, and Gates has already started to turn his sights to efforts outside Microsoft, largely through his philanthropy. Gates this week declined to state which of the two he would work for in the event of a breakup. “That is a hypothetical question that fortunately I will never need to answer,” he told reporters in Taiwan.
“Human beings have sizable egos, and they’ve built a gigantic software empire,” said a former midlevel Microsoft executive who asked to remain anonymous. “To see their baby get cut in half — boy, any reasonable parent might throw their hands up, and say they can’t handle it. It’s entirely feasible.”
And if they both retire? “This is still the Bill and Steve show. If they decide to tap internally, boy, that’s a hard one. I don’t know anyone who has the force … currently that could capture that same passion and leadership,” said this former employee.
Enderle, the Microsoft analyst at Giga, said that with or without an antitrust ruling, breaking Microsoft in two would be better for the company because it would become more nimble.
At the same time, he offers an extreme scenario if a break-up is ordered by the government. “Bill feels so strongly about the breakup that if he were not to get the religion and do what’s right for the firm, I have a valid concern that he’d be intent on trying to show the DOJ that what they were doing was destroying the company,” he said. “He’d take it down the toilet. He’s that stubborn.”
Several former Microsoft executives dismissed that idea, saying Gates is a smart businessman who would act rationally even if the case went against him.
Enderle also said that if the company were split, the system side could become “an operating system specialty shop that could acquire other operating systems and provide the tools for them,” he said.
“The applications business needs to grow into the applications service provider and Internet service provider markets,” he added. “It needs to be separated due to the lower reliability of Windows and the increasing complexity of the platform. They need to be separated before they spiral down and out of control.”
Several former Microsoft employees said the notion that either of the two companies would begin translating Windows-based applications to the various derivatives of the Unix operating system is laughable.
“That part (of the theory behind the breakup plan) mystified me,” said Usama Fayyad, chief executive of digiMine.com. “The reason Office doesn’t exist for Unix is because the demand wasn’t there, and I doubt it is today. It was never about the fear of competition.”