Bill Gates: Behind Microsoft, Money, Malaria

by Forbes Staff

  Put all these advantages of technology and pipeline control and economics in the hands of another entrepreneur, and you still might not get the results Gates has achieved. Make no mistake: Gates is no softy as a businessman. And no piece of business is too small to escape his competitive instincts. T/Maker, an $8 million company selling word processing packages for the Apple Macintosh, put out a souped-up version at a discounted $175 in late 1986. Not wanting to lose even a little bit of business, Gates, who then had six times the market share in Macintosh word processors, made a competitive counteroffer.

  Consider what happened to GO Corp., a little company designing software to recognize handwriting. A week before GO’s January announcement of its innovative program, Microsoft told the press it too had “pen” software in the works. A few weeks later it announced that 21 computer makers were “considering” building computers around what Microsoft is calling Pen Windows. Why this assault on such a tiny competitor? “They [Microsoft executives] are worried about GO’s software because it’s good,” says Stewart Alsop, editor and publisher of P.C. Letter.

  Adobe Systems, which makes desktop publishing software, has also stirred Gates’ competitive juices. Gates wanted to incorporate Adobe’s typefaces in his Windows program and proposed doing that with no royalty to Adobe. Adobe refused. Gates retaliated by working with Apple to produce not just the typefaces but a full-dress publishing system that has the potential to cut deeply into Adobe’s business.

  When Hewlett-Packard introduced its NewWave software, a user interface based on Windows that allows users to link programs from different companies, Gates couldn’t say enough nice things about the product. “When NewWave showed off Windows, they [Microsoft engineers] were very cooperative,” says Webb McKinney, head of HP’s NewWave product group. “But when it looked like it would be a force, they wanted to do it themselves and told customers explicitly not to buy our stuff.”

  As the powerhouse in software, Gates is in a position to call the tune. At an early stage in Apple’s development, sales of its machines were held back by the comparative paucity of applications available to run on them. Gates helped by writing Apple software. But he exacted a price. He obtained rights to Apple technology, and for several years dissuaded Apple Chairman John Sculley from starting an Apple-owned software subsidiary. In a similar vein, in 1989 Gates threatened Ashton-Tate with loss of preferred licensee and developer status on a joint database project if it cooperated with Novell on a database product for networked PCs.

  Apple is now too large to be intimidated by Gates. But small software houses have another uphill battle—getting into distribution channels. Xyquest, for instance, makes a word processing program ideal for professional writers, but the package is almost impossible to find in software stores. The stores just don’t have the shelf space for niche products.

  Is Gates, then, driving inexorably toward a monopoly or near monopoly position? Fearful of just such a result, his competitors vow not to let it happen. Says Jim Manzi of Lotus: “The sin of hubris is always the source of the greatest tragedies. No competitive advantage lasts forever: You’re caught off-guard by change, or your competitors nibble away at you in a concerted fashion.” Indeed, the competition is acting to counter the threat, in some cases even ganging up against Gates. Lotus and Novell, for instance, attempted a defensive merger last year, into a company that would have been Microsoft’s size. The deal fell through over the issue of who would control the board of directors. Other defensive alliances may be evolving. Hewlett-Packard has lined up the support of Sun Microsystems in a battle against Microsoft over industry standards for sharing data among different computers on a network and making it easier to link different programs. An HP/Sun victory could ultimately challenge Microsoft, which has already designed a competitive product called Ole.

  Even more threatening to Gates is the cooling of the relationship between Microsoft and IBM. The computer giant put Microsoft in business by giving it the contract to produce an operating system for the first IBM PC; since then they have spent millions together in a joint effort to create OS/2, a successor operating system. But memory-hungry OS/2 has sold poorly, and now the two giants are not acting very friendly. Microsoft has ceded to IBM most aspects of the OS/2 business while it focuses on new versions of Windows. And this is how the formerly close partners speak of each other: “Sometimes our interests were more aligned than others, I don’t know that we ever really shared the same vision,” says James Cannavino, vice president and general manager of IBM’s Personal Systems unit. “Today, our views are alarmingly different.” Mutual need at one time masked the fact that IBM and Microsoft have dramatically different notions about personal computers. For IBM, the PC is the link to its mainframes. For Gates, it’s what the name “personal computer” implies: a tool primarily for individuals who may not have an interest in IBM’s grand schemes. OS/2 is a key component of IBM’s Systems Application Architecture, a scheme for linking computers of all kinds within large corporations. “IBM is as serious as it gets about OS/2,” says Jeffrey Tarter, editor and publisher of Softletter. “No company has challenged IBM at the center of its business and lived,” notes David Fulton, president of Fox Software.

  Gates, for his part, downplays IBM’s role. Microsoft, he says, not IBM, established the standard for PC software. “Believe me, it was not IBM who made MS-DOS the standard,” Gates maintains. “It was up to us to get people to focus their development on it, to get other PC manufacturers to license it.”

  Evidently mindful of what an unchecked Microsoft could do to damage IBM’s interests, IBM has acted to support Gates’ competitors. IBM chose GO, not Microsoft, as the supplier of pen-based software for a coming laptop. IBM infuriated Gates by purchasing a license from Gates’ archrival Steve Jobs; IBM will offer Jobs’ Nextstep graphical user interface on IBM computers. And IBM will now resell Novell’s Netware, even though it had previously endorsed Microsoft’s LAN Manager as the operating system for IBM PC networks.

  IBM isn’t the only company resentful over the success of Windows. Software developers who developed products for OS/2 and not Windows feel betrayed. “A lot of traditional PC software developers were very upset,” says Adobe President John Warnock. “Developers depend on Microsoft to deliver. Microsoft took developers down the path of OS/2 for years and then changed its mind.” There was, however, another factor at work: Software makers may have underestimated Microsoft’s ability to set a standard without IBM.

  Gates insists that Windows can coexist with OS/2 and downplays the friction with IBM. “People keep acting like there can only be one thing, like we have to choose to do what IBM wants or not do what IBM wants,” he says. “People like to think of it as a contest between two products.” Maybe it isn’t this kind of a contest, but, clearly, Microsoft plans to enhance Windows to become a powerful operating system that can compete with OS/2.

  “We have not changed our agenda,” says IBM’s Cannavino. “Microsoft can participate in our strategy if it chooses. If we compete, it’s because our views are changing rapidly. If they [choose to compete], we will compete fiercely.”

  In a significant move to weaken Microsoft’s stranglehold on PC operating systems, IBM plans to invest $80 million over the next three years in a project with Metaphor Computer Systems to develop the ultimate answer to the compatibility problem: “platform independence.” The idea is to produce a layer of software that would rest atop any operating system on any piece of hardware. The application developers would write their software just once, rather than start from scratch when adapting a software package for a new computer.

  “It’s a recognition that the long-term economics for application software developers have become increasingly difficult,” says Metaphor Chairman David Liddle, who heads the project, called Patriot Partners.

  Technically, the task is daunting, which is why IBM engaged Liddle, an alumnus of Xerox’s prestigious Palo Alto Research Center, and his team of expert programmers. If successful,
and an aggressive schedule has it shipping first versions of the software by the middle of next year, Patriot would threaten Microsoft’s near monopoly in operating systems. After all, one of Microsoft’s great advantages is that for a long time popular packages like 1-2-3 were available only on computers running MS-DOS. Lotus’ Manzi calls platform independence “software nirvana.” Liddle hopes it will allow software developers to spend more time creating interesting new packages rather than simply upgrading existing programs for new operating systems.

  How has the consumer fared as Gates has extended his power in the software business? So far, very well. The de facto standard that Microsoft and IBM created for the PC, MS-DOS, gave birth to a thriving industry of application programming that would have never gone so far if developers had had to write code to fit competing operating systems. The pair created a uniformity that spawned riches of new products by allowing the software developers to concentrate on new products rather than on different forms of the same product.

  Can anyone stop Microsoft? The answer probably is no, just as no one has ever been able to stop IBM. But competitors have given IBM a run for its money—and forced it to stay efficient. In the course of doing so, they created (and forced IBM to create) new kinds of computers—minicomputers, workstations, personal computers—that would have been a lot slower in coming had IBM ever been a true monopolist.

  Why was IBM slow to answer Digital Equipment in minicomputers, Apple Computer in personal computers and Sun Microsystems in workstations? It’s not a matter of deficient technology; IBM always spent lavishly on research. It’s the installed-base phenomenon.

  A large computer company can become as much a captive of an operating system or computer design as its customers. Thus, Sun was the first company to get a lot of mileage out of reduced instruction set computing, yet the technology was invented many years earlier by an IBM scientist.

  Gates and his fellow programmers certainly don’t lack in technology. Gates is already talking about a new operating system that will surpass DOS and OS/2 while beating back competition from the up-and-coming Unix. He envisions a day when every desk will have a computer on it, running Microsoft software. That day will come only if computers become much easier to use, bridge the communication gaps among different brands of hardware and software and become powerful enough to process speech, handwriting and pictures. However powerful his present position, Bill Gates knows that he is in a business where the only constant is change.

  MR. GATES AND MR. ALLEN BUILD THEIR DREAM HOUSES

  By Julie Pitta

  October 1992

  TEN MINUTES APART by speedboat, two estates are under construction along the eastern shoreline of Seattle’s Lake Washington. William H. Gates III, at 36 America’s richest man, is spending around $35 million on his new place in the wealthy enclave of Medina. Gates’ old comrade-in-silicon, 39-year-old Paul Gardner Allen, is spending about $30 million for his multistructure estate on Mercer Island.

  Gates and Allen have much in common. They both attended Seattle’s Lakeside School; Gates went on to Harvard, Allen to Washington State University. But they found college less exciting than computers; both dropped out shy of graduation.

  In 1975 they cofounded Microsoft Corp.; its stock market valuation now rivals General Motors’. Allen left Microsoft in 1983 after being diagnosed with Hodgkin’s disease; the disease is now in remission. In 1985 Allen started his own software company, Asymetrix Corp. But he held on to his Microsoft stock, which is now worth $2.9 billion. Gates still holds Microsoft stock worth $6.7 billion. Against such wealth, what’s $30 million or $35 million for your own lakeside dream house?

  Despite their common background, the two young billionaires are going about their house-building projects in very different ways.

  First, take Paul Allen. A very private person, Allen has nonetheless opted for conspicuous construction. In the process he’s managed to irk most of his neighbors.

  From the air, Allen’s compound looks like a medieval hill town. The estate includes a 6,500-square-foot house for his widowed mother. Faye Allen will be able to stroll to her own 1,800-square-foot library. (Allen’s father was a librarian and his mother worked in the library at the University of Washington.)

  Basketball is a passion of Allen’s; he owns Portland, Ore.’s National Basketball Association team, the Trail Blazers. If the team ever comes over to visit, they’ll be able to play in Allen’s new $6 million sports complex, complete with a pro-size basketball court, some indoor tennis courts and swimming pool.

  Downhill from the sports complex is an entertainment center with a theater, an art gallery and a star-gazing room; the center will be surrounded by a rose garden. When Allen decided he needed more land around this building, he bought lots from several neighbors. He tried to buy out another neighbor to the north, but this one refused. Allen has almost encircled the holdout.

  Allen himself will live in a house near the water. Part of his house is a mansion that was once owned by Horace McCurdy, who helped design the first Lake Washington floating bridge. But Allen found McCurdy’s 4,500-square-foot house a bit cramped, and is adding on space that will nearly double the original structure’s size.

  Neighbors say Allen tours his site most Tuesday mornings but apparently doesn’t say much. One of his architects, Charles Moore, of Austin, Tex.-based Moore/Andersson, says Allen prefers to communicate through his sister, Jody Allen Patton. “We were trying to make this a special house for a special person and it was hard to know what he had in mind,” Moore says. “It became apparent that he didn’t want to be involved. We made numerous dates with him and they always got broken.”

  Without much guidance from his client, Moore says he patterned the Allen estate after the Swedish agricultural estates of the 16th century. The wooden buildings will be painted a slate blue; they are in keeping with the local landscape—except, of course, for their massive scale. “I wanted to have big pieces without messing up the scale and making it seem like the civic center,” says Moore. But it’s hard to hide sports and entertainment complexes, a gatehouse and a couple of enormous main residences.

  Allen’s neighbors have been complaining about the noise, inconvenience and dust created by the construction, which began two years ago. Nor do they like the workers’ beat-up pickup trucks, which are startlingly out of place amidst the Volvos, BMWs and other tony imports the locals favor. And deep down, many neighbors simply dislike the sheer scale and ostentatiousness of the Allen estate. “People in Seattle are low-key,” says Mercer Island Mayor Elliot Newman. “Bigness is something people here don’t like; it’s associated with the sprawl in California.”

  For an altogether different approach, turn now to Bill Gates. He is trying to make his 42,000-square-foot estate practically invisible. The main house will be burrowed into a steep hillside, camouflaged with wood, glass and rock, and hidden behind trees. The 20-car garage will be an underground cavern.

  According to the blueprints, the compound includes a residence and two separate pavilions for guests and receptions. All told, there will be seven bedrooms, including three children’s bedrooms and another for a nanny, in the event Gates ever marries and has a family. There will be three kitchens, a 10,000-book library, a 20-seat movie theater, two elevators, a 60-foot swimming pool, an exercise room, a game room and three dining rooms—a private one for family dinners, a larger one for small parties, a third for large-scale events.

  Most of the buildings in the compound are connected by a network of tunnels. And throughout the interiors there will be high-resolution screens that will show artwork. (Gates owns the electronic rights to over 100,000 paintings and other images that can be used in multimedia murals.)

  In a city that takes its environmentalism seriously, Gates and his architects took great pains to blend in with nature. “If you build in the forest, you do what the forest tells you to do,” says Seattle-area architect Jim Cutler, one of Gates’ two architects. The other is Peter Bohlin, of Pennsylvani
a’s Bohlin Cywinski Jackson. The pair won a design competition coordinated by another local architect, Micheal Doss, who is still advising on the project. (Doss also ran the design competition for Paul Allen’s house.) Cutler and Bohlin report that Gates is keenly interested in the project. “He can be very penetrating in his questions,” says Bohlin. “But he’s never been arbitrarily domineering.”

  “We fought tooth and nail to save every tree we could,” Cutler continues. Even faraway trees: Much of the lumber for Gates’ house has been taken from old buildings and is being remilled in an old sawmill. Says Cutler, proudly: “This building will probably use less new-cut timber than any traditional 3,000- to 4,000-square-foot house.”

  Hundreds of mature alders and big-leafed maples, as well as other native flora, have been planted on the estate. Once the house is finished, they’ll plant hundreds more. “I don’t think there will be more than 10 nonindigenous plants when we’re through,” Cutler says.

  Gates even helped to recycle the house that was on the site when he purchased it. Rather than tear the old house down and incur the wrath of Seattle’s liberal media, Gates agreed to sell it for the bargain price of $60,000; the house was then barged to another lakefront site.

  Whereas Allen has been somewhat indifferent to his neighbors, Gates actively curries favor with his. Since breaking ground in the spring of 1990, Gates has posted notices and sent regular newsletters to his neighbors warning them what the coming month will bring; he has personally attended at least one meeting to assuage neighbors’ fears. Construction workers are bused to the site so that their cars and pickups don’t congest the streets. Each day the dirt kicked up during construction is swept up; weekly the roads are lightly sprayed with water to keep down dust. A containment boom floats offshore in case of a petroleum spill.