Microsoft reminds us why they still have all the cards... in a quarter where
some of the world's greatest software companies -- i2, webMethods, Ariba,
CommerceOne, Oracle, Siebel, BEA, JD Edwards, and Tibco -- are down 45%
to 80% from where they were on January 1, Microsoft and its $25 billion in
cash are sitting on a pretty 27% gain year-to-date:
Microsoft has always had the best brain trust in the software business...
and in times of market upheaval, that's worth ton. With a market cap of
$291 billion, Microsoft is worth twice as much as the totals of all the
software companies I mentioned above, plus SAP. (Of all of them, only
SAP and Oracle could not currently be purchased with Microsoft's cash
March 25, 2001
Microsoft Relies Again on an Inner Circle
By JOHN MARKOFF
REDMOND, Wash. -- Last summer, even before Microsoft introduced its
ambitious .Net strategy for moving its Windows operating system onto the
Internet, its chairman, William H. Gates, was pursuing his next challenge.
Mr. Gates wanted to replace the mouse-based point-and-click system of
operating computers with something that would let machines converse directly
with people. The idea of talking to computers is as old as "Star Trek," but
accomplishing it would be radical, as starkly different as Microsoft's
Windows software was from its original PC-DOS operating system.
When it came to doing the work, however, Mr. Gates quickly realized that no
one at the Microsoft headquarters could handle the job. All the
user-interface experts on the main corporate campus here were experts in
mouse-based systems, not voice. He needed to look elsewhere.
"Where's Kai-Fu?" he asked.
At the time, Kai-Fu Lee was in China, where he had gone in 1998 to found a
Microsoft research center. Within a month, though, Mr. Lee, an
internationally known expert in voice recognition, was back in the United
States, one of a small cadre of technology experts who now make up Mr.
Gates's inner circle.
Mr. Gates has always relied exclusively on a close-knit group of engineers,
rather than bringing in marketers or other executives, to help him design
the company's strategy and products. The pattern has been seen often,
beginning two decades ago when Mr. Gates lured Charles Simonyi, a Xerox
computer expert, to help him develop a word processor.
A brain trust for Mr. Gates has never been more important than it is now. As
the Justice Department's pending antitrust case shows, Microsoft is still
the power in the software industry, but its dominance is under constant
threat of being undermined by the arrival of the industry's Next Big Thing.
And many of the people who helped Mr. Gates push Microsoft to the top
including Nathan Myhrvold, the former head of research, and Paul Maritz, who
directed Microsoft's operating system and Internet development strategies
have left the company, burned out.
Last year, in tacit recognition of the pressure to innovate, Mr. Gates
handed over day-to-day operations to his close friend Steve Ballmer and
became the company's "chief software architect." Then he set out to recreate
a small team of technical experts to advise him. In rebuilding his brain
trust, Mr. Gates said he was doing what he did in the 1990's only this
time, his task is more challenging.
"Things are much more complex now," he said in a recent interview, asserting
that the world had expanded beyond the personal computer to include other
devices often wirelessly interconnected.
The new team is a mix of new faces and veterans. In addition to Mr. Lee,
there is Eric Rudder, Mr. Gates's closest technical assistant and a
strategist who once studied under the legendary computer scientist Andries
van Dam at Brown University. Craig Mundie, a refugee from the supercomputer
industry, is the company's top consumer strategist. Jim Allchin is in charge
of operating system development, while Richard F. Rashid, one of the
nation's best-known computer scientists, heads the research laboratories.
Paul Flessner has been the key executive leading Microsoft's challenge to
Oracle, while David Cole, a 15-year veteran of Microsoft, runs the division
that develops the company's Internet services.
"This is the way Bill has always liked to operate," said Michael A.
Cusumano, a professor at M.I.T. and co-author of "Microsoft Secrets" (Free
Press, 1995), which detailed the company's management style. "Key decisions
are made informally, and there are a few people close to him whom he
The challenges facing the new group are breathtaking. In a remarkably short
period, Mr. Gates has begun spending some of Microsoft's vast hoard of
cash more than $25 billion to push the company into a startling array of
markets, from the Xbox video game to new operating system software for the
largest corporate mainframes. And he is trying to do so while shaking off
the bitter antitrust case, which is now before a federal appeals court.
The chosen advisers will have to tackle these problems in an intense,
hothouse corporate culture driven largely by blunt debates, conducted
chiefly through the company's e- mail system and, less often, in face-
The company's .Net strategy for taking its business beyond the desktop PC,
for example, was born in a series of shouting matches between Mr. Gates and
Mr. Maritz, who was one of his closest advisers through much of the 1980's
For several years, Mr. Gates heatedly rejected Mr. Maritz's idea of taking
the functions of a computer operating system the product that gives
Microsoft its monopoly and recreating them on the Internet, according to
several people who worked with both men.
In the end, Mr. Maritz won but at a cost. After Microsoft last year
announced the Internet idea, which it calls .Net, he resigned. Once one of
the company's principal strategists, he now spends his time working on
wildlife preservation and environmental issues in Zimbabwe, where he was
born. A friend of Mr. Maritz said recently that the battles with Mr. Gates
"wore Paul out." Mr. Maritz was traveling and could not be reached for
Yet bruising battles like that and a willingness to borrow ideas freely
from everywhere in the computer industry are what has given Microsoft the
ability to respond effectively to threats from competitors for more than two
So even after the many notable defections of top Microsoft executives in the
last year, the new structure at Microsoft in many ways closely mirrors the
company's halcyon days before the antitrust suit.
Mr. Gates said he still relied heavily on a handful of Microsoft's best and
brightest software designers to help shape the company's technical strategy.
The group a "theocracy of hackers," to borrow a phrase coined to describe
a confederacy of programmers who controlled the software developer Autodesk
Inc. in the 1980's is not a formal organization in any sense, he said;
membership depends on the subject at hand.
But as Microsoft sets off to jump beyond the desktop PC, the men closest to
Mr. Gates veteran technologists and rising stars are no monolith. Each
brings a personality and perspective that diversifies the technological mix.
Energized and Unbowed
High-strung and with intense commitment of a true believer, Jim Allchin is
probably the best example of the Microsoft that computer industry rivals
love to hate.
Many competitors in Silicon Valley say he embodies the arrogance that got
Microsoft embroiled with Judge Thomas Penfield Jackson in the antitrust
trial. Indeed, Mr. Allchin, 49, took the heat for a botched videotape
demonstration that the Justice Department was able to show had been secretly
When he left on an extended vacation last spring to sail off the coast of
Sardinia, there was speculation that he would not return to Microsoft. But
he came back last fall even more energized, and anything but chastened.
Soon after his return, he met with Mr. Gates and Mr. Ballmer and directly
challenged both men about their commitment to the company's core PC
business, which made Microsoft dominant.
Such aggressive forthrightness is nothing new for Mr. Allchin, a computer
scientist who has long been one of Mr. Gates's most trusted lieutenants. He
is a veteran of the often pointed e-mail discussions in which Mr. Gates's
closest advisers engage when discussing strategic visions and turf wars.
Several years ago, for example, Mr. Allchin won a brutal behind-the- scenes
battle with another key Microsoft executive, Brad Silverberg, over the
future direction of the company. The fight, other former Microsoft
executives said, was over the foundation on which to build an Internet
platform like the company's new .Net software.
Mr. Silverberg advocated using older Windows 98 technology, these people
said. Mr. Allchin argued to wait and to use the company's more modern
Windows 2000 software when it became available. Mr. Gates ultimately sided
with him. In 1999, Mr. Silverberg left Microsoft.
But unlike many engineers at Microsoft, Mr. Allchin, who is formally a group
vice president, has a healthy appreciation for how far the company must go
to make its software easier to use.
Not long ago, the company videotaped ordinary users as they tried to set up
their new computer systems. Mr. Allchin watched the videos, and recalled
being alarmed and embarrassed by some of the confusing situations in which
nontechnical owners of PC's found themselves.
"I wanted to crawl underneath my desk," he said.
In the Line of Fire
During the Microsoft antitrust trial, David Cole had the dubious honor of
drawing the direct ire of Judge Jackson of United States District Court in
Washington after he ordered Microsoft to separate its Internet Explorer Web
browser from the Windows 95 operating system.
The judge accused the company of undermining his order when Microsoft told
its customers that they had a choice of buying software that complied with
the judge's order but would not work or buying Windows 95 with the browser
In court in January 1998, the judge asked Mr. Cole: "It seemed absolutely
clear to you that I entered an order that required that you distribute a
product that would not work? Is that what you're telling me?"
"In plain English, yes," Mr. Cole replied. "We followed that order. It
wasn't my place to consider the consequences of that."
That exchange set the acrimonious tone for what followed. Microsoft later
acknowledged that it could disable the browser without rendering Windows
useless, and Judge Jackson eventually ruled that Microsoft had abused its
effective monopoly in operating systems.
It is fitting that Mr. Cole was the Microsoft executive who ended up in the
line of fire. He is both a Microsoft lifer, having joined the company in
1986 directly out of college, and someone for whom Mr. Gates has tremendous
Mr. Cole was a key manager in developing both the Windows 3.1 and Windows 95
He is described by some who have worked for him as a "finisher," someone
upon whom Mr. Gates can rely to help push a large and unwieldy project out
the door and into stores. Now Mr. Cole is managing some of the new Web
services, like Hotmail, that are the foundation of Microsoft's Internet
Installing Quality Control
Paul Flessner is one of the best examples of "adult supervision" at
Microsoft. Before he joined the company in 1994, he managed large corporate
computing systems for many years and was often an unhappy Microsoft
"I was very vocal about saying their software was just not bulletproof," he
Since then, he has tried to change the company culture to focus first on
quality and to worry less about the time it takes to get a product to market
or how many new features are included. He did this first in building the
company's database- software business and more recently as part of
Microsoft's push into .Net Web services.
The strategy has paid off handsomely. Microsoft's database business, once
worth about $50 million a year, has grown to more than $1 billion since Mr.
Flessner took it over. That is one reason that he has become a respected
voice inside the company's leadership council.
"It used to be that quality at Microsoft was a second- or third-order
value," said Barry Goffe, a group manager who has worked for Mr. Flessner
since coming to Microsoft six years ago. "Paul really changed the ethos of
how we develop products."
Other groups at Microsoft, including the one that developed the Windows 2000
operating system, have since adopted many of Mr. Flessner's ideas. Customers
and reviewers have praised Windows 2000 for being more stable than previous
Mr. Flessner supervises about 2,500 people, including developers who left
I.B.M. and Tandem Computers specifically to work with him.
"Good managers in general are a rare thing," Mr. Goffe said, "and good
managers capable of overseeing a vast collection of rocket scientists and
who have egos and opinions are even rarer."
A Quieter Approach
Some veteran Microsoft software developers have expressed reservations about
Kai-Fu Lee's being put in charge of advising Mr. Gates on radically changing
the way people use computers. His qualifications are not at issue, but his
approach is. They note that Mr. Lee is reserved and academic, which are not
the typically combative characteristics of a Microsoft executive.
Inside the intellectual hothouse that is Microsoft, few topics boil as much
as user interfaces, the software equivalent of an automobile steering wheel
and dashboard. The user interface is among the most crucial elements of the
company's strategy and has been the source of much bitter infighting on the
company's development team.
Three groups fought a pitched battle, for example, for the prize of
designing the user interface for the new Windows XP operating system that
will be introduced later this year. Mr. Lee will face a distinct challenge
in harnessing all of the warring groups. When he returned to United States
from China last year, his first order of business was to sit down and read
the voluminous e- mail discussion that Microsoft's top developers had been
having on the future of its user interface. He then plowed through 8 to 10
of Mr. Gates's "vision" memos on the subject.
Since then, Mr. Lee has engaged Mr. Gates in an extended discussion on that
topic, most often by e-mail, at all hours of the day and night. Their goal
is as ambitious as, for now, it is vague: creating a more "natural and
intelligent" user interface, Mr. Lee said. On this, Mr. Lee and Mr. Gates
are in perfect harmony.
"My dream is that the computer of the future is going to be an assistant to
the user," Mr. Lee said. "There is a rich set of things we need to
The First Strategist
In a company with its roots deeply in the PC industry, Craig Mundie has long
been an anomaly. Not only did he come from the rarefied world of
supercomputing, but his original charter at Microsoft was to lead the
company into the world of consumer electronics.
Before joining Microsoft, Mr. Mundie was a co-founder of Alliant Computers,
a maker of massively parallel supercomputers. However, in 1992 Mr. Gates
flew to New York and recruited Mr. Mundie, who had once developed the
operating system for a Data General minicomputer.
At the time, Mr. Gates was just beginning to push Microsoft into new non-PC
areas like interactive television, and Mr. Mundie went to work for Nathan
Myhrvold, who was then head of research and director of new- business
There Mr. Mundie ran Microsoft's consumer platforms division, which he
formed to develop the company's non-PC platform and service offerings,
including the Windows CE operating system; the Handheld, Pocket and Auto
PC's; and early cellular telephony products. He also helped to acquire
Three years ago, Mr. Gates started using Mr. Mundie as a strategist, someone
to help him look across the various operating groups in the company to help
develop broader designs.
"I was the first person Bill took on as a strategist," Mr. Mundie said. He
gets along with his boss, he added, because "we're both essentially
In his new position, he has helped Mr. Gates refine Microsoft's "vision,"
the high-level set of priorities essential in mobilizing the company. "We've
always talked about the future of computing," he said.
That has proved the essential ingredient to focus the entire company on
broad goals like the new .Net strategy.
"I contend the reason that Microsoft has been successful," he said, "is that
Bill has been able to continuously re-synthesize a high-level vision for the
company." And, he said, translate vision into reality. "You have to work the
big picture back to the present," he added.
The Trekkie Researcher
When it comes to vision, few people at Microsoft can rival Richard F.
Rashid. He was recruited from Carnegie Mellon University a decade ago by Mr.
Myhrvold specifically to start a research laboratory for the software
After considering his future at Carnegie Mellon, where he was next in line
to become dean of the computer science department, Dr. Rashid moved to
Redmond and what eventually became Microsoft Research. That group, with
laboratories in four countries, has projects ranging from new approaches to
distributed computing to voice recognition and mathematical theory.
Dr. Rashid, who earned a Ph.D. in computer science from the University of
Rochester, brought with him the low-key style of an academic and computer
scientist, which may explain why his criticism of Microsoft's Windows NT in
the early 1990's was rejected by the designers David Cutler and Jim Allchin.
People who know Dr. Rashid say his influence at the company has increased
sharply in recent years. That is partly because he has been able to
cultivate a close relationship with Mr. Gates, but also because he has been
more successful in transferring technologies from Microsoft Research to the
company's development groups.
A measure of his status at the company is that when Microsoft embarked on
its .Net strategy, he was put in charge of the task force that oversaw the
creation of a programming model of the new Internet operating system.
His department has also succeeded in creating buzz within Microsoft. Its
annual open house on the Redmond campus last month drew more than 4,000
employees including Mr. Gates.
At the same time, Dr. Rashid has gone to great lengths to cultivate the
support of people who work for him. A die-hard Trekkie, he has long treated
his employees and their families to private screenings complete with sodas
and popcorn of each new "Star Trek" film. He enjoys greeting them
personally at the theater dressed in Trekkie regalia.
The Right Hand of Gates
If proximity is a sign of power and influence, then Eric Rudder is in a
remarkable position: his office is closest to Mr. Gates's. That is not
surprising, since Mr. Rudder serves as his technical adviser.
The job of technical adviser to the chairman is important at many high-
technology companies, but particularly so at Microsoft. At most companies,
the position is filled for short periods by young engineers or scientists
who then move on to other roles in the company.
That was true at Microsoft, too, until Mr. Rudder took the job in 1997. He
has remained in it ever since, in part because he shares Mr. Gates's
temperament and sardonic sense of humor.
Many Microsoft employees and business partners consider Mr. Rudder to be the
chairman's eyes and ears, both inside and outside the company. One Microsoft
software developer suggested that the omnipresent Mr. Rudder was a candidate
for the title of Rasputin at the company.
As part of his role, Mr. Rudder puts together both the materials and the
questions for Mr. Gates's so- called "think weeks," when the chairman
retreats from the company to read and ponder strategic issues.
A self-described gadget freak, Mr. Rudder came to his current position after
managing the company's Visual Studio product line, a programmer's
environment that is dear to Mr. Gates's heart.
Now it is not unusual to see Mr. Rudder's name attached to a broad range of
the company's e-mail discussions, and he routinely assists Mr. Gates by
sitting in on product reviews, a Microsoft institution that has done much to
shape the company's culture.
He has been deeply involved in the development of the new .Net strategy.
Because it involves the operating system software that is the foundation of
the company's success, the project is an important initiative for Microsoft,
but Mr. Rudder was able to keep it in perspective.
"You get incredibly excited and at the same time incredibly depressed," he
said. "You say to yourself: `What did I sign up for? We're doing all this
just to make my wife's cell phone beep?' "
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