The tide changes for Microsoft

For the first time in a decade, the big Redmond machine has genuine reason for concern as it struggles to ensure market dominance in a most uncertain future.

COMMENTARY--Throughout its antitrust trial, a favorite Microsoft bogeyman was the "kid in a garage" with a computer, a modem and a good idea.

What appeared to be a monopoly, the company insisted, was in fact a fragile market position that could be destroyed in a flash by the kinds of innovation that defined technology industries.

The argument was laughable. Just ask Marc Andreessen. If an idea as good as Netscape Communications, backed by enormous financial and technological resources, could grab 80 percent of the market, only to be smashed within months by Microsoft's free Internet Explorer browser, what chance does the next lonely innovator or entrepreneur stand?

Yet today, even as Microsoft anticipates victory in its appeal of the antitrust verdict, some very real bogeymen are lining up. For the first time in a decade, the big Redmond machine has genuine reason for concern as it struggles to ensure market dominance in a most uncertain future.

Inter@ctive Week's senior writer Ed Cone examines the future of software and its seemingly inevitable migration from a product to a virtual online service. The very nature of this evolution--and the economic realities driving it--suggest that Microsoft's strategies for continued domination of applications and platforms will require much more imagination than ever before. No longer will the company be able to leverage its Windows monopoly by simply absorbing interactive technologies. In fact, this trend threatens Windows itself by weakening its hold on application development.

Microsoft's enemy today and for the foreseeable future is the evolution taking place within the market itself.

At the very time when the Bush Department of Justice seems inclined to leave the company alone on antitrust issues, customers--especially enterprise customers--seem to be consciously seeking alternatives to a Windows-dominated future. I'm not talking Bill bashers or open source fanatics here. These are loyal customers, largely satisfied with Windows, Office and BackOffice in their current forms, but wary of a future in which their corporations' nervous systems are increasingly tethered to Redmond.

"I don't know anybody who is comfortable with Microsoft's whole .Net thing," the chief technology officer at a major corporation told me at last month's Vortex conference. Yet, he admitted, "I'd be hard-pressed to say why, exactly. Maybe it's their track record with security problems. Or maybe it's just a fear of the unknown."

Microsoft also faces tough challenges on other fronts, in both the business and consumer markets.

In the enterprise, the open source threat will clearly keep growing. In fact, expect it to accelerate as increasingly more Fortune 1000 companies embrace not just myriad open source Internet solutions, but the killer app of open source--the Linux operating system.

With Linux threatening to overtake Windows as a server OS, Microsoft is clearly desperate to come up with a penguin-killing bullet. But much of its railing against open source on intellectual property grounds seemed specious last week, after The Wall Street Journal reported that Microsoft had incorporated open source code in its own software and was largely dependent on open source solutions in some of its Web services.

Meanwhile, on the consumer front, Microsoft last week lost a key confrontation with AOL Time Warner, which walked away from negotiations after refusing to abandon RealNetworks' multimedia platform for the Windows Media Player. In doing so, AOL Time Warner delivered two stinging messages: It no longer considers Microsoft's competing Microsoft Network service a threat, and it no longer needs a home on the Windows desktop - in this case, the forthcoming Windows XP, on which Microsoft is staking a big chunk of its future.

This kind of thing could prove contagious. If the world's largest Internet service provider--and gateway to a potential multibillion-dollar media empire--no longer has to cringe in the Windows shadow, others might well be emboldened to thumb their noses at Redmond, too.

Suddenly, Microsoft really is surrounded by things that go bump in the night.