Ibm's Unruly Kids

By THOMAS McCARROLL

How quickly things change in the technology business. A decade ago, IBM was the awesome and undisputed king of the computer trade, universally feared and | respected. A decade ago, two little companies called Intel and Microsoft were mere blips on the radar screen of the industry, upstart start-ups that had signed on to make the chips and software for IBM's new line of personal computers. Though their products soon became industry standards, the two companies remained protected children of the market leader.

What has happened since is a startling reversal of fortune. IBM is being ravaged by the worst crisis in the company's 79-year history. It is undergoing its fifth restructuring in the past seven years as well as seemingly endless rounds of job cuts and firings that have eliminated 100,000 jobs since 1985. Last week IBM announced to its shell-shocked investors that it lost $4.97 billion last year -- the biggest loss in American corporate history.

And just when IBM is losing ground in one market after another, Intel and Microsoft have emerged as the computer industry's most fearsome pair of competitors. The numbers on Wall Street tell a stunning story. Ten years ago, the market value of the stock of Intel and Microsoft combined amounted to about a tenth of IBM's. Last week, with IBM's stock at an 11-year low, Microsoft's value surpassed its old mentor's for the first time ever -- $26.76 billion to $26.48 billion -- and Intel ($24.3 billion) is not far behind. While IBM is posting losses, Intel's profits jumped 30%, and Microsoft's rose 44%.

Both Intel, the world's largest supplier of computer chips, and Microsoft, the world's largest supplier of computer software, have assumed the role long played by Big Blue as the industry's pacesetters. What is taking place is a generational shift unprecedented in the information age -- one that recalls a transition in the U.S. auto industry 70 years ago, when Alfred Sloan's upstart General Motors surpassed Ford Motor as the nation's No. 1 carmaker. The transition also reflects the decline of computer manufacturers such as IBM, Wang and Unisys, and the rise of companies like Microsoft, Intel and AT&T that create the chips and software to make the computers work. "Just like Dr. Frankenstein, IBM created these two monster competitors," says Richard Shaffer, publisher of the Computer Letter. "Now even IBM is in danger of being trampled by the creations it unleashed."

Although Intel and Microsoft still have close relationships with Big Blue, there is little love lost between IBM and its potent progeny. IBM had an ugly falling-out with former partner Microsoft over the future of personal-computer software. Microsoft developed the now famous disk operating system for the IBM-PC -- called DOS -- and later created the operating software for the next generation of IBM personal computers, the Personal System/2. When PS/2 and its operating system, OS/2, failed to catch on, a feud erupted over how the two companies would upgrade the system. Although they publicly patched things up, the partnership was tattered. IBM developed its own version of OS/2, which has so far failed to capture the industry's imagination. Microsoft's competing version, dubbed New Technology, or NT, will debut this spring and will incorporate Microsoft's highly successful Windows program, which lets users juggle several programs at once. Windows NT, however, will offer more new features, such as the ability to link many computers together in a network and to safeguard against unauthorized use.

IBM and Intel have also been parting company. After relying almost exclusively on the Santa Clara, California, company for the silicon chips that serve as computer brains, IBM has moved to reduce its dependence on Intel by turning to competing vendors. In Europe, IBM last year began selling a low- cost line of PCs called Ambra, which runs on chips made by Intel rival Advanced Micro Devices. IBM also demonstrated a sample PC using a chip made by another Intel enemy, Cyrix. And last October IBM said it would begin selling the company's own chips to outsiders in direct competition with Intel.

IBM clearly feels threatened. And the wounded giant still poses the biggest threat to any future dominance by Intel and Microsoft. Last year it teamed up with both companies' most bitter rivals -- Apple Computer and Motorola -- to develop advanced software and microprocessors for a new generation of desktop computers. In selecting Apple and Motorola, IBM bypassed its longtime partners. Just as Microsoft's standard operating system runs only on computers built around Intel's computer chips, Apple's software runs only on Motorola's chips. Although IBM has pledged that the new system will eventually run on a variety of machines, it will initially run only computer programs written for Apple's Macintosh or IBM's OS/2. Its competitive juices now flowing, IBM last week announced that it and Apple Computer will deliver the operating system in 1994 -- a year ahead of schedule.

Despite their differences with IBM, Microsoft and Intel seem to have inherited some of Big Blue's most fearsome qualities. They have become so dominant in their markets, charge critics, that they are virtual monopolies. In a way eerily reminiscent of the Justice Department's famous 1969 trust- busting suit against IBM (dismissed after 13 years), both Intel and Microsoft are under investigation for possible antitrust violations.

The Federal Trade Commission will meet next week to decide what action, if any, to take against Microsoft. The agency launched its investigation in 1990 as questions were raised about some of Microsoft's sales practices. The Redmond, Washington-based company, which holds a commanding 48% share of the $7 billion worldwide computer-software market, has been accused by rivals of stifling competition by offering PC makers financial incentives to install MS- DOS on their machines. Competitors also complain that Microsoft illegally requires customers to buy its operating system with its software programs. Operating systems control the inner workings of computers, such as how information is stored and retrieved. The software is required to run programs that perform specific functions like word processing and bookkeeping. Tying product sales together is a technical violation of antitrust laws when it involves a monopoly item, such as Microsoft's system software. Microsoft has a 90% share of the operating-system market.

Perhaps the most serious accusation is that Microsoft favors its own software programmers when it comes to disseminating information about new or proposed changes in its operating systems. Competitors say Microsoft withheld critical design data about its new NT system for months, giving Microsoft's own developers a head start in writing new software. Some rivals, including Go Corp. and CC:Mail, even claim that Microsoft swiped their ideas when they allowed the company's engineers to examine their software under development. Says a Microsoft competitor: "If what they're doing isn't outright illegal, it is at least very unethical. This company does not play fair." Microsoft has denied any wrongdoing.

Microsoft rivals have argued that the FTC should take drastic action, perhaps even break up the big software developer. Even if the FTC acts, it would not stop Microsoft's relentless drive into new markets, such as computer networking and data bases. Nor would it do much to curb Microsoft's cutthroat pricing. Some of Microsoft's competitors have sought to match the company's aggressive price cutting, but at their own peril. Borland International, for - instance, reported a $61 million loss in the past quarter largely as a result of price competition. "Microsoft resembles the IBM of yore: the 800-lb. gorilla that sits anywhere it wants," says Heidi Sinclair, vice president of corporate strategy at Borland, the nation's No. 3 software vendor. "We won't be hurt if the FTC fails to act, but it could affect the little guy, who is finding it impossible to get venture funding because Microsoft might enter that market. Inaction by the FTC could stifle competition."

Intel is receiving its own share of attention from the regulators. The FTC launched its probe of the chipmaker in 1991 for a host of allegedly anticompetitive practices. The agency is looking into allegations that Intel, which controls 68% of the $5 billion market for microprocessors, has threatened to withhold its chips from customers who buy Intel clones.

Intel is also accused of playing favorites. According to one competitor, the company allegedly allocates supplies of its latest, most sought-after chips first to its biggest customers, such as PC makers IBM and Compaq, and then to smaller clients. In doing so, critics charge, Intel can determine which PC maker survives or perishes. Competitors have also raised concerns about Intel's own entry into the PC market. They complain that the company favors customers that resell Intel-made machines with its newest and best chips. Says Walter J. ("Jerry") Sanders, chairman of Advanced Micro Devices: "It's clear to us that Intel is restricting competition by using bully-boy tactics."

In response, Intel chairman Andrew Grove says only, "We make no apologies." While Grove declined to discuss the FTC probe, he suggested much of the criticism is mere envy of Intel's success. If so, that envy may grow more pronounced as Intel prepares to put more distance between itself and its competitors. This year Intel will begin shipping its next generation of microprocessors called the Pentium, which will process information twice as fast as Intel's current crop of chips. Moreover, Grove says, Intel will price the Pentium "more aggressively" than previous microprocessors. Although computers based on Pentium will start at $5,000, prices are expected to fall by as much as 60% within the next three years.

With both Windows NT and Pentium, the next generation of personal computers will probably be as powerful as today's workstations and mainframes. More important, the combined technology is expected to strengthen Microsoft's and ^ Intel's ever tightening grip on the $100 billion market for desktop computing.

While Intel and Microsoft appear headed for total domination, both remain liable to product delays and technical failures, which can be deadly in the computer business. That could leave plenty of room for rivals to strike.

Then there is the possibility that Microsoft and Intel may end up abetting each other's enemies as they move to expand their own options. Intel's newer chips will run competing operating systems, like UNIX, for instance, while Microsoft intends to write versions of its Windows NT for computer chips designed by Intel rivals Digital Equipment and MIPS.

For all the sniping at Microsoft and Intel, the underlying reason may have less to do with envy than with how the two companies have learned to do what IBM used to do so well: marry leading-edge products with in-your-face marketing tactics. That is their inheritance, and that is what makes them powerful chips off the old Big Blue.

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