Microsoft's Future

By Chris Taylor

What's worse for a software company than being told it broke the law? Only this: Being told it makes an inferior product. Scarcely a day after Judge Jackson's ruling of law last week, AOL and Gateway unveiled a trio of low-cost Internet-access devices that pointedly excluded Microsoft from their party. The devices--a countertop, a desktop and a wireless Web appliance--use upstart Linux, rather than Microsoft's Windows, as their operating system. Linux, according to AOL and Gateway execs, beat Windows to the punch by being faster and more reliable. Ouch.

Chalk it up to longstanding Microsoft-AOL rivalry if you will. But "netpliances" like the new Gateways are a portent of precisely the kind of products that could release--faster than any judge--Redmond's iron grip on the software industry. By 2004, analysts expect this kind of cheap-and-easy surfing gadget to outsell PCs. In this market, the most unobtrusive operating system wins, and the feature-heavy heft that won the desktop wars for Microsoft becomes a liability. "Most of these devices have no need for a Windows experience," says Dan Kuznetsky, a system-software analyst at technology firm IDC. "Who needs a week-long training class to learn how to use a Web cell phone?"

So would Microsoft consider ditching its crown jewels and starting from scratch with a simpler operating system? Never. "Two words: Windows survives," says senior strategist Craig Mundie. The company expects us to continue buying PCs alongside our handy little mobile Net appliances. But it's also throwing buckets of money at research to make existing versions of Windows better, lighter and cheaper. Meanwhile, its hardware partners are planning a stream of funky little gadgets to seed with Microsoft's DNA. If Mundie has his way, "powered by Windows" will become the selling point for the '00s that "Intel inside" was for the '90s.

First gadget out of the gate is the Pocket PC, set to launch next week and butt heads with the Palm Pilot family of Personal Digital Assistants. Windows-based PDAs have been technically superior for some time, but the Palm outsells them all because of a Filofax-like operating system so simple even executive V.P.s can use it.

"We got the message that we needed to improve our software," says Pocket PC group manager Phil Holden. His new device promises better handwriting recognition than the Palm, easier-to-read text, an MP3 player, a voice recorder, a fully functional Web browser and instant access to e-mail, even for AOL users. Down the line, an experimental device called MiPad has made some promising breakthroughs in voice recognition. PDAs you talk to? Even the CEO might be able to handle that.

You can't fault Microsoft's dogged determination to have a piece of every possible future. Last year Gates bought a $5 billion chunk of AT&T so he could start churning out the software for Ma Bell's cable set-top boxes. Later this year Microsoft and Israeli firm Gilat will launch a new satellite service called Gilat-To-Home that promises to deliver the Web at speeds of up to 400K. In late 2001, Microsoft's Internet-ready video-game console, the X-box, is slated to hit store shelves in time for X-mas sales. And, yes, by then there will be several powered-by-Windows cell phones on the market. How many night classes you'll have to take to program them is anyone's guess.

Microsoft's success in its consumer-electronics adventures should ultimately ride on connectivity: the extent to which all these Windows-seeded devices are able to talk to each other and share data. Imagine the timesaving advantages in this technologically fragmented world if you're able to beam a number from your Pocket PC to your Windows cell phone, or use the synchronicity between your satellite dish and your X-box to play games over a broadband network. "Their Windows-ness could turn out to be a benefit," says Mundie. In other words, if Gates has his way, Microsofties won't just be crashing this party in a few years, they'll be the hosts.