Barring a quick settlement, Microsoft and the US Justice Department will be wrangling over Microsoft's allegedly harmful monopoly practices for years to come. By the time the Supreme Court rules on a Microsoft appeal in 2002 or 2003 - the longest route to resolution - technology will have moved far beyond the desktop where Microsoft built its monopoly power. Consumers and businesses will be using a variety of devices for the web, such as handheld communicators, smart phones and interactive TV sets. Software may come in small dollops across the Net as and when needed - not in megabytes on your hard drive or in pricy shrink-wrapped boxes. And new powers may well emerge to challenge Microsoft's hegemony. The web has already placed limits on Microsoft's power by making Windows less important. Since the emergence of the Internet and web browsing software in the mid-1990s, the balance of technology power - and the focus of innovation - has been shifting away from the desktop, where Windows rules, to the network. Despite its aggressive moves and massive spending, Microsoft is only one among a group of web giants. In the realm of web computing, America Online, IBM, Yahoo!, Amazon.com, Sun Microsystems, AT&T and MCI WorldCom all have huge businesses, too. Each is scrambling to keep ahead of the unending tide of web upstarts, such as Priceline.com and eBay, which appear overnight to have nailed down strategically important chunks of cyberturf. Microsoft could fall behind in the race to build ebusinesses on the web. If legal battles cause it to divert its energies, everyone else could have a little more room to run. Competitors noted that when the Feds bore down last year, Microsoft modified its behaviour - a bit. It voluntarily backed off some of its more aggressive practices, such as forcing PC makers to display only Microsoft Net access icons on the Windows screen. Recently, a handful of major PC makers - among them Gateway - announced that they wouldn't use Microsoft technology at all - apparently without fear of retribution. That would have been unthinkable before the legal tide turned against the software giant. 'This gives enormous breathing space in the new areas,' says Paul Saffo, director of the Institute for the Future think-tank. 'The judge just put a leash on the bulldog.' But it would be a mistake to underestimate the determination of Microsoft chairman and chief executive Bill Gates - both in court and in the race to the web. And even as the web grows up around Microsoft's empire, the $19 billion (#11.5bn) giant retains almost all of its power. It still controls around 90% of the markets for PC operating systems and applications, and is working to gain a similar hold in the market for server software. Looking ahead to 2003, Jim Clark, co-founder of Netscape Communications and chief executive of startup myCFO, says: 'Microsoft will have grown four or fivefold in the areas it dominates today and maybe tenfold in the services market.' Steve Case, chairman of America Online, warns: 'Just because other brands emerge does not mean Microsoft is fading. It's the world's most valuable company because people recognise it has a firmly entrenched position and is likely to leverage into new markets.' Will Microsoft become more aggressive, figuring it has nothing to lose? Some insiders say a key signal will be the rising role of Steve Ballmer, who was made president in August 1998. If Ballmer really dictates day-to-day strategy, the industry could see a more accommodating Microsoft. 'We will continue to do our jobs with the same vigour, energy and passion that we always have,' says Ballmer. But he emphasises that Microsoft will play by the rules. 'The number one thing is that we are going to continue to do business with a high level of integrity,' he adds. When it comes to the basic software that runs the web, no one expects Microsoft to settle for less than being number one. With NT, it has captured 38.3% of the market for operating systems on servers - the machines that handle corporate networks and run web sites. Now comes Windows 2000, which Microsoft has been working on for half a decade and plans to deliver in February. With this new product, it hopes to become the software supplier of choice for large web sites and corporate computing centres. Microsoft certainly isn't backing off when it comes to the web. It has won the browser battle, snagging 64% of the market, and has announced that early next year, it will begin offering online versions of its Office applications. That strategy comes in response to announcements from Sun and Corel that they will sell their own Office-style applications as services. Sun and Corel are expected to price their applications very cheaply, or even give them away free in Sun's case because this isn't a key part of its business. But Microsoft cannot afford to ruin its $7 billion a year Office franchise. It hasn't announced prices yet, but one PC company executive says he expects the Microsoft service to cost about $75 per month per user. Still, he says, Microsoft is serious about this market and will eventually price more aggressively. 'It is willing to pour a lot of money and marketing into this to make it successful. It's following the same pattern as with Netscape,' he says. That's a handy reminder: Microsoft may have sanded off some of its harder edges, but this is no pushover. It still has two monopolies, billions in the bank and 33,000 hard-charging employees. All Judge Thomas Penfield Jackson's ruling does is begin to level the playing field. - For a critical analysis of the break-up options, see page 35. Article by Steve Hamm, Michael Moeller, Catherine Yang and Paul Judge. First published in Business Week. Copyright 1999 by the McGraw-Hill companies Inc. All rights reserved.
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