Gates To Wall Street: Microsoft Faces Many Challenges On Many Fronts

Microsoft

Bill Gates, chairman and chief software architect of the software "factory" he founded more than 25 years ago, defended Microsoft's long-term .Net vision, legal standing and corporate governance before hundreds of Wall Street analysts gathered here exactly one week after the company reported a $1.5 billion profit for the fourth quarter of its 2002 fiscal year.

Despite the economic downturn, Gates said his company will increase its R and D investment by 20 percent, to $5.2 billion in fiscal-year 2003, and will continue hiring additional employees to stimulate more adoption of its .Net platform. Microsoft currently has 50,000 employees.

While the company has enjoyed the successful launches of Visual Studio.Net, BizTalk and Windows XP in the past year, uncertainties and competitive pressures lie ahead of the software vendor, sources said. One question is whether Microsoft will ever return to the 30 percent-plus growth rates that it demonstrated throughout the 1990s.

"We face many challenges on many fronts," said Gates, noting that IBM and Linux are his biggest worries. "We're increasing our levels of investment. Hey, there's some risk in that, but it's a decision we made, and we're full-speed ahead in doing that."

Microsoft has made gains in improving its reputation for scalability of its server line but has some ground to gain against IBM and Linux, Gates said.

"We are stronger vs. all of our competition with two exceptions, where we're either equal to or have things to focus on," he said. "We're much stronger in messaging, but IBM Global Services has a strong asset there and they managed to get WebSphere out. They're a long-term competitor."

Gates hopes some of Microsoft's other problems are behind it as well,antitrust issues, for one. Right now, the company and industry await a decision from the U.S. District Court concerning the non-settling states' revised remedies.

"The legal front wasn't as active this last year," said Gates, adding that he hopes his testimony before the court in June on the "dramatic impact" of the revised remedies proposed by non-settling states will influence the court to stick with the proposed consent decree. "Hopefully we will come out the same or close to the same with what we settled with the DOJ," said Gates. "We await that--it's a significant thing for the company."

As for corporate governance, Gates and his top executives will continue to embrace a policy of shunning executive stock options to avoid conflict of interest and corporate wreckage like that seen in recent months, he said. "The vast majority of our net worth is in our ownership of this business," said Gates of himself and CEO Steve Ballmer. "We don't take stock options. We've never taken stock options. We will never take stock options."

Gates outlined plans for a raft of new products due in 2003, including Windows.Net, the Tablet PC, Office 11 and the new CRM server. More immediately, Microsoft plans to ship Windows XP Service Pack 1 with USB 2.0 support and Windows Media 9 support (in September), as well as Pocket PC Phone Edition with VoiceStream's T-Mobile service (in August).

Gates also highlighted new digital rights management technology (see CRN Online), phone and PC-phone Integration, note-taking and information annotation, information agents and digital dashboard and portal technologies that will drive information workers in the next year.

Microsoft's digital rights management platform, with protocols and formats for Office and other applications, is in development. "If you have privileged e-mail, a bank record or tax return, you want to enforce who exactly has access to it," said Gates. "Digital rights management is not just about music and videos but about all the information that exists in business, government and schools."

Gates told financial analysts that the full investment in .Net won't likely be realized until the release of the Longhorn version of Windows sometime after 2004. That version of the OS will incorporate the new XML-based unified store/engine and file system currently code-named Yukon and will enable many new business and personal scenarios.

"It's a very big deal," said Gates, noting that the full-featured .Net lineup of Office, Visual Studio.Net, Exchange, SQL Server, MSN and Business Solutions from Great Plains and Navision will enable those scenarios to take place.