Microsoft Spending Spree

FRAMINGHAM (03/10/2000) - Since January, Microsoft Corp. has been on an investment binge of more than $5.5 million per day, collecting the bandwidth, vendors and Web services the software giant will need to transform itself from a provider of packaged software to a supplier of Web-based software services.

In one stretch, between Jan. 11 and March 1, the company made investments totaling $250 million in seven companies and had investments of undisclosed value in another three. The majority of those investments were in e-commerce Web sites and represents Microsoft's most aggressive move into the business-to-business market. That market is expected to generate $2 trillion in 2003, according to the Boston Consulting Group Inc.

The winter spending spree follows a whopping $10 billion in telecommunications investments Microsoft, which has $18 billion in cash, made from November 1998 to December 1999.Microsoft made the investments to stimulate wireline, wireless and cable TV broadband services and adoption of the company's platform and client software, such as Windows CE and Mobile Explorer.

"Investments are one of Microsoft's most strategic weapons," says Michael Gartenberg, an analyst with Gartner Group in Stamford, Conn. "None of these investments is strategic on its own, but they represent the company's transition from packaged software to Internet services. It's Microsoft's way to get market share, partners and knowledge of technologies it is not yet good at."

Microsoft will need all three as it begins a dramatic shift from shrink-wrapped software installed on desktops and servers to supplying applications and platforms that live on the Internet and are accessed via the Web.

According to CEO Steve Ballmer, Microsoft envisions a world where "applications will be Web sites, and Web sites will be applications. Every Web site, we believe, becomes essentially a programmable source of information to other applications."

Investments in broadband suppliers guarantee the bandwidth needed to expose such a world to any device connected to the Internet.

"We don't plan to become a telco in the traditional sense," says Thomas Koll, vice president of the Network Solutions Group at Microsoft. "But we need to support the fat pipes to deliver services."

That's critical, Koll says, because "in three to five years, delivery of applications over the Internet may be a majority of our software revenue."

To that end, the pattern of investments in application service providers (ASP), such as Digex ($50 million) and Corio ($10 million), will ensure adoption of Microsoft's platforms, applications and services.

But the key element, Web-based software services, is just now being assembled.

"If they can build the infrastructure and the operating system, that's great, but they need applications and services in place to win in tomorrow's world," says Joe Clabby, an analyst with the Aberdeen Group in Boston.

Microsoft already has a small set of "megaservices," including an authentication service called Passport, which is offered on the company's bCentral Web site. Its Office applications and Exchange messaging server are already being tested online by ASPs.

The big push, however, will come in May when Microsoft unveils its software services model, dubbed Next Generation Windows Services (NGWS). Microsoft has provided few details about NGWS and how it fits with the Web-based development platform called Windows DNA 2000 introduced in September.

Behind the scenes, Microsoft is hard at work.

In January, it made a $100 million investment in VerticalNet, a Web site that links buyers and suppliers in some 56 industries ranging from chemicals to health care. It was the largest investment in a business-to-business dot-com Microsoft has made.

"They want access to our expertise in the business-to-business world," says Mike Hagan, chief operating officer for VerticalNet, which has promised to help develop NGWS as well as showcase Microsoft products.

The pair is focused on Microsoft's instant messaging and ClearLead, a software service for distributing customer leads.

"We want to tailor instant messaging for a request for proposal or request for quotation [RFQ] infrastructure," Hagan says. Buyers could talk to vendors in real time and hook into legacy systems and transact off instant messages, Hagan says. "ClearLead could become part of the communication infrastructure that lets buyers send out an RFQ to a select number of suppliers," he says.

VerticalNet's shortcoming, however, is that most deals are completed off-line.

"The hard part is how can I make this online stuff go right into my Windows systems, my ledger application, my procurement software, my legacy systems? No one has the answer to that," says Mark Walsh, CEO of VerticalNet. "If Microsoft is going to be a player, it has to have the software to make that happen."

Microsoft is trying to fill the gap. It was part of a group that recently pumped $60 million into, a Web service that matches users with questions and users with answers over traditional phone lines. It also made undisclosed investments in the past weeks in Radiant Systems to develop Web-based management and supply-chain services for retailers, and in Honeywell's, a Web-based hub for the manufacturing industry.

"We are partnering with leaders that have vertical applications today that Microsoft will supplement with horizontal infrastructure services like instant messaging and ClearLead," says Rebecca Kaske, director of Microsoft's Business Solutions Group. "These relationships will allow us to tap expertise and develop NGWS."

Karl Jacobs, CEO of Keen. com, agrees. "We are helping Microsoft understand how to build a better platform to support our service. For example, there is certainly telephony integration work that needs to be done," he says.

Other work also needs to get done.

Microsoft developers need retraining and platform software needs revamping because NGWS requires a new programming technique, user interface, application integration technology, file system and XML data types.

Earlier this month, Microsoft held a secretive SQL Server 2000 conference to introduce developers to the new database, and its relationship with other Windows DNA 2000 servers and NGWS. SQL 2000 will go into its first public beta in April and ship by midyear.

Ballmer also rallied the Visual Basic troops during his keynote at the Visual Basic Insiders Technical Summit in February, laying out enhancements in Visual Studio and Visual Basic that facilitate development of NGWS.

However, key server software beyond the just released Windows 2000 is missing.

The linchpin is BizTalk 2000, XML middleware that is the glue for software services delivered from any number of platforms. A BizTalk technical beta, which has been sent to a select group of testers, will ship this spring, but it's missing features. Other servers, including Application Center Server 2000 and Commerce Server 2000, also are absent but due this year.

But even with its billions of dollars of investments, Microsoft still isn't guaranteed billions in return.

"The big risk in software as services is that there is no way to tell if services delivered in large quantity for a small fee will deliver substantial revenue for Microsoft," says Warren Wilson, an analyst with Summit Strategies in Kirkland, Wash.

"With the open standards nature of this architecture, he continues, Microsoft's desktop dominance won't matter a bit."

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