King of the hill

King of the hill

Love it or loathe it, Microsoft is the benchmark against which other software companies are measured. One man who will have a big say in its future is the company's chief operating officer, Bob Herbold. ARN's Naomi Jackson journeyed deep into Microsoft's bunker at Redmond to find out where Herbold thinks the company is positionedARN: What do you consider to be the key contributors to Microsoft's success as a company?

Herbold: There are three things we focus on. First, we recruit people who are smart and have a real passion for this industry - they're really excited by information technology and what it can do for people and organisations.

Second, once people get here, the primary focus of Microsoft is to create products that are eventually judged to be the best by the third-party trade press. And sometimes it takes us years and years of work, but that's what we're trying to get and usually that's what we achieve.

Third, this is a company that places a lot of emphasis on being efficient. We try to run it like a small company with the realisation that IT is a very fragile business - things might not always be as good as they currently are - and that we have to be very frugal. That ethic oozes out of every pore of MS.

Where do you see Microsoft relative to the software market as a whole?

The desktop operating system market is a very competitive business and it's one that's important to us.

There are a lot of good competitive ideas out there where the chief executive officers (CEOs) of those companies get up on a podium and tell the world how they're going to take Microsoft's business away.

And that's okay because that's how the world's supposed to operate and may the best approach win. Network computers, Java middleware, browsers that morph themselves into operating systems are all good ideas and we'll let the marketplace determine how things go.

In terms of desktop applications, it's a business we've been in for a long time, but it has not always been healthy. We had the Multiplan spreedsheet in the late 1970s that at one stage had a market share of about 80 per cent, but Lotus anticipated the popularity of the IBM PC much better than we did, and within 18 months Multiplan had a market share of zero.

We simply missed a technology window and got scalded by the marketplace, but then Lotus didn't acknowledge Windows as early as it should have and we began developing applications like Excel and Word that became very popular and we got the business back again. So today we have a strong market share in these businesses, but we're also humble enough to realise that we constantly have to modify the products to take advantage of new technologies.

In all of our BackOffice businesses, we have a lot of room for improvement in terms of market share and our position in the market - in the database market, we don't have the strongest product. Hopefully, we're on our way, but we're not currently, and in regard to Exchange, it's been a battle and it will continue to be a battle.

With respect to our Interactive Media Group, the Internet and connectivity to households should represent the next mass media, so making it convenient for people to get information on a regular basis is a hot subject.

It requires a lot of connectivity so you'll see us making investments in cable companies to encourage them to build up their networks to homes that can carry a lot of bits; you'll see us cooperate with telephone companies; you'll see us continually change the Microsoft network as we learn more about what it takes to be successful; and you'll see us take a lot of these things and push them together and call them a portal and begin to compete with some of the portal sites.

So there is a lot of activity but the whole emphasis is that that form of mass media is going to require a lot of great software skills. For example, the Win CE operating system is likely to play a big role in terms of the set-top box.

However, I think our role going forward will be an infrastructure role. The dream is that in your typical home there'll be a pipe that sends bits to it and it goes to a box and the box sorts out the bits [to various locations around the home]. So the operating system will be very useful for helping sort all of that out.

Obviously, NT 5.0 is the key software release for Microsoft, so can you place it in a strategy context? As Microsoft has been piloting the product, can you nominate the features that you have found to be the most important?

If you had to characterise one aspect of NT 5.0 that is very important, the total cost of ownership capabilities of the product that enable CIOs to deploy the product in such a way that they are able to use a spectrum of clients is what I find to be the most powerful feature. The ability to drive down costs is what CIOs have told us is important so we've driven that into the product.

Strategically, we think NT 5.0 is very important. It should put us at a level where we are in an even stronger position relative to the reviews of operating systems on servers versus our competition.

I should also point out that NT 5.0 will be an infrastructure kind of decision as opposed to a desktop kind of decision, so don't expect an immediate spurt relative to revenue.

As we get into these infrastructure pieces like NT 5.0, we've got to be thinking long-term.

Speaking to integrators and users, most don't tend to adopt major new releases until at least service pack 2 or 3, so how will that impact the success of NT 5.0?

I don't think that concept has changed much over time. We still have a bunch of accounts that are really at the leading edge of our versions and we have others that tell us to go back and see them in two years. That isn't any different from 10 years ago.

Standardisation on Microsoft products as a software infrastructure is a key component in the Digital Nervous System (DNS), Microsoft's strategy for enterprises. Obviously, most companies can't afford to just toss out their old systems, so how do you see it being applied?

First of all, your statement that most companies can't do that: a lot of companies are and the reason why is because for the first time in the history of the information technology business, a lot of the off-the-shelf applications really are robust enough to handle major companies.

And the ability to standardise data enables you to clean up your processes so a lot of companies are looking at these things and saying: "I know I need to get rid of legacy systems."

Don't get the idea everyone is doing this, but what's happening today is most CIOs are saying they're going to have to go down that path because the cost profile is so much lower than their current configuration.

So over the course of time, they are constantly asking the question: "Where am I in terms of capability for this company and is this the right time to make some major changes in terms of improvement?"

Are you suggesting that CIOs want a standardised environment, ie, end-to-end Microsoft software and a single hardware provider?

If their objective is to have an incredibly efficient, low-cost and responsive system, that is what they are highly interested in.

When do you think this is going to be a reality?

In the next 20 years. At this stage, there are still a lot of big companies out there where the last thing they're going to do is trash their $100 million implementations to do something dramatically different. They're not going to do that, but every year a bunch of them will say I'm going to seize the moment and make a change.

The job of the CIO is to pick the right opportunities.

That's obviously going to require a lot of migration work. What role will your partners play?

Companies all have unique problems and they're going to have to face up to what they want to do so partners will be vital. Some customers will make giant steps and some will do it in an incremental fashion.

There are already many ISVs like SAP, Baan and others, that we are working with regularly to ensure our software that runs the infrastructure interacts well with their software which does applications.

And our other partners like the big global systems integration firms and our solution providers will be important for working with companies to build them the right solutions and implement off-the-shelf software that suits their needs.

Microsoft has been tightening its relationships with a number of other major vendors like SAP and Baan of late. How are relationships such as these likely to impact Microsoft's strategies going forward? Like for example, in the use of resellers.

Well, it does have an effect on our strategies and as these evolve, however they evolve, we have to be in tune with what's going on. Exactly how it's going to evolve we're not sure, but we do know that it's necessary for us to keep close with them, and vice versa, so that our products work well together.

Similarly, with the hardware partners we have active dialogue.

Do you think the platform standardisation you referred to earlier could lead to a rationalisation of the channel with mega-resellers or mega-integrators having a narrower choice of solutions that they can provide?

What usually happens in markets is they fragment as they mature because people want special types of capabilities. So I don't know that consolidation will be the answer.

I think that the channel's ability to deal with special needs of people will become even more specialised. But who knows? We're all really speculating.

You are responsible for driving Microsoft's brand strategy. Can you describe its administration and what is it designed to achieve?

The brand strategy is really not coupled with short-term behaviour. When we run brand advertising, we don't expect a huge bunch of people to go out and buy Microsoft products or any behavioural difference in the channel.

Of all of our marketing dollars, you need to understand that only about 8 per cent go to strengthening the trademark. The other 92 per cent are print ads, etc that are designed to say get out there and buy the product now.

The 8 per cent that is used to strengthen the trademark are long-term investments in the basic equities of what people think of when they think of the name Microsoft. And so we know exactly what we want to insert in their heads - we want them to think of Microsoft as the software leader and to think of Microsoft as a tool to get at great new capabilities.

It's a background issue in this industry. It's a tie-breaker so that when there is a situation where you have a competitive product and Microsoft product, you realise "Microsoft is the software leader, how can I go wrong?"

Unethical practices or a case of 'tall poppy syndrome'?

If the US Department of Justice (DOJ) is questioning the legality of the company's actions now, what will it be like in 20 years if the vision to have companies standardising on Microsoft products comes to fruition?

From our standpoint, if we continue to do what we have been doing and we continue to get the sort of decisions we got out of the US Court of Appeals, we're just fine because what they've said so far is, throughout a lot of legal activity, we actually like what you did.

This is a company that operates totally ethically, totally within the law, listens very carefully to what customers want, hustles and tries to get out there and have the better product, and that's okay.

Now the probability of us being successful in all of these areas is actually low. Why? Look at the history of business ventures.

A lot of people look at our success on the client and say: "Maybe they can replicate that here, here, here and here." That would be amazing if we did. They're giving us more credit than we deserve.

So what is the updated situation in the DOJ's legal action against Microsoft?

The more recent lawsuit had two aspects to it. The most recent lawsuit was filed before the decision took place on the appeal of the first lawsuit.

The Government filed a second lawsuit that said it was concerned about two things: firstly, the integration of Internet features into the operating system because it looks like it may have inappropriately damaged Netscape; and secondly, the first screen popping up being Windows-related when you boot up your PC for the very first time.

The second point turns out to be the easy part of the lawsuit for us because any hardware vendor can put whatever they want on that first screen so long as they register that it has Windows.

So the DOJ filed this second lawsuit, then the appeals decision came down and it was clear that the judges said the integration of those Internet capabilities are appropriate, the integration of capabilities in general into a product are appropriate, and the consumer is better off with the things integrated versus not integrated.

And in the case of operating systems, independent software vendors (ISVs) are advantaged if the functionality is in the operating system because they don't have to guess what features each consumer has on their PC. So we like that. The consumer wins big time.

So both the DOJ and Microsoft thought the first part looked like it was in question too, so we filed a motion for summary judgment, that is to just skip the second lawsuit.

But the judge said he wanted to have the trial to investigate the logic of whether or not the consumer really is winning, which surprised us because the first set of judges made such a thorough decision.

The decision is that the trial will go ahead [on October 15, this year] even though the judge acknowledged that the structure the appeals court laid out was a good one.

Are there any positives to the lawsuit as far as Microsoft is concerned?

The positive aspect is that we probably couldn't pick a better set of features to discuss in terms of integrating into an operating system than Internet features. They're so amazingly useful to people.

If you look at Intuit's Quicken product, when the user asks for a stock price, the operating system can acknowledge the need for the stock price, send a command out to the Internet with the proper URL, get the stock price, bring it back and insert it into the file without anybody ever knowing it.

It's so tightly integrated into the operating system that the winner is the user of the Quicken product because they don't even know they're on the Internet.

So the Internet becomes the user's next big hard drive which is truly exciting. From the standpoint of that test, that's why the appeal judges came across so strong. So we'll see what happens.

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