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Noise Inhibitor: By David Bank 11/19/1998 But Mr. McNealy is doing a lot of heavy-duty consorting these days. A fragile and fractious alliance that includes Sun, International Business Machines Corp., Oracle Corp. and Netscape Communications Corp. has been quietly collaborating in an effort that may be the last, best chance to stop Microsoft Corp. from extending its monopoly beyond desktop software. Much is going the alliance's way of late. Sun this week won a major court victory in its civil lawsuit against Microsoft to preserve its Java software as an alternative to Microsoft's Windows operating system. The antitrust trial in Washington D.C., at least so far, appears to be going in favor of Microsoft's rivals. And IBM, still the world's largest computer company with more than five times the revenues of Microsoft, is stepping out of the shadows to take leadership and increase funding of anti Microsoft efforts. This anti-Microsoft cabal represents an experiment in mutual cooperation against a single enemy that may be unprecedented in modern American industry. "The entire industry must behave like a single, focused competitor to Microsoft," IBM executives asserted in an internal strategy memorandum circulated in July. Adds Michael Zisman, IBM's vice president for software strategy in an interview: "We're going to take some leadership. . . . This is IBM's move." But the group's goal, to create a common foundation for computing not controlled by Microsoft, is an enormous technical challenge. Moreover, strategic blunders and competitive infighting have often crippled the effort. Sun, for example, has repeatedly pushed its version of an operating system called Unix over one unified industry standard. Bill Gates, Microsoft's chairman, crows about the lack of unity. "Every time they have one of those great committee meetings, the guy comes back to Sun and says, 'Am I supposed to make my Unix run better than the other guy's?"' Mr. Gates recalled in a recent interview. "The Unix guys didn't ever have a standard." But Microsoft doesn't discount the threat. In its 1998 report to shareholders, Microsoft warns that the four rivals are collaborating on initiatives "to move software from individual PCs to centrally managed servers. . . . Widespread adoption of such computing systems would present significant challenges." The fate of the alliance could shape the future of the software industry far more than the antitrust trial, absent a draconian anti-Microsoft ruling upheld by the U.S. Supreme Court. At stake is who will win the bulk of the enormous growth expected in one of the most strategic sectors of the next century's economy. Will the software industry be winner-take-all, with Microsoft commanding market shares above 90%? Or will it be more like the old auto industry, when the Big Three held steady shares of the domestic car market for decades? For that reason, executives of the camp called Noise -- Netscape, Oracle, IBM, Sun and "everybody else" -- have had backchannel contacts for several years. "We meet regularly, we talk regularly," says Mr. McNealy. "If we don't set the standards, we lose." Adds Oracle's chairman, Lawrence Ellison, resorting to a bit of considered overstatement: "The whole Internet is part of the conspiracy to get Microsoft." The consortium may have an ally in Intel Corp., the giant chipmaker that has long been Microsoft's most important partner. Intel, angling for more negotiating power against Microsoft, recently struck a deal with IBM and SCO Inc., a Unix software concern, to create a standardized version of the Unix operating system, a competitor to Microsoft's Windows NT, for its next generation of microprocessors. Because of Microsoft's power, some antitrust lawyers and economists believe that viable competition in software may require cabal-like collaboration . "A decade ago, the only entry in an antitrust textbook under 'cooperation,' was a description of cartels," says David J. Teece, professor at the Haas School of Business at the University of California, Berkeley. Now, some scholars think, "it may well be beneficial for the small players to come together and create a standard to take on the dominant provider." The allies must be careful that cooperation doesn't become collusion. "Compatibility is OK. 'Stay out of our market' is different," says Sam Miller, a San Francisco antitrust attorney who worked on an earlier government case against Microsoft. Microsoft's subpoenas, as part of its antitrust defense, have unearthed a wealth of e-mail messages documenting the cooperative efforts. "We must work together using all of our collective contacts to establish Java as the standard," John M. Thompson, IBM's software chief, exhorted Mr. McNealy and James Barksdale, Netscape's chief executive, in August 1997. "We must move quickly to pre-empt Microsoft." Mr. Thompson offered to call Novell Inc.'s chief executive Eric Schmidt if Mr. McNealy or Mr. Barksdale would enlist Oracle's Mr. Ellison. Microsoft's intent in introducing such documents in the antitrust trial isn't to prove collusion by its competitors. Rather it hopes to show negotiations it held with Netscape, Apple Computer Inc. and Intel are common practice in the industry. Those meetings have been characterized by Justice Department lawyers as illegal attempts to divide markets. Indeed, yesterday in federal court, Microsoft lawyer Steven Holley produced several e-mails showing how the Microsoft rivals consorted, and repeatedly grilled IBM executive John Soyring about the matter; Mr. Soyring repeatedly pleaded ignorance. Noise members even collaborated to foment the government's antitrust investigation. Netscape's Mr. Barksdale hosted Assistant Attorney General Joel Klein for breakfast at his home and both Netscape and Sun fed government lawyers a steady diet of complaints. Netscape, Sun and Oracle also help finance an anti-Microsoft lobbying group called ProComp. (The Justice Department, for its part, says monopolies and their competitors play by different rules. Referring to 1995 talks between Netscape and America Online Inc., the government's lead trial lawyer, David Boies, said, "Small companies get together all the time, especially when they are facing monopolies.") But the anti-Microsoft effort got off to a rocky start. In 1994, Oracle's Mr. Ellison conceived of an elaborate multiparty deal to create unified competitors to Microsoft in each software category. According to people familiar with the discussions, Mr. Ellison considered acquiring then-independent Lotus Development Corp., the maker of the popular Notes messaging software. Mr. Ellison planned to combine Notes with Oracle's own database products to create a competitor to Microsoft's BackOffice suite for businesses, which is also built around e-mail and database software. Next, Oracle was to spin off Lotus' 1-2-3 spreadsheet software to network software maker Novell, which owned WordPerfect, then the leading word processor. Novell could have bundled the two in an impressive desktop suite to compete with Microsoft's Office, which includes the Word text processor and Excel spreadsheet. To complete the deal, Oracle proposed that it serve as a nonprofit steward of a new unified Unix operating-system standard, built around Novell's Unix unit, the holder of the original rights to the powerful software, which Oracle was to receive in trade. An array of slightly different Unix versions has long hurt companies competing with Microsoft's Windows NT operating system. Mr. Ellison invited Hewlett-Packard's chief executive, Lewis Platt, to his home and the two companies brokered a series of difficult meetings to convince IBM and Sun to subsume their versions of Unix under a new combined standard. Oracle hoped to announce the series of deals at its annual users conference in San Francisco in September 1994. As the date neared, the tentative agreements unraveled. Other companies feared Oracle would get too much power. Hasso Plattner, co-chairman of SAP AG, the German business-software giant and a party to the discussions, adds that Sun never fully bought in. "It's an ego problem," he says. "Sun believes they have a better Unix, and perhaps they have." Another participant says the mercurial Mr. Ellison simply lost interest. Mr. Ellison now says he never engaged in serious negotiations. Instead, Mr. Ellison switched strategies to directly challenge Microsoft's desktop dominance with a "network computer" that would eliminate the need for Windows altogether. "The network computer obliterated the Lotus Notes deal," Mr. Ellison says. The fallout from the aborted plan was considerable. H-P broke from the anti-Microsoft camp and forged a major partnership with Mr. Gates based on Windows NT. Novell sold WordPerfect and is only now recovering from a long decline. IBM bought Lotus itself, in part to keep it out of Oracle's hands. The network-computer effort didn't gain broad industry support, and Unix remains splintered and has lost considerable ground to Windows NT. Next it was Sun's turn to lead the charge. Its Java technology, introduced in 1995, promised to deliver on the long-held dream of software developers, allowing them to write programs that would run on any computer regardless of the operating system. That threatened Microsoft, which recruits developers to write software specifically for Windows. Netscape was to be the distribution channel to get Java onto every computer. Once again, competitive tensions split the Noise camp. Netscape became suspicious when Sun introduced its own Web browser, named HotJava. Netscape's distrust grew when Sun licensed Java to Microsoft, which was adapting its own strategy to the Internet. "The recent history suggests we are not partners," Sun co-founder Bill Joy told his colleagues in a February 1996 e-mail. Netscape, he said, should "stop being paranoid about HotJava. It's not the enemy, Microsoft is." Also creating tension was the fact that Netscape's Java development work often diverged from Sun's specifications. "You had Netscape diverting from pure Java, just like Microsoft was, leaving Sun standing naked," says Michael Cusumano, a professor at MIT's Sloan School of Management and co-author of "Competing on Internet Time," a new book about Netscape's battle with Microsoft. Netscape also alienated IBM, by moving into direct competition with IBM's Lotus Notes. Netscape was also hampered by Java's shortcomings. Last year, it agreed to create a new version of its browser, dubbed Java-gator. But Sun didn't come through with the financial assistance Netscape expected. Strapped for funds and shifting its business away from browser sales, Netscape finally dropped the Java-gator project a few months ago. Sun is again working on HotJava itself. That leaves Netscape with a smaller role in the Noise strategy. According to the IBM strategy memo, the computer maker's goal is to help Netscape maintain at least 30% of the browser market -- down from 80% in 1996 -- so Microsoft can't gain unilateral control over technical standards. In recent months, IBM has assumed an increasingly pivotal role in Noise. It is executing a more sweeping attack on Microsoft, bypassing desktop PC software altogether and shifting the battle to software for servers, more powerful computers that deliver services such as e-mail, electronic commerce and database access, on corporate networks and the Internet. It is also adopting Internet standards for security safeguards and network directories, which serve as white pages for finding users and control who gets access to sensitive files. The focus on server software exploits one of Microsoft's weaknesses: Most large businesses use more than one type of operating system and need software that can run equally well on Unix systems and mainframe computers as well as on Windows. "We at IBM are going to lead that effort," IBM's Mr. Zisman says. "We are not going to get into a thousand committees." That's how Microsoft sees it as well. "In the end it is going to be a battle between Microsoft and IBM," says Tod Nielsen, the Microsoft general manager who is responsible for recruiting software developers to the Windows platform. Mr. Zisman concedes that Java alone isn't going to neutralize Microsoft desktop monopoly, as Noise once thought. But IBM is pushing Java as a way to attack Microsoft from below and above, by enabling servers, instead of PCs, to run applications, and by linking those applications to a myriad of non PC devices such as handheld computers, cellular phones and television set top boxes; these, by some industry estimates, could account for more than one-third of all the devices hooked to the Internet by 2001. IBM boasts an army of 3,000 Java programmers -- more than Sun itself -- who are collaborating with Sun's staff on a common Java operating system and technologies for non-PC products. "Our goal is for at least 50% of these devices to support 100% Pure Java," says the IBM internal strategy memo. The software industry's shift to servers running applications over the Internet for all kinds of digital devices clearly represents a credible threat to Microsoft. But the software giant has its own strategy for applications running on Windows NT servers, and has a version of Java fine-tuned for Windows. Perhaps most importantly, Microsoft has the ability to implement its strategies with single-mind ed focus. "They can enforce a common vision on everybody," says Jim Clark, Netscape's chairman. "For us, each one has its own objectives and we don't all share a common vision." Indeed, IBM's pivotal role won't end tensions. IBM and Oracle, for example, are such fierce competitors in the database market that relations between Mr. Ellison and IBM's Mr. Thompson are said to be strained. Suspicions between IBM and Sun flared in July when Sun paid $160 million in stock for NetDynamics Inc., a company that provides server software to create electronic-com merce applications that could compete with IBM's own offerings. According to one IBM executive, Mr. Thompson told Sun's Mr. McNealy in a telephone conversation, "We're counting on you executing on Java and not advantaging NetDynamics with early releases of Java." Still, this executive says, "it increases the level of nervousness. We said, 'We understand why you did that, but we'd be a lot happier if you didn't. You're coming into our space."' Such tensions are just what Mr. Gates has been waiting for. In a September memo to his managers on "The Era Ahead," he predicts, "As Sun, IBM and Oracle all compete to be the 'true' Java server software solution, the incompatibility of their products and goals will become more evident." If that happens, the Noise coalition will be left with few options. "If I could have my way and dream," muses Ray Lane, Oracle's president. "I say IBM buys the other three companies and competes with Microsoft." Copyright © 1999 Dow Jones & Company, Inc. All Rights
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