R. Microsoft 3

R. Microsoft 3
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Steven Anthony Ballmer

AGE
43, born Mar. 24, 1956.

EDUCATION
BS in math in 1977 from Harvard, where he befriended Bill Gates. One year at Stanford University B-school before Gates tapped him to help run Microsoft.

CAREER
Began in 1977 as a marketer at Procter & Gamble. Has spent 19 years at Microsoft. Promoted to president last August.

CHIEF GOAL AS PRESIDENT
Rallying the troops. ''We need to give our people a beacon they can follow when they're having a tough time with prioritization...what hill to take.''

TOUGHEST PERSONAL CHALLENGE
He's a hands-on guy who wants to do it all himself. ''Now I've got to be a leader of leaders,'' he says.

MICROSOFT STOCK HOLDINGS
$19.5 billion.

PERSONALITY
Ballmer speaks at the top of his lungs-not always because he's angry but because he gets excited. Had surgery to fix throat damage.

SPORTS
He plays basketball and jogs. He's not fast, but he accelerates when he goes up hills.

FAMILY
Wife, Connie, is a former Microsoft public-relations staffer. Three sons, the last born in March. He arrives at home most nights in time to put his children to bed.

The Five Facets of Bill Gates's Tech Vision

FINALLY, A SIMPLE WAY TO FIND STUFF
Can't find that word processing file you're sure you created last month? You're not alone. Today, Microsoft's applications store data in a host of different places. But Gates's engineers are working on technology that will allow people to search in one way for key words in E-mail, databases, spreadsheets, and word processing files.

INTERACTIVE WEB PAGES
Most Web pages are created with technology called HTML (hypertext markup language). It makes for static pages. Now comes eXtensible markup language (XML), which allows software writers to easily embed calculator programs and other interactive features into Web pages. Microsoft plans on including it in all its programs.

DIGITAL PHOTOGRAPHY
Picture-taking is going digital. Today, it's complicated to use your PC to capture and edit digital photos. Gates wants to make it much simpler. Microsoft's upcoming Windows 2000 operating system will let people transfer photos from their digital cameras to their PCs just by pressing a button on the camera and pointing at the PC.

3-D IMAGES
Digital images are becoming commonplace in PC games and other consumer programs. Now, Gates wants to go a giant step further, creating technology that will allow game players to swing baseball bats or golf clubs, record their swings with a video camera, and see the effects as 3-D images in PC games. For the duffer, that will be much more satisfying than making a bunch of mouse clicks to play virtual golf.

JUST TELL THE PC WHAT TO DO
The keyboard and mouse are fine for most computing tasks, but the latest ways to input and manipulate information in your computer are much more natural--voice commands and handwriting recognition. You can expect to see Microsoft make use of the gee-whiz technologies in everything from tablet computers to interactive games.

Q&A with the Visionary-In-Chief
A talk with Chairman Bill Gates on the world beyond Windows

Since the government's antitrust case against Microsoft Corp. went to court last October, Chairman William H. Gates III has kept a low profile, granting few wide-ranging interviews. BUSINESS WEEK Correspondent Michael Moeller and Senior Editor Kathy Rebello caught up with him during a stopover in Chicago on Apr. 26. He explained the company's sweeping reorganization, then supplied additional answers via E-mail.

Q:Microsoft's financials have never looked better. So why reorganize? Some would say if it isn't broken, why fix it?
A: Companies fail when they become complacent and imagine that they will always be successful. That's even more dangerous in a world that is changing faster than ever, especially technologically. So we are always challenging ourselves: Are we making what customers want and working on the products and technologies they'll want in future? Are we staying ahead of all our competitors? What don't our customers like about what we do, and what are we doing about it? Are we organized most effectively to achieve our goals? Even the most successful companies must constantly reinvent themselves.

Q:What are the three key principles of the reorganization?
A: First, our vision had always been a computer on every desk and in every home, and we've gone a long way towards achieving that. But it was also clear that we needed to build on that vision. Although the PC is still at the heart of computing, it is being joined by a large number of new devices--from palmsize PCs to smart telephones. At the same time, the Internet has changed everything by giving the world a level of connectivity that was undreamed of just five years ago. So we needed a new vision centered around the Internet and focused on giving people the power to do anything they want, anytime they want, anywhere they want, and on any device.

Second, the new structure puts the customer at the center of everything we do by reorganizing our business divisions by customer segment rather than along product lines.

Third, we're now holding the leaders of our new business divisions accountable to think and act as if they are independent businesses. That will give us even more flexibility to respond to changes in technology and the marketplace.

Q:You've been freed to spend more time as the company's visionary. So what technology do you see on the horizon that will dramatically change people's lives?
A: I'm optimistic about what the industry can achieve, but the word ''dramatic'' will mean different things to different customers. If you're a large enterprise customer, being able to connect your employees with on-demand videoconferencing for collaboration would be dramatic. If you are head of IT for a large corporation and can deploy software, do updates, and change users on a companywide network of PCs, and never visit a desktop, ever--that's dramatic. If you have a PC at home and use the Web to buy products such as a car, a TV, or a dishwasher, and if you can use your PC to track the warranties, find the nearest repair center, and have your PC store remind you of all that information--that would be dramatic.

Q:Do you think information appliances will become as popular as desktops? If so, how will Microsoft fare in that world?
A: Desktop PCs have been incredibly successful. Most businesses have them, and 50% of homes do. And for most people, the PC will remain their key computing tool, but it will also work alongside a lot of other cool devices. That's why we've expanded our vision to giving people the power to do what they want, where and when they want, on any device. That means on PCs, handheld PCs, phones, or smart TVs such as WebTV. We're working hard to provide the software, like Windows CE, for a range of devices. I'm not sure that everyone who currently has a PC will also have a handheld, but the market will be very large.

Q:Is the company more serious now about going beyond the PC and Windows?
A: We've been doing things that go way beyond the PC for a long time....Who is the biggest mover in TV-based Internet computing? Well, that's us. Has it taken over the PC? No, it has not. Is it something important that we believe in? Absolutely. So it's always hard to bring the right balance to those discussions....The last thing I want to do is get this notion that we won't have any full-screen devices and we won't be creating documents ever again.

Q:Which three companies do you consider to be your biggest competitors today, and why?
A: In 25 years in this industry, I have never seen so much competition in every single area, and the competitive landscape and market boundaries are constantly changing. In the software industry, the barriers to entry are very low, so anyone with great ideas can build a business. New competitors such as Linux are constantly emerging and growing amazingly fast. In the U.S. alone, $14.3 billion in venture capital was raised in 1998. That was a record, and all of the 24% growth [in venture capital] last year was invested in IT companies. Plus the VC number doesn't count the cash that companies like IBM, Intel, Compaq, Time Warner, Disney, and many others are investing in startups. So it's hard to name just three competitors, because we have so many in each of our businesses, and they are changing constantly. But I can probably narrow today's list down to IBM, Sun, AOL/Netscape, Novell, Linux, and Oracle.

There's an unchanging competitor too--ourselves. Customers can choose whether to stay with the software they have or upgrade to our new products. We have to ensure that all new releases are much, much better than our previous products. If they aren't, customers won't upgrade.

Q:Is there any threat that keeps you up at night?
A: Well, my daughter used to keep me up, but she's older now. I imagine when our new baby comes I will also have some sleepless nights. Seriously, every year we have been in business there have been serious threats to our future. But we just work hard and keep focused.

Q:Has the Justice Dept.'s antitrust suit against Microsoft had a significant effect on the company?
A: The legal side of the thing doesn't really affect the people at Microsoft who are building the software, working with customers, or anything like that. If you looked at my calendar, you'd find maybe 2% to 3% of my time is spent on this. I did my deposition. That was a few days. I talk to lawyers every couple weeks about how they're seeing things....Contrary to this image that's created in the press, it's not something that is a major focus for me.

Q:Can you imagine yourself doing anything besides leading Microsoft?
A: I've said many times that I have the best job in the world. I get to work on really interesting projects, like figuring out how to make digital, audio, and video so easy that a grandmother can see her three-month-old granddaughter on her PC. I get to work with an incredible group of smart people who are helping solve hard technical problems. I love the software business, so I plan to stick around for a long time.

Why Microsoft Shareholders Should Cheer the AT&T Deal
Through set-top boxes, Microsoft will enter millions more homes -- and find new ways to make money

Microsoft MSFT is never far from the headlines, but for much of the past year the software giant has been lying low. While it has made numerous small investments and acquisitions, it has been absent from the high-profile technology megadeal scene. Meantime, America Online has snapped up Netscape NSCP and partnered with Sun Microsystems SUNW, USA Neworks has negotiated to buy Lycos LCOS, and Yahoo YHOO has moved to buy Broadcast.com BCST. Microsoft's Web sites have been climbing in traffic, but they hardly command the presence of the likes of Amazon.com AMZN or Yahoo! (YHOO). Even upstart Linux, the open-source operating system, has been able to make inroads against mighty Windows NT this year. To some observers, Microsoft seemed to be sitting on its $22 billion cash horde waiting for the right opportunities while the Internet Age was passing it by.

Some analysts believe the company's ongoing antitrust trial has not only taken up more time and energy than top execs are letting on but has also softened the company's well-honed killer instinct. "The combination of the trial with certain fundamental aspects of the Internet -- it's hard to be a big fish in a pond the size of the ocean -- has basically caused Microsoft to recede into the background," says John Robb, an industry analyst and president of Gomez Advisers. "They started to get gun shy."

Now, though, change is clearly afoot. Microsoft is engaged in a sweeping overhaul of its corporate structure to focus on developing software for a range of information appliances beyond the PC. It is reportedly considering creating a separate "tracking" stock for its Internet properties that could allow it to cash in on the Internet stock boom while insulating MSFT shares from volatility in that sector. And on May 6, Microsoft announced that it will invest $5 billion in AT&T T in exchange for a nonexclusive deal to supply software for cable-TV set-top boxes. "Our agreement today represents an important step in Microsoft's vision of making the Web lifestyle a reality," Microsoft Chairman and CEO Bill Gates said in a statement.

CHANGE ON A DIME. An important step is right. For investors in the $414 billion market-cap company, seeing Microsoft at the center of such an important deal is welcome news. Through set-top boxes, Microsoft software will enter millions more homes, and from there the company can add other Internet services and find new ways to make money, analysts say. The deal also shows that Microsoft is making good on its promise to adapt to a market where desktop PCs and operating systems are less important than networks and information appliances, says Trent Nevills, an analyst with Federated Investors. "It shows the power of Microsoft to be able to spend cash and change on a dime."

Analysts believe this deal may be the first of more announcements to come. "They have a lot more money to spend," says Robb. "I don't know if this is the pivotal event," adds Nevills, pointing out that the timing on the current deal was triggered by AT&T's move to buy MediaOne Group. "But as the antitrust trial winds down, [Microsoft] will be free to really pursue its Internet strategy."

An increase in dealmaking activity and other important announcements could act as a catalyst to Microsoft's already expensive stock. The stock has averaged an annual gain of nearly 70% for the past five years, and in the past six months alone notched an additional 50%. But since its Apr. 6 high of 95 5/8 it has fallen about 18%. Microsoft opened higher on May 6 on news of the AT&T deal, but it closed down 1 3/15 points at 77 15/16, as interest rate worries brought down tech stocks.

WORDS OF CAUTION. Microsoft's month-long decline is due partly to a general shift in the market away from technology stocks with high price-earnings ratios in favor of less expensive capital-goods makers and consumer cyclicals. (Microsoft's p-e is 62 compared with an average of 24 for the S&P 500.) The decline was also caused by looming concerns over slowing PC demand. In its fiscal third-quarter earnings announcement, Microsoft expressed caution about growth in 1999 since companies are expected to lock down their computer systems in preparation for the Year 2000 date change.

While Microsoft often uses cautionary language in discussing growth prospects, Prudential Securities analyst Douglas J. Crook downgraded the stock to hold from accumulate and lowered his fourth-quarter earnings estimate following the company's Apr. 20 earnings announcement. "Overall, we continue to believe Microsoft possesses a franchise with unprecedented market strength. However, we don't see any near-term catalysts to the stock from these levels," he wrote in an Apr. 21 research note.

Deals such as the new one with AT&T could potentially provide those catalysts. At the same time, other analysts are looking to the recent introduction of an updated Microsoft Office and the coming Windows 2000 operating system to provide earnings growth. For example, Microsoft gets about $45 for every copy of Windows 98 installed in a new PC, says Brian Goodstadt, an analyst with Standard & Poor's equity research group, who rates Microsoft a buy. But for Windows 2000, he expects it to get more like $85 a copy. That means Microsoft revenues can grow even if PC prices fall or if fewer units are sold. "Long-term, they can't just rely on PC software," says Goodstadt. "They need to aggressively move into new areas, and I think they'll continue to focus on that." In that light, the deal with AT&T could be a sign of things to come.

By Amey Stone in New York