Microsoft hauls in the Net

Just six months ago critics were writing off Microsoft, claiming that the company's failure to anticipate the impact of the Internet was a fatal flaw in chairman Bill Gates's vision. In a wholesale redefinition of the company's strategy last December Mr Gates protested that Microsoft was now "hard core" about the Internet.

Dismissed at the time as probably too little, too late it now looks as though Microsoft might have succeeded, as one employee recently claimed, "in turning the company on a dime". Immediately after the announcement two divisions were axed and an Internet-based division launched to bring a much-needed focus to the company's approach to the Internet.

Several products based on non-Internet Microsoft proprietary technologies were abandoned or redirected to Internet- based standards. The company has also acquired and started to integrate technologies it had previously dismissed, the most recent being the acquisition of eShop Inc, a California- based developer of on-line shopping computer programs.

The company's "Explorer" Internet browser now has around 7 per cent of the market, up from almost nothing six months ago, and its software programmers are hard at work on integrating browser technology into operating systems such as Windows, a tactic that rival Netscape will find hard to emulate. Lessons that the company learnt from the ill-fated first launch of its Microsoft Network on-line service last year are clearly reflected in the launch of Slate, an on-line Internet magazine or "webzine".

Two milestones stand out. The first was the launch of Exchange, the company's long overdue "groupware" program. Groupware, which allows people to work together on projects, sharing and pooling information, has long been a gap in the company's portfolio. The only real competition has been Lotus Developments' Notes product, which was the prime reason for IBM's $2.2bn (pounds 1.4bn) takeover of the company last summer.

Once touted by Microsoft as "a Notes-killer", Exchange was criticised for being a stripped-down groupware solution that lacked several of the most valuable features of Notes. In fact much of the difference simply boils down to an arcane debate about what exactly groupware is.

To Notes, everything shuttling around a network is a Notes "document", with other information (forms, spreadsheets, e-mails, message "threads" and so on) attached. Thanks to the Internet, however, that is slowly changing. "Notes has opened up a lot," concedes Chris Vezey, the marketing manager of Lotus. This proprietary view of groupware was the sort of thinking Microsoft threw out in December.

Its contrasting view is of a world where all kinds of messages can be received by a system intelligent enough to identify their source and process them accordingly. Increasingly, that means the Internet.

Brian Valentine, the general manager of the Exchange product unit, says that three years ago the company discovered that 85 per cent of its 2,000 largest customers were seriously considering using Internet protocols for e-mail messages. So it decided to assign a team of programmers to build Internet-capability into the product, a gamble that has now paid off handsomely.

The company also involved potential customers in the design of the product to an unprecedented degree - 42 global corporations were closely involved for almost two years. "Bill Gates was really sceptical," explains Mr Valentine. "He assumed that these companies would violate our non-disclosure agreements and leak information to our competitors. That hasn't happened, and now he thinks the concept is wonderful."

In another departure the company forged links with third-party software vendors to enhance the basic Exchange product. Such "add-ons" are usually developed independently, and only when the product has been judged successful enough to create a market opportunity of sufficient size.

One of these third-party vendors was Octel Communications, a $500m market leader in the corporate voice messaging market based in Los Angeles. "What people want is a single device to handle and show and store all their incoming messages, whether these are faxes, voice-mails or e-mails," says Paul Cheslaw, a director. "It won't be necessary to carry a laptop computer about with you to read your e-mail. Exchange will read your faxes and e-mails out to you over the telephone. You will be able to reply to e- mails by voice, thus clearing all your incoming e-mail over the cellular telephone on the way to the office."

The second, and related, milestone occurred last month. While the Internet has been receiving all the publicity, sales of Internet equipment and software to companies for internal use on "Intranets" has been growing three times faster than Internet sales and will generate 50 per cent more money for software and hardware vendors this year than Internet sales. By 1998 one firm of analysts reckons Intranet sales will reach $7.9bn against Internet sales of just under $2bn.

Before December's about-turn Microsoft's plans in this market were minimal. Exchange has in-built links to Intranets, but both Lotus and Microsoft have had to fend off claims that Intranets render groupware obsolete. While there are overlaps Intranets are less than ideal forsuch as e-mail, although well suited for internal publishing. Nevertheless, it is a market area that Microsoft will ignore at its peril.

After its experience with the Internet this seems unlikely. Mr Gates says future releases of the company's best- selling "Office" product and the latest release of the corporate Windows NT system will have a substantial Intranet capability.