NEWS ANALYSIS; The great hi-tech gamble

A windows product launch this week may unleash a PC revolution, says Charles Arthur

LATER this week, factories in the US and Eire will receive a copy of a computer program, to be transferred and copied on to CD-ROMs - the computer data form of compact discs. The program is the "gold" or final version of a product whose release on 24 August will be the biggest event in the software industry for years: Microsoft's new operating system for personal computers, Windows 95.

In the factories, the program will be copied on to thousands of CD-ROMs and then distributed for simultaneous launch of the English version all over the world. (Versions in 30 other languages will follow in the succeeding three months.) Microsoft, and the rest of the software industry, expects that it will be the fastest-selling piece of software ever.

But every new product launch is a gamble. And after five years of development and hundreds of millions of dollars in R&D, this is Microsoft's biggest punt yet.

Every computer needs an operating system to make its other software work. Microsoft's current Windows dominates IBM-compatible personal computers, which themselves dominate the market for desktop computers. Windows 95 is expected to reinforce the company's hegemony.

Intelligence InfoCorp, which specialises in analysing PC markets, reckons Windows 95 could sell up to 20 million copies this year and perhaps 50 million in 1996, bringing in about $1bn (pounds 625m) in revenues. For Bill Gates, Microsoft's chief executive, it will simply underpin his position as the richest man in the world. Last week, Forbes declared that Mr Gates had finally made it to the top with his pounds 8.6bn fortune.

The expectation that has built up over the launch of Windows 95 has been huge. Ten days ago, the Dow Jones index dipped briefly on rumours that the product's launch might be delayed by a further few days or weeks. Alterations and refinements of the program have already delayed its release date by eight months after three-and-a-half years' development.

The fact that mere rumours, which were quickly denied, could move the entire market indicates the clout that Microsoft, with its turnover of $5bn, now wields in the world's $100bn PC industry. But Mr Gates and Microsoft are taking on increasingly powerful enemies. Three weeks ago, the US Justice Department's anti-trust division began an urgent investigation of one of the new elements of Windows 95. This is a built-in feature to connect the user over the telephone to an on-line database of software and information, called the Microsoft Network (MSN). Companies such as America Online, CompuServe and Prodigy, which provide comparable services, complain that Microsoft should not bundle MSN, but sell it separately as an add-on.

"We are concerned that there should be a level playing field," said a spokeswoman for CompuServe. "Microsoft has a trem- endous distribution advantage in its operating system. But we want to be a part of a computer user's first experience, too. We are talking to the Department of Justice."

The on-line service providers hope that the department will make a decision before the launch, though it is not clear what will happen if it comes afterwards. Earlier this week, Brad Silverberg, a senior vice-president at Microsoft, told the Wall Street Journal that the corporation is working on a contingency plan to "unbundle" the MSN connection from the overall program.

While MSN is important to Microsoft, the longer-term emphasis is on making its operating system pre-eminent. Steve Case, president of America Online, said: "In the new digital world, the operating system for computers is like the dial tone for telephones." Mr Gates's aim is that eventually, whenever you turn on a PC, its "dial tone" will be Microsoft's.

Already the present version of Windows - entitled "3.1", which in the computer industry's jargon means it is the first significant rewrite of the third incarnation - is installed on about 95 million PCs around the world, representing 90 per cent of the market. Anyone wanting to move up to to Windows 95 will have to pay about pounds 50.

If Microsoft was being consistent, Windows 95 would be entitled "4.0". To explain the title, Microsoft says it is trying to give the naming system the same feel as a car. Critics say it is just creating a rod for its own back, because users will expect so much more than they get now. Microsoft is not worried. It is spending millions of dollars launching the product with TV and print advertising.

The operating system is the first program to run when you turn on your computer. It checks that the hardware is all working properly, and then acts as the interlocutor between you and the computer's processor, turning the input from the keyboard, mouse or outside connections such as telephones, into a digital stream that the processor can deal with. It then translates the processed digits into pictures, sound, words or numbers - or all of those - and sends them to outputs such as the screen or loudspeaker.

Mr Gates sees the operating system as potentially doing far more than this. While early PC operating systems had to be controlled by typing arcane commands into the computer, modern ones such as Windows 3.1 and Windows 95 use graphics to make the screen resemble a desktop. Files and programs are arranged into "icons" so that the user can see at a glance what files are available and what programs are running. But Mr Gates argues that operating systems are just programs like any other; so why not make them bigger and include functions such as word processing, sound players, and programs to connect to on-line networks?

To rivals such as IBM and Apple, which have developed their own operating systems, Windows 95 marks another battle in a long-running war. Earlier this year IBM released OS/2 Warp, its newest PC operating system. Essentially it already does everything that Microsoft is claiming for Windows 95: it can run a number of programs at once, recognise hardware that is added to the computer (a facility called "Plug and Play"), and it uses the full power of the computer.

The key to achieving widespread sales of an operating system is winning over the manufacturers of PCs. If they can be persuaded to "pre-install" the product - meaning that it is already stored on the machine when the user buys it - sales will rocket, especially with the all-important corporate customers. It is here that IBM falls down. In the previous three decades, when computing was mostly carried out on huge mainframe computers, IBM dominated the market by consistently using tactics that locked users into expensive hardware and software; complex operating systems were one of its prime sources of revenue. That has made manufacturers wary of tying up with Big Blue.

Apple's problems lie in the chip used to power its machines, such as the Macintosh. Microsoft has always written operating systems for Intel's microchips; Apple has always powered its systems with chips made by Motorola. Although Apple has 10 per cent of the PC market, it has recognised that it must persuade more companies to use its system, and has now begun licensing its own operating system, known as System 7.0, to other computer manufacturers. But they will have trouble matching Microsoft's lead.

Microsoft originally planned to launch the product last December. But it delayed the launch for further testing. Software is notorious for "bugs" - errors in the program that cause unexpected faults. Eliminating bugs is the usual reason for succeeding versions (which is why Windows 3.0 was replaced by 3.1). In the past few months, 400,000 people, including 40,000 in Britain, have been trying test versions of Windows 95 in search of bugs, compared with a total of 10,000 testers for Windows 3.1.

There are rumours that an update - Windows 4.1, in effect - is being planned for next January. And if the Justice Department decides that the inclusion of MSN is anti-competitive, the first update might come earlier, and in effect, be a downgrade.

But Mr Gates is in no doubt about what will happen. "Things should explode, not only for new users but for the entire installed base." Too much is riding on the product for it to fail.