Overdrive, page 23
Industry analysts predicted that the Microsoft Network could have 20 million subscribers by the end of 1995, in sharp contrast to the other three, none of which had more than 3 million subscribers. Given Microsoft’s formidable wealth and power, Microsoft seemed poised to bury its competition in the on-line world. A city once shaken by underground atom bomb tests now felt the antitrust rumblings, which resounded all the way to Washington, D.C., and the United States Department of Justice, where some of Gates’s old pals were well under way in their investigation of Microsoft’s proposed purchase of Intuit.
Jeff Lill, (The number two guy on the MSN development team, had skipped Comdex and was resting at a summer home with his wife in Phoenix. Getting the service up and running for a live demo at Comdex had left him exhausted. He had fought many battles over the last few months, technical as well as political, to get ready for the fall show.
“I was planning to go to Comdex, but I was tired and I needed a break,” said Lill. “It had been a marathon effort to get it from just barely working for a demo for Bill in October to actually working at Comdex [a month later]. It took a really tremendous effort. The whole development group was pretty exhausted by that point ”
Lill’s most difficult challenge had been to convince Siegel- man and others, including Gates, that Microsoft Exchange, the mail program; would not work with the Microsoft Network. A significant number of programmers in the Advanced Technology Group had been working on Exchange for several years. Despite several delays, it was supposed to be ready to be shipped to customers in 1995. It was a critical project that was intended to make Microsoft competitive with Notes, the bestselling mail system from bitter enemy Lotus Development Corporation. The revolutionary Notes software, often referred to as groupware, made it possible for groups of people connected to different PCs to work together. They could store their material in central files where it could be easily viewed, updated, or changed by others in the group. Notes was so popular that it was even being used by the staffs of the White House and the Central Intelligence Agency. In short, Notes was a Microsoft-killer. No wonder the Exchange project had Gates’s special attention.
“Notes was the one thing Microsoft really felt bad about,” said Lill. “Lotus had put together a strategy and a product and made it happen, and for some reason Microsoft could never get its arms around Notes and compete with it. The Exchange guys were chartered to do it, but they were having a hard time. Maybe they spent too much energy worrying about Notes, Then the Internet came along, and it seemed that was a way to finally leapfrog Notes. It was kind of funny how quickly their worrying about Notes changed to worrying about the Internet.”
Although Exchange was still under development in mid- 1994, it seemed like the perfect mail service for the Microsoft Network. And that’s exactly what Lill had told Gates a few months before Comdex, during a briefing on how things were going with MSN. After that briefing, Lill and the rest of the top managers on the MSN team made the long walk back from Gates’s office in Building 8 to the East Tech building on the edge of the 300-acre campus. Lill began talking with one of the other technical guys, to whom, despite what he had just told Gates, he admitted that he was having doubts that Exchange would work. It had not been designed for the large numbers of servers that would be needed to handle the millions of potential customers that would sign up for the Microsoft Network.
“Frankly,” recalled Lill, “I wasn’t getting the support out of the Exchange group that I needed to make it happen. And frankly, in their defense, they were just trying to ship a product for an office server rather than the mega-servers we needed for the Microsoft Network. My design goal was to have 40,000 to 50,000 mailboxes per server. Their design for Exchange was to have maybe 200 to 300, certainly no more than 500 mailboxes per server. So it just didn’t fit. But politically, it was a very difficult battle to say, ‘Oh, we’re not going to use it; we’re going to write our own,’ which is what we ended up doing.”
The day after the briefing, Lill went to lunch at a Thai restaurant just off campus, a favorite of many at Microsoft, including Gates. While he was eating, Lill decided what to do: he would have a quick prototype of a mail and bulletin board system built for MSN. “I wanted something low-budget, low- risk, and high-performance,” said Lill. Later, he told Siegelman that he was going to take five or six programmers and assign them the job of building the prototype. Siegelman gave his okay. Ltd sent a general e-mail to the MSN technical team, which numbered about 100 programmers, explaining his plan to build a mail and bulletin board prototype system not based on Exchange. He said the project would have the highest priority, and it would probably determine the fate of the on-line service.
“I told the entire team to give these five or six guys anything they needed,” said Lill. “If they needed servers, get them servers. If they needed space, get them space. This was a make- or-break project. It was to have the highest priority.”
Lill’s e-mail went to everyone on the MSNDEV (Microsoft Network developers) mailing list. But other Microsoft employees who were not part of the MSN development team were also on that mailing list, in order to keep with what was happening on the project. Usually, an interested staff member just had to ask, and Lill would put him or her on the list. “I was pretty open about letting people get on the list,” he said. “It was the best way to get a feel for what was going on inside the project.”
As it turned out, a Microsoft employee in Australia, at what Lill described as “this little outpost,” received a copy of the e-mail and immediately forwarded it to Gates with an attached note saying that it was crazy not to incorporate Exchange into the Microsoft Network after so much effort had been put into the development of the sophisticated mail system. Gates, of course, had only recently been told by Lill and Siegelman that Exchange would be used, and that everything was going great. When Gates got the e-mail from Australia, he forwarded a copy to Siegelman with a terse note of his own: “Are things this insane in the MSN group!?”
“Russ was not happy,” said Lill. “But I ignored that and Russ took the heat. I did have a problem, though. Microsoft probably had a hundred labor-years invested in Exchange, and here I was going to take six guys and in a few months build a mailing system. It just didn’t seem feasible.”
In fact, the prototype took only a few weeks to build, and when Lill ran a side-by-side performance test against Exchange, the prototype was a hundred limes faster. Although Siegclman was catching hell from Gates and was now in the camp of those who wanted Exchange, Lill had convinced Nathan Myhrvold that the newly designed mail system would work better than Exchange on the Microsoft Network.
By September, also in preparation for Comdex, now two months away, the Microsoft Network team was preparing for another critical go/no go meetings with Gates—with one major difference: Gates wanted a live demo. How well the Microsoft Network worked in the demo would determine whether it would be included in Windows 95.
Shortly before dawn the day of the demo, the Microsoft Network came alive for the first time, not in the lab but running on servers from a data center in downtown Bellevue. Hours later, Gates and Myhrvold watched the first live demonstration. Gates even took part in an on-line chat with someone in France and in Australia. “We were chatting worldwide,” said Lill. “It was a very nice demonstration. It was just amazing, considering the whole thing did not even work the night before. We had a contingency plan to demo this for Bill in the lab. But with Comdex coming up, we knew we had to get it up and running out of the data center, which had a butt-load of servers.”
Once he knew that Microsoft’s on-line service actually worked, Gates turned his attention to a pressing business matter that he was hoping to wrap up before Comdex. He had to convince his friend John Malone that TCI should invest in the Microsoft Network and not in America Online. Even though TCI and Microsoft were collaborating on interactive TV projects, those experiments were not going to produce results anytime soon, if ever. So Malone was looking to make a major investment in one of the on-line services, which were seeking telecommunication partners whose cable networks could deliver video and graphics much faster than telephone lines could. Although Malone had put out feelers to Prodigy, he actually had his eye on Paul Allen’s remaining 9 percent stake in America Online. Malone had talked to Steve Case about buying Allen’s holdings, and Case assured him that not only would there be no objections from the AOL board, but taking Allen out of the picture would be welcomed.
There was bad blood between Allen and AOL. A year earlier, in 1993, AOL had adopted a poison-pill strategy to prevent Allen from taking control of the company. Microsoft’s cofounder had started buying stock in AOL soon after the company went public in early 1992. At the time, the stock was selling for about $11 a share. Allen wanted AOL as part of a broad strategy in which he was buying or investing in companies he believed would become key players on the information highway. By 1993, Allen owned two software companies, Starwave and Asymetrix, and had made substantial investments in a dozen other businesses, including $300 million for an 80 percent stake in Ticketmaster. He also had formed Interval Research, a think tank in Palo Alto, California, to which he had pledged $100 million in support over 10 years. Allen was hoping that it would become another PARC (Xerox’s famed Palo Alto Research Center). To that end, Allen had hired David Little, one of PARC’s best minds, to oversee Interval Research.
Allen also continued buying stock in America Online, and by 1993 owned about 25 percent of the company. Microsoft, too, had designs on AOL. Siegelman had met with Case several times to discuss a possible acquisition, but Allen’s interest in AOL was making negotiations difficult for Microsoft. In early May of 1993, Siegelman had sent Gates a memo in which he complained that Allen “has made our life much more difficult.” “It was hard to understand what the heck was going on,” said Lill. “At the time, I was privately asking myself, ‘God, don’t Bill and Paul have lunch and sort of coordinate on this stuff?”’
That summer, Case flew to Seattle to talk face to face with Allen about his intentions. Later that day, Case also met with Gates. Microsoft’s founders were both interested in the same thing: acquiring America Online. Hut now they were rivals. “It was a very strange situation, because Allen was on Microsoft’s board,” said Case. And Allen also owned the second biggest chunk of Microsoft stock after Gates.
“We were really just feeling each other out and getting a sense of the situation,” Case said of his meeting with Gates. “Obviously, we had a lot of respect for Bill and Microsoft. But it was our view then, and frankly our view now, that we could best develop this franchise as an independent company not tied to any specific technology or any specific communications company or any specific software company or any specific media company. And that path of independence has paid off. Our market value in 1993 was probably one-tenth of what it is today.”
Because of Allen’s close ties with Microsoft, Case did not want him to get control of AOL, either. “If we had been willing to consider an acquisition by Paul, I suspect he would have pursued it vigorously,” said Case. “And if he had been successful, I presume he would have had to get off Microsoft’s board, because clearly what we were doing was going to be increasingly competitive with Microsoft. But things did not develop in that direction, because we tried to cut off the discussions with Allen at the pass.”
Fearing a hostile takeover, AOL flooded the market with millions of shares of new stock, thus making it too expensive for Allen to buy a majority stake in the company. By the summer of 1994, a frustrated Allen had dumped more than half of his share of AOL stock—for a cool $75 million profit. Malone was poised to buy Allen’s remaining 9 percent stake in AOL in September, when Gates came on aggressively with a full-court press. He convinced Malone that the Microsoft Network, bundled with Windows 95, was a much more attractive investment than America Online. There would be no deal with Allen, who soon sold the rest of his AOL stock for another $30 million profit. “This is positive news,” a spokeswoman for America Online told the Wall Street Journal upon learning that Allen no longer had a stake in the company. “We believe it closes the chapter on Paul Allen and America Online.”
TCI had wanted to invest in the Microsoft Network all along, according to Case, but Gates had been unwilling until Malone began talking with America Online. “As soon as Gates became concerned that TCI might fall into the AOL camp, he quickly expressed a willingness to sell a stake in the Microsoft Network to TCI,” said Case. “But prior to that he had been unwilling to entertain such a notion.”
Before Comdex, Malone and Gates reached a tentative agreement that TCI would invest $125 million in the Microsoft Network, a 20 percent stake. The partnership papers were not signed, however, until after the trade show. When the deal was finally announced publicly, some members of the MSN development team were stunned. “We were shocked, just absolutely amazed,” said one MSN manager. “We had not even launched a project yet and suddenly we had a market value of $625 million!”
Immediately after Comdex, Lill told the development team to relax and to take their two-week vacations. “The group was exhausted,” he said. “I told everyone we would get the project started back up in January. Comdex had been a success. We were happy to be alive. We felt that we had the majority of components running. We obviously had a lot of bugs, and we had some implementation work to do, but we felt like we were going to be able to make it. In one sense, Comdex actually got us on the map inside the company. Internally, people started saying, ‘Hey, maybe they are really going to make it, and maybe this will really matter.’ We started getting some other groups coming in and wanting to participate.”
The Internet had finally moved up a notch or two in importance. One of the team’s managers, Anthony Bay, was assigned responsibility for making the Microsoft Network work on the Internet. For that, Microsoft needed an Internet service provider to supply the telecommunications lines to connect computer users to the Microsoft Network and the Internet. There were many such service providers, including Ablecom, Netcom, PSINet, and UUNET Technology. Microsoft began talks with UUNET in early December and quickly reached an agreement to purchase a minority stake in the company, which was based in Falls Church, Virginia. Microsoft also got a seat on the UUNET board. “I put in a significant number of my resources to make sure that we could deliver Internet access simultaneously with the launch of MSN,” said Lill. “Frankly, considering how aggressive the whole schedule was to begin with, I was taking a big risk... but the Internet was starting to be cool.”
In early December, only a couple of weeks after Comdex, the Microsoft Network lost the media spotlight to Netscape Communications Corporation, which was the center of attention at the Internet World trade show at the Hilton Hotel in downtown Washington, D.C. It was standing room only around Netscape’s booth, while Microsoft attracted hardly any attention. A Wall Street Journal reporter covering the show wrote that Netscape was the “new star of cyberspace.” The trade show itself was testimony to the booming business of the Internet. Attendance had tripled since the 1993 show; the number of companies displaying Internet-related products had jumped from 40 to 115.
Netscape may have been the star, but its main rival, Spyglass, was also drawing large crowds. “We had a little booth, probably 10 feet by 10 feet, and at one point there were so many people crowding around that you could not even see it,” recalled Spyglass flak Randy Pitzer. “I actually got trapped and could not get out of the booth. They were trying to take my last press kit. Someone grabbed it out of my hand. It was a madhouse.”
Although Spyglass and Microsoft had managed to keep their negotiations secret, there had been speculation that a deal for Mosaic was in the works. “We all knew that Microsoft needed a browser, and they did not have enough time to develop something in-house,” said Karen Rodriguez, who was covering Internet World for the trade magazine InfoWorld. “So the question was, where were they going to get the technology? All that was out there were Spyglass and Netscape.”
By this time, Spyglass and Microsoft had pretty much wrapped up their negotiations. In early December, a few days before Internet World, Reardon and a lawyer for Microsoft flew to Boston to meet with Tyrrell and the lawyer for Spyglass. The four went to a Boston Celtics basketball game and spent the next day working on the contract at the Boston law firm of Hale & Dorr, which was representing Spyglass. “Once we reached general terms with Microsoft, negotiating the actual agreement with them was very, very, very reasonable and fair,” said Tyrrell. “I’ve done lots and lots of big OEM agreements, and [Microsoft is] very, very reasonable and fair to deal with, once you have the basic structure of the deal in place. They don’t waste time. I’m a huge Microsoft fan, even though I’ve sat across the table from them. I admire the hell out of them. And it’s guys like Reardon and Allard that I really admire. They are cut from the Bill Gates cloth, in the sense that they are brilliant technically; they understand the big picture; they love strategy, they love to think strategy, they want to know your strategy, they want to know everybody’s strategy; and they’re tough negotiators. They don’t waste time and they get things done. That’s an amazing, amazing, amazing company.”
The agreement between Spyglass and Microsoft contained a provision that Microsoft would credit Spyglass and the NCSA in an “about box” that users could open when they clicked on Microsoft’s browser. But there was to be no formal announcement of the deal. During Internet World, however, reporter Rodriguez had lunch with Spyglass CEO Doug Col- beth, who dropped such significant hints that something was in the wind with Microsoft that Rodriguez went with a story. Once the word was out, Bill Gates went nuts. He called ThomasReardon into his oilier and demanded to know where the leak had come from. Reardon said he didn’t know. Gates said there had better be no more leaks.
