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Dependencies and increasing returns are no guarantee of long-term survival, however, and nobody knows that better than Gates. He and his lieutenants are always on the lookout for the technological breakthrough that could permit some smaller, scrappier competitor to do to Microsoft what Microsoft has done to everyone else. In the past the company was content to let others lead the way-into online services, for example-waiting until there was a clear market opportunity before swooping in. Now Microsoft is starting to do its own basic research, spending $600 million a year trying to build computer systems that can see, hear and understand ordinary English and anticipate a user's needs.
In the nearer term, the company is moving aggressively in markets that are closely linked to its existing business. Its new Microsoft Home division, for example, is an attempt to leverage its position in the market for business desktops, which is becoming saturated, and move into the so-called SOHO (small office, home office) market, which is growing at an estimated 20% a year. Microsoft has begun advancing on Lotus by adding Notes-like groupware features to Windows 95 and Windows NT. And pursuing what may be its most important source of revenue in the next few years, Microsoft continues to work relentlessly on Novell's and Oracle's biggest customers, arguing that it would simplify their lives to have Microsoft software run all their operations, from the back-office file server to the desktop.
Gates has invested in a variety of speculative alliances: with Hollywood's DreamWorks troika (Spielberg, Katzenberg, Geffen) to make interactive entertainment products; with cable giant Tele-Communications Inc., to build interactive TV systems; with cellular-telephone pioneer Craig McCaw's Teledesic Corp., to build a network of low-flying telecommunications satellites.
But Microsoft's primary focus right now is the Internet. Gates in April 1994 called an off-site meeting of his top staff to talk about a technology that had been around for 20 years but had suddenly exploded. Gates confessed that the Internet "mania," as he called it, had taken him by surprise. Millions of people were communicating via computers using software standards and application programs that Microsoft had no hand in developing. Gates could even foresee a day when Microsoft's bread-and-butter programs would be cut out of the market because they didn't work well on the Internet.
"Microsoft got religion about the Internet in a big way that day," says Release 1.0's Michalski. Product managers went back to Redmond determined to make their programs Internet-compatible. The Microsoft Network, originally intended as a straightforward commercial online service, was redesigned to embrace the Internet and eventually steer it in a profitable direction. Microsoft crafted a strategy by which the company could make it easier for people using Microsoft software to do everyday transactions over the networks-pay bills, order from catalogs, check bank balances. "Our plan," says Myhrvold, "is to make the pie really big and take a little slice out of each transaction."