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Chief executive of the year.

Your verdict is in. Chief Executive readers have nominated and a panel of peers have confirmed Microsoft's William H. Gates III as the 1994 Chief Executive of the Year. A number of factors influenced the selection committee. "Gates is a dynamic business leader whose vision has set the standard for the next century," says Deloitte & Touche's Mike Cook. Adds Mellon Bank Corp.'s Frank Cahouet: "He developed a business, nurtured its growth, and sustained its momentum while maintaining a reputation for providing a high-quality product." Boeing's Frank Shrontz was impressed by his "vision, leadership, and perseverance in a tough industry." Andersen Consulting's George Shaheen admires Gates' adaptability in creating an industry giant "where rapid change and technological obsolescence are facts of life."

Was Microsoft's financial performance a factor? A five-year net income compound annual growth rate of 50 percent is heady stuff. But other finalists also had impressive results. In short, the judges sought a CEO who fundamentally changed his industry. As Data General's Ron Skates sees it, Gates is "one of the dominant influences on the evolution of the entire computer industry." Liberty Mutual's Gary Countryman reckons he "is one of those rare individuals with the leadership skill to make a successful transition from entrepreneur to corporate leader." Ryder System's Tony Burns feels "he has done a remarkable job of keeping himself and his company on the leading edge of technology and has created great value for shareholders."

Outgoing 1993 Chief Executive of the Year Jack Welch of GE perhaps sums it up best: "Bill Gates' passionate pursuit of a dream he had 19 years ago created a revolution that has changed the way business is done around the world." Chief Executive salutes Bill Gates, 1994 Chief Executive of the Year.

Mr. Software

Some maintain Microsoft's Bill Gates is to computing what John D. Rockefeller was to oil, Henry Ford was to autos, and Andrew Carnegie was to steel. With the information highway upon us, Gates is in a unique position to shape the next phase of computing's future--and, for that matter, everyone else's.

Though Alexander Graham Bell hardly comes to mind each time a telephone call is placed, without Bell--or someone like him--the history of the 20th century would be quite different. Similarly, folks don't think of Bill Gates each time they click a mouse on a personal computer, but his imprint is there. Microsoft's operating system, MS-DOS, is installed on more than 140 million IBM PC and compatible microcomputers around the world--roughly 90 percent of the total. Microsoft Windows, which the company turns out at a rate of 2 million copies per month, can be found on over 50 million computers worldwide and generally is regarded as the operating standard for PCs. Its software programs, designed to run under Windows, are best-sellers, and comprise almost half the market in such areas as word processing and spreadsheets. Microsoft also leads in applications programs for Apple's Macintosh PC.

In one sense, Gates has a leg up on Rockefeller, Ford, and Carnegie: Markets for oil, autos, and steel predated the careers of the turn-of-the-century trio. In 1974, when Gates and his Seattle friend Paul Allen developed a BASIC language for the Altair 8080, the world's first personal computer, few believed there would be a demand. With visions of computers in every home, the two founded Microsoft as a partnership a year later. A turning point came in 1980 when IBM turned to Microsoft for an operating system for its first PC. The deal permitted Microsoft to license the software to other hardware manufacturers, allowing it to collect royalties from a broad range of hardware vendors. Microsoft made the most of this advantage, eventually becoming the largest and most profitable company in the software industry.

Since it went public in 1986, the company's revenues have exploded from $198 million to almost $3.8 billion last year. Net income has grown at a compound annual rate of nearly 50 percent. After five splits, $1,000 worth of Microsoft stock from its initial public offering in 1986 would be worth $43,000 today. Gates' 27 percent equity stake is worth over $7 billion. Microsoft employs 14,700 people in 50 countries. It is sitting on $3 billion in cash with no debt and has an annual cash flow of over $1 billion. With a $30 billion market capitalization, Microsoft is larger than Chevron, Motorola, or Intel.

All of which means the 38-year-old Gates ought to be the industry's Cheshire cat. But if so, he conceals the grin well. Pale, with shortish, uncombed hair, he is no longer a college-student-turned-boy-wonder. Gates is perhaps the only Fortune 500 CEO to be recognized in public places. Travelers to and from Seattle are accustomed to seeing his blanket-clad figure in coach class. Most people who know or have dealt with the chairman and CEO put him at the extreme right of the intelligence bell curve along with theoretical physicists, gene splicers, and baseball buffs who comprehend the infield fly rule.

A smile at greeting vanishes quickly. Gates turns to business, rocking backward in his chair, elbows on knees. His glasses are in need of a cleaning. His mind races like a projectile aimed at the future, and he's eager to banter about Microsoft's game plan and the evolving computer industry. The company's vision of a computer in every office and home has been expanded to include every pocket, car, and wallet. Microsoft's newest goal is "putting information at your fingertips," Gates says, meaning users would have universal access to all information in a digitized form.

The company also is focusing on usability--making Microsoft products more accessible--both in operating systems and applications. For example, graphic icons now come with descriptive phrases reminding users of a given function. Among other things, the company's IntelliSense program corrects spelling errors on the fly as it recognizes the user's intent and produces the correct result.

Meanwhile, consolidation is sweeping the software industry. Cutthroat pricing and the increasing agility of rivals Lotus and Novell are raising the stakes. Microsoft's Windows NT, aimed at the growing market for client/server networks, is currently in a dead heat with Sun Microsystems for the No. 1 position in operating systems for workstations. Microsoft at Work is an effort to carve a position in integrated office computing by linking computers with phones, copiers, and printers. Traditionally, the company has excelled at marketing software to individuals. But under a dramatic restructuring launched last March, one out of four Microsoft employees is now engaged in consulting or product support. "We want to be a strategic supplier of technology to companies," says Bob McDowell, vice president, Microsoft consulting.

What IBM used to be, Microsoft has become. So absolute is the software company's grip on the industry that the Department of Justice is investigating it for alleged anti-competitive behavior. Rivals including WordPerfect and Lotus Development allege Microsoft is unreasonably restricting access to its forthcoming operating system, called Chicago, to gain an advantage in its sales of applications software, such as spreadsheets and word processors.

In any case, the question remains: Can the software giant excel in computing's next battleground, multimedia, an area where its dominance is by no means certain? Gates has spent $150 million so far to develop an end-to-end multimedia system. Nonetheless, smaller, more nimble competitors boast of stealing Microsoft's thunder in this field. Competitors call Tiger, its current approach to interactive media file-server software, a "paper tiger." But as industry expert Patricia Seybold, president of Patricia Seybold Group, observes, "One of Gates' strengths is his ability to run around and get in front of the parade."

Gates argues that one of Microsoft's key resources is the loyalty and cleverness of the people around him and, some would add, their foresight. Steve Ballmer, executive vice president for sales and support and the company's effective co-No. 2, told the Financial Times, "We are certainly paranoid enough about the potential to fail that we are looking very hard for the potholes in the road." Gates himself is a hard-charging leader. "Cold, calculating, and extremely knowledgeable," observes Alex Jacobson, chairman of Inference Corp., an artificial intelligence software firm that has dealt with Microsoft. CE's J.P. Donlon recently talked with Gates in his Redmond, WA, headquarters.

REPEAT PERFORMANCE

For a long time, Microsoft was the upstart, David rather than Goliath. Now that it is the leader--and a very profitable one at that--how will you maintain that position and capitalize on your success?

In terms of software, we've never really been David. We're only the 20th largest firm in the computer industry, but we are the largest software company. Even when we only had two employees, we were the only microcomputer software company out there. We've always had strong products. We run the company on graphical interface by supporting Macintosh and Windows, because we thought graphical interface was the way to go.

In the long term, we probably won't be able to maintain the profit percentage we've enjoyed recently--that's what happens when you're bringing in 25 percent after taxes for a number of years. In the finest industries you can name, 15 percent over any period of time is pretty good.

Nevertheless, there are so many opportunities out there, so much we haven't done yet. In our business, the unbelievable improvement in microchips and communication technology allows us to take on new projects. Software is the key--it enables people to use their PCs to communicate, to make market decisions, to learn, to be entertained.

In this industry, looking more than five years down the road, the challenge is to broaden your skill set and to determine what new partnerships and research you need. The rewards go to the company that can peer into the fog of the future and sort through the opportunities.

We take a long-term view of things--especially in terms of hiring people, working with customers, and investing in research. So, we're beginning some ambitious projects related to this phenomenon called the information highway. Think of the impact this might have. The very way we organize business--what's inside a corporation versus research you find outside, for example--will be affected.

We're investing enormously more in developing software products and technologies for the information highway than anyone else. We've spent more than $100 million so far this year on it. And that amount will keep increasing. The same way Windows enabled the software industry and Microsoft to grow, this information highway will enable software companies to renew themselves.

Look at encyclopedias. When most people grew up, encyclopedia meant "World Book" or "Britannica." During the 1993 holiday season, more Microsoft Encarta units were sold than any other CD-ROM encyclopedia program.

Look at banking. We're working with banks to enable users to complete transactions at home; to record all checks, credit-card payments, investments; and to analyze all transfers to their records.

Banks have been talking about that for quite some time. Will it finally happen?

Absolutely. Cheap communications and intelligent devices, mainly the PC and a little bit of software, can make it happen. Now that most households have PCs, people already have made the investment in the machine, and they are familiar with how it operates.

The world of consumer banking will be revolutionized. And that's just one example. The applications of this type of technology--intelligent screen-based devices--can extend to choosing movies, teaching students, filing complaints with businesses, and ordering products.

Perhaps I'm something of a zealot in believing in these opportunities. If I'm wrong, Microsoft won't be able to grow as much in the future as it has in the past.

LET'S GO TO THE VIDEOTAPE

Microsoft has joint ventures and relationships with multimedia companies such TCI and AT&T. What does the future hold in this area?

As the PC rapidly improves and is connected to networks, such as corporate E-mail networks, online services, or the Internet, it moves into the arena of video signals. For the first five or six years, this technology will be popular in business, which already has a large base of PCs and networks, where the collaborative work, customer service, and marketing will justify the cost.

The Holy Grail is going beyond the business market into the home, especially in areas such as education, travel, shopping, and entertainment. Obviously, many companies such as Microsoft, Time Warner, AT&T, MCI, and TCI, want to lead this new industry--either by providing software or networks. So, a lot of pilot-testing is going on now in terms of types of services, user demographics, necessary hardware, and how much people will pay for the services. This won't happen overnight.

It's sort of a $100 billion question: Is it worth spending $1,500 dollars to hook up each of the, say, 60 million cable households? Does the revenue flow for transactions and movie viewing justify the capital cost, which funds the box in the home and the network upgrade?

No one has found an answer yet. We do know the software will have to be pretty darn good, and many companies will have to participate.

The software industry is changing: Prices are tumbling, and banks and other businesses are creating their own, proprietary products. How is Microsoft dealing with these changes?

We're at the center of the industry in the sense that we encourage software developers to create new applications that drive market growth, such as CD-ROMs with home or educational software. In 1986, we began "evangelizing" these new applications at conferences. It is fun stuff. If I demonstrate Microsoft Complete Baseball or Cinemania to an audience, people recognize they're seeing something neat. The industry is still growing. We're just getting into the U.S. home-education market. And we eventually will move into the international arena. The growth will be somewhat higher inside the U.S. than outside, because the PC saturation level is substantial in the U.S., so there are more customers to sell to.

It's a competitive business. The Mac is very popular, and IBM alone is writing four different operating systems to compete with us and other vendors. And software rapidly becomes obsolete within two or three years. If we don't redo a product, then somebody else will come along with something that replaces it. Ironically, the software that has made a difference for us is that which people initially didn't think was that important, such as MS-DOS or Windows or our networking software.

Our original vision of a computer on every desk must be amended to include a computer in every pocket, car, and wallet.

Is this the future of personal computing?

Yes. The key is screen size. You'll have a pocket-sized computer, a tablet-sized computer, a desk computer with the keyboard directly wired to the optic fiber, and one whose screen covers an entire wall.

The wallet PC will hold your schedule, financial data, hundreds of digital photos of your kids, and whatever else you carry around in your wallet. Credit cards and keys will be replaced by this digital device that also knows the locations of restaurants and can take messages. By the end of the decade, this device will cost a few hundred dollars and will be widely used.

Besides screen size, the only thing really distinguishing machines will be whether data is communicated in a wireless way or not. Communication is much faster when you're wired in. But, of course, wireless gives you the flexibility to carry it around.

BULLY BOY?

It's been said Microsoft looks at other companies' products, setting up the expectation it may buy them, then it borrows the ideas and develops them alone.

There's no need for us to borrow anyone's secrets or approaches.

What about the Micrografx case, in which Microsoft sought to acquire the source code for a software called Mirrors, which translated Windows programs into programs for OS/2, the operating system Microsoft and IBM had been developing as a potential successor to MS-DOS?

That happened about six years ago. Micrografx is a Texas company that develops graphics software for PCs. It was the first independent software company to put a product on the market for Microsoft Windows--In-A-vision, a drawing program. We signed an unusual contract with Micrografx, in which we paid it $50,000 to look at its code and evaluate it. Depending on what we saw, we had the right to give it back to the company with no residual pollution--meaning that our people who looked at it could do some more work. We examined the code, and it wasn't directly applicable to what we were trying to do. So we sent it back, and the company went public, claiming we didn't have the right to do anything with the code at all.

So is Microsoft the silicon savior or the silicon bully?

Neither. We create software products. We put them in a box, and people decide whether to buy them. Our success comes through great products such as Windows, Excel spreadsheet, or Word.

THE NEXT FRONTIER

Microsoft seems to be mainly in the desktop market, but some have indicated that the next frontier is network computing, an area in which you lag larger companies such as IBM or Unisys. How will you meet this challenge?

Our business-computing division focuses on this. The key to our success would be to bring powerful software onto the same kind of grade price-performance platform we have for the desktop.

One of the industry buzzwords is "client/server"--which means the mainframe and the desktop machine work together. Thus, combining our product, Windows NT, with the new generation of servers that companies such as Compaq are creating provides one solution.

We've done an immense amount of R&D in this area, and we are starting to make some real strides, getting banks, manufacturers, and investment companies to buy into this Windows NT approach. We kicked it off less than a year ago, so getting all the consultants and the software up to speed is a time-consuming process. But so far, the people investing in it have given us positive feedback.

Is the mainframe dead?

It depends on what you mean by those two terms. Corporations will always store their data bases on a big set of computers. In terms of new purchases, though, far more efficient, cost-effective machines are available now, even for the most demanding user, such as an airline reservation center or a creditcard company.

That doesn't mean we don't need to accommodate the mainframe, because companies already have paid for it. They run their applications on it, and they store their data bases on it. We have to ensure that the new technology can co-exist with the mainframe. But in terms of any new sales, the buying binge is over.

Should the people who currently operate mainframes junk them?

No. Once you've paid for something like that, your marginal cost to keep it running is mostly maintenance. The main motivation for replacement comes when you want more flexible software systems. For instance, when businesses re-engineer their processes, they often want customer-services representatives to be able to access all the information about customers who call with a complaint, so they can solve the problem online.

To do tasks such as this, companies need to upgrade their information systems. That often means rewriting the software for client/server applications.

You were once quoted as saying that IBM has seven to 10 years to live. How would you judge its prospects today?

That quote was not accurate. In fact, we worked with IBM in the creation of its PC business. In terms of software, IBM is still one of our best customers because of the volume of PCs it sells. It is the highest volume seller of PCs in the world and gets over $12 billion of its revenue from that.

GOING PC

Do you think the use of personal computers is an area in which CEOs should lead by example, and if so, how?

I could never come close to doing my job if I didn't have E-mail to stay in touch with a broad set of people. My employees want to know what I'm thinking, and they want to be able to tell customers how we see things. They want to write an E-mail message that goes around the world to all the managers affected. I, on the other hand, want to be able to call up any product in any country and see how it compares to budget.

The world moves very fast, and CEOs have many demands on their time. I can't imagine being without a tool like this. Even at a meeting, I often take my computer, and as I listen, I create E-mail messages. But to make it work, the CEO must be comfortable with the system, and all employees must use it. Everyone must have access to the same data.

Some CEOs have Executive Information Systems that provide them with different data than everybody else. It's a system designed just for them. My system is not an EIS; it's a system we built for everyone else in the company to use. The paradox is that in a sense, CEOs are the last ones who need such a system, since they are surrounded by all sorts of smart people who can gather information and summarize it in nice ways. Nevertheless, they should use the EIS and save the smart people for things that require in-depth analysis.

NEXT IN LINE

Our selection committee noted your lack of a succession plan, something of a blot on your CEO report card.

The external visibility of a company in no way reveals the complexity of its inner workings, the innovation in its products, and the great work that is accomplished. I am a small percentage of that. I try to ensure that it all makes sense and that we hire good people. And every once in a while, I come up with one or two ideas in a particular area. But the key is the framework of our vision and the employment of talented people.

Our executive staff is largely unsung, because it is overshadowed by having one founder who represents the American success story. That said, in a biased way, I think my absence would be missed. I haven't completed one of a CEO's jobs--haven't performed well on one part of the CEO report card--which is having a standby ready to step in. Someone will have to rise into the position--someone who can provide business leadership and technical leadership. The top two or three people must work together closely as a team, but I bring the product leadership to that small executive group.

No matter what, I don't plan to change my role for the next decade.

Are there any CEOs living or dead whom you have used as a role model in your own leadership of Microsoft?

GE's Jack Welch, for one. One of the reasons I'm excited about receiving CE's Chief Executive of the Year award is that he will be at the celebration dinner. I'm a big admirer of his and of the things he did, such as leading the charge toward corporate re-engineering.

In the computer industry, I would point to Intel's Andy Grove and John Akers, formerly of IBM. We learned a lot by working closely with IBM.

I'm still trying to learn wherever I can.

What would you like to change about Bill Gates going into the future?

Sometimes I'm torn between how much time I can spend on the product side versus the broader CEO job.

Meanwhile, I don't want to grow old; I want to maintain the kind of energy and intelligence necessary to read and synthesize everything. When I was in my early 20s, I always thought somebody in their late 30s wasn't necessarily all that sharp. That's the chauvinism of youth.

Now that I'm in my 30s, I've decided I'm still fairly sharp. But I envy that ability to stay up all night like I used to.

Time is a big limiter. I have to sleep every night, and it wastes so much time.

A FLIGHT OF FANCY ON THE INFORMATION SKYWAY

It's the year 2000. Welcome aboard a United Airlines non-stop flight to the destination of your choice.

Under your seat in this Boeing 777 is a personal computer linked to a network through Microsoft's Windows Operating System. As you buckle your seatbelt, note the flat screen on the seatback in front of you; a keyboard is available on request, along with the customary headphones. Swipe a major credit card through a device on your armrest, click on your mouse, and strap yourself in for a trip on the information skyway.

Want to play a game of poker with someone in 24C? Click on the appropriate groupware. (If gambling is permitted, air casinos might raise enough revenues to offset ticket prices. Who knows, tickets might even be free to high rollers.) Moreover, passengers can browse the menus of restaurants in their destination city and make reservations.

Instead of shopping from a duty-free cart, passengers will shop by computer for a limitless variety of goods, to be delivered on arrival in a customized choice of color, style, and size.

This flight isn't ready to take off yet, but given the rapid pace of technological change, it may happen soon.

TECHNOLOGY GETS PERSONAL

Computers become twice as powerful, or twice as cheap, every 18 months. This inexorable phenomenon, says Nathan Myhrvold, Microsoft senior vice president, advanced technology, means that "computers are like lettuce; they wilt on you."

It also means that when it comes to technology, cost increasingly is less of a barrier to entry. CEOs take note.

A corollary trend, notes Myhrvold--generally regarded as Bill Gates' alter ego when it comes to Microsoft's technology vision--is that comparable computing power comes in ever-smaller, ever-cheaper packages. For example, he says, American Airlines' giant Sabre reservation system, which today runs on 14 mainframes, may run on a single PC by the end of the decade.

Technology developments will continue to change the products and services provided by entire industries--and the assumptions that drive them. For the price Blockbuster pays to purchase four copies of a rental video, Myhrvold says, it will be able to put a movie on CD-ROM and download it simultaneously to any number of interactive users. Goodbye, home video rental outlet.

"In the future, the ability to find and filter personalized information will be key," Myhrvold says. "The only barrier will be human skill and the spark of creation."
COPYRIGHT 1994 Chief Executive Publishing
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Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:CE Award; includes related articles; interview with Microsoft CEO William H. Gates
Author:Donlon, J.P.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Jul 1, 1994
Words:4413
Previous Article:Capital needs in the '90s.
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