SEATTLE — There aren't many things that can strike fear in the heart of Microsoft Chairman Bill Gates, the richest man in America, but the Internet computer network is one of them.
Over the past 18 months, the global Internet has exploded into the most important force in the digital universe, threatening to dislodge Microsoft from its perch as ruler of the personal computer industry.
On Thursday, Gates struck back, outlining a radical new strategy that acknowledges Microsoft's inability to control this new world even as it shows how the Redmond, Wash., software giant intends to embrace it and mold it.
The gaggle of tiny rivals that had stolen a march on Microsoft in the Internet gold rush were already quaking Thursday, or at least their shareholders were: The stocks of red-hot Internet companies such as Netscape Communications plummeted on fears that Microsoft would do to them what it has already done to most of its rivals in personal computer software.
But industry observers believe Microsoft's commitment to the Internet will ultimately make a hot market even hotter--and accelerate the Internet's emergence as the most important new communications and information medium since television.
"This is like a new continent and there is room for everybody," said Bill Joy, founder of Sun Microsystems and one of the original creators of the Internet. "If anybody was hesitating before, they aren't hesitating anymore."
Gates, who once hoped to build his own private online world, made some important concessions to show his newfound commitment to the Internet--a collection of interconnected computer networks that thus isn't owned or operated by any single entity.
He eased fears of a ruinous standards battle by agreeing to license a popular software language, called Java, that was developed by rival Sun Microsystems. He also said the company was negotiating a truce with rival Netscape to meld two separate standards for safely processing credit card transactions.
But he also launched a frontal attack on Netscape, the leading provider of Internet software, by announcing that Microsoft would offer Explorer, its own software for navigating the Internet's World Wide Web, for free. It will also incorporate it into some of its business software.
That puts heavy pressure on high-flying Netscape: The company went public this summer at $28 a share and the stock shot as high as $174 earlier this week, but on Thursday the shares plunged $28.75 to close at $132.50 on Nasdaq.
"This is a very aggressive effort from Microsoft," said Chris Le Tocq, an analyst at the market research firm Dataquest. "They are pulling the rug out from under their competitors."
Certainly, Microsoft's dominant position in the PC software business puts it in an enviable position to capitalize on the Internet mania. Indeed, Microsoft's control over the DOS and Windows operating software that controls more than 80% of all PCs worldwide remains such a powerful lever that the Justice Department is continuing to investigate possible antitrust violations by the company.
While Microsoft is a bit late to the Internet party, the company has long triumphed by being a smart and voracious follower rather than a leader. Speaking coincidentally on the anniversary of Japan's attack on Pearl Harbor, Gates paraphrased a Japanese admiral when he said the aggressive Internet companies challenging Microsoft's dominance had "awakened a sleeping giant."
But it's also true that few technology companies have made the transition from dominating one technological era to another. IBM, for example, ruled the computer world for decades only to be humbled by the PC. And few doubt that the fundamental change underway today--from an era of stand-alone computers to one of powerful and pervasive computer networks--is just as epochal.
Microsoft isn't the only behemoth scrambling for traction in this new world. IBM said last week it is reorienting itself with what Chief Executive Louis Gerstner Jr. called an "enterprise-wide program" aimed at the Internet. Failure could undercut the value of the company's multibillion-dollar acquisition of Lotus Development Corp. and its Notes networking software.
Cable and phone companies that were promising interactive television as the next big market now aim to provide net surfers with high-speed communications links. Companies such as Digital Equipment that were promoting their computers as the best way to store movies for interactive television are now doing a booming business selling their machines as servers for the Internet.
For it is the Internet that will provide, via the PC, what many had expected the cable companies to provide via television: new types of interactive entertainment services, electronic shopping, customized news reports, and even--eventually--video on demand.
Generally, analysts were impressed by both the detail and the comprehensiveness of the strategy Gates outlined Thursday.