Last modified: August 6, 1999 5:00 AM PDT
Microsoft: Resistance is futile
Such a warning to AOL's chief executive could easily come from Philippe Kahn, a mercurial French mathematician with a taste for both jazz and hyperbole who was uncharacteristically humbled by his experience with the Microsoft juggernaut. The founder and former CEO of software maker Borland International, later renamed Inprise, serves as a cautionary reminder for those who find themselves the target of Microsoft's technological and marketing prowess.
"Beating on your chest and saying, 'We are taking on Microsoft' is one sure way to get their attention," said David Smith, an analyst with the Gartner Group. "No one who has done that has survived."
Borland's lesson is particularly educational as the battle over instant messaging--which some believe to be the next technological foundation for the Internet--takes shape. AOL is in the lead for now, but Microsoft smells blood and has devoted its formidable resources to catch up quickly.
Kahn's experience with the software giant may yield some clues to what AOL can expect of its enemy. His plight shows how Microsoft's perseverance can spell disaster for its competitors even when it's far behind--or completely absent--from a particular technological market.
Borland, for instance, controlled 50 percent of the $600 million database management software market in the early 1990s. At that time, the company's stock traded at nearly $90 per share; today it hovers around $4. Five CEOs have come and gone since 1994, and none has been able to regain the company's former luster and market valuation.
Throughout this period, Microsoft proved a patient enemy. The final chapter in the decade-long battle came just last month, when Dale Fuller, the latest executive to take the helm at Inprise, accepted a Faustian bargain from the software giant. In exchange for a desperately needed $125 million cash infusion, the company gave Microsoft the blueprints for much of its key technology, let Microsoft off the hook by settling long-standing patent disputes, and agreed to tie its own tools even more tightly to the Windows operating system.
While the money represents a huge windfall for Inprise that could help keep it alive, the sum amounts to little more than pocket change for Microsoft. But the transaction signified final victory for Microsoft in an epic battle to control the desktop database and development tool businesses.
And perhaps more important, it fosters the survival of some form of competition in the area that Microsoft can point to if antitrust regulators come knocking. Many speculated that this was also Microsoft's motive behind its $150 million in investment in Apple Computer in 1997.
A familiar pattern
Microsoft beat Borland by undercutting prices, bundling new features into its products and by hiring away its key executives. It is a pattern familiar to many other companies past and present that were unlucky enough to find themselves in Microsoft's crosshairs, including Netscape Communications, Stac Software, Novell, and Corel, as well as Apple.
In the end, all found that resistance to Microsoft seemed futile.
As part of its deal with Microsoft, for example, Inprise agreed to provide full access to more than 100 of its technology patents, including spreadsheet technologies and pending patent applications related to newer products. The company also agreed to license Microsoft's competing technologies in favor of its own, such as C++ foundation classes.
That's a shocking concession for a company that once ruled an important piece of the computer software business and was once a formidable opponent. In the 1980s and early 1990s, Borland was considered one of a handful of companies that stood between Microsoft and complete control of the PC software market.
In the early 1990s, while Microsoft had yet to ship its own desktop database--the only key application that the software giant did not sell--Borland had two: the market-leading dBase, and Paradox, an easy-to-use product for consumers.
Gates poured money and dozens of developers into a project to build a desktop database, code-named Cirrus. In the making for nearly three years, Cirrus would become Microsoft Access, which is now the leading database and is bundled with Microsoft's nearly ubiquitous Office application suite.
"Microsoft's ability to turn on a dime and react immediately, along with the propensity of its competitors to screw up, has kept the company on top," Smith said.
Microsoft's onslaught continued in March of 1992. To counter dBase--a favorite of business application developers at the time--Microsoft shelled out $173 million to buy Fox Software, makers of FoxPro, the No. 2. database on the market.
Gates's acquisition of Fox was well timed. The two companies had been in negotiations for three years, but talks didn't get serious until a threatening lawsuit against Fox was lifted. The suit was filed in 1988 by Ashton-Tate, which Borland acquired in 1991. Ironically, after Borland acquired Ashton-Tate, the company dropped the suit under pressure from the Justice Department and promised not to file a similar suit for ten years, clearing the way for Microsoft's acquisition.
The day the news broke, Borland's stock dropped by 10 percent, and the downward spiral had begun. For the next three years, Borland executives would spend all of their time and energy battling Microsoft.
Borland was under siege, even as the company moved into a controversial $70 million headquarters in Scotts Valley, California, a sprawling high-tech campus that would later be described by visitors as a "ghost town."
Over time, Access and FoxPro gradually ate away at Borland's database lead. And a new, easy-to-use Windows development tool from Microsoft, Visual Basic, despite being considered technically inferior, began to displace Borland's lead in the tools market.
In 1994, as losses mounted, Borland began to drastically cut its staff, which dwindled from a high of 1,700 to fewer than half that today.
Borland also suffered from a familiar Microsoft tactic--aggressively recruiting its competitors' key executives. Borland lost both Paul Gross, its vice president of research and development, and Anders Hejlsberg, the technological visionary behind Delphi, to Microsoft. Court documents showed that Microsoft offered Hejlsberg a $1.5 million signing bonus, a base salary of up to $200,000, and options to buy 75,000 shares of Microsoft stock.
One of Kahn's successors, former Apple executive Del Yocam, even filed a lawsuit against Microsoft to stem its aggressive recruiting tactics.
Yocam claimed that in a 30-month time frame, Microsoft hired 34 of the ailing software developer's key employees with huge signing bonuses, some in excess of $1 million. "They have the audacity to send limos to Borland's headquarters to take Borland employees out to lunch," he said at the time.
While the suit was later settled, the damage had been done. Last year, in an effort to distance his retooled company from Borland's earlier troubles, Yocam renamed the company Inprise and attempted to steer its product lines to higher ground--safely out of Microsoft's sights. But the strategy has yet to pay off.
Earlier this year, Yocam abruptly resigned as losses continued to mount. The company posted a $10.5 million loss in its latest quarter, ended last month.
For AOL, there is a bright spot in this tale: Microsoft pummeled Borland with steep price cuts. In the instant messenger wars, price is not an issue, since both AOL's and Microsoft's products are free.
In retrospect, Kahn said Microsoft's key weapon on both the database and tools front was price. "The fundamental problem I had at Borland was that I was trying to sell what Microsoft was giving away," Kahn told CNET News.com. "Everyone always agreed that Borland built the best technology, but how much better did the technology continue to have to be to compete with what essentially was free software?"