Inside Business: Gates banks on the Web

Microsoft is investing billions on Internet applications, writes Malcolm Wheatley

Bizarre though it seems, growth is a problem for Microsoft. Founder Bill Gates has long fretted over the implications of the expected market saturation in office PCs. The booming home market is seen as offering only a temporary respite.

Just as worrying is the effect of the company's cash mountain on its return on capital: figures published last week showed that the company has nearly $9bn (pounds 5.6bn) in cash and short-term investments that was growing by $18m a day, but it was earning only 5.2 per cent.

Hence the significance attached by the company to the latest release of Internet Explorer 4.0, its Web-surfing Internet browser, and the associated plans to make its Windows operating system and Office suite of business applications better able to link to, and communicate with, the Internet. The company has concluded that switching more consumers on to the Internet is the key to maintaining growth for the industry.

"Getting more users on to the Internet is the first job our industry must do," said Paul Maritz, the group's vice-president, at a gathering in Seattle to showcase the product. "It's the one way that we can continue to grow at 10 to 15 per cent."

Microsoft intends to spend roughly three-quarters of its research and development funds on inventing and adapting software so that it can be used with the Internet - around $1.5bn in the fiscal year just started, according to Mr Maritz. Given that last year's total research and development expenditure was $2.1bn, the company is clearly investing an enormous amount in an area regarded as insignificant a couple of years ago.

What is more, the move sees Microsoft leaving the relative comfort of the PC market, where it has hitherto almost exclusively concentrated its efforts, and start to tackle other sectors. The intention is to make the new browser, and its successor, the software of choice for Internet surfers, whatever their computer. Accordingly, the software will be available on a wide variety of platforms: it will come not just in Windows 95, Windows 3.X and Windows NT versions, but also in Macintosh and UNIX versions. "We are now 110 per cent focused on the Internet," stressed Mr Maritz. "We haven't lost our fervour."

In addition to Web browsing, the software offers users a host of features to reflect the way that the rapidly evolving Internet is developing. Indeed, in much the same way as the company drove a number of manufacturers of handy "utility" programs out of business by incorporating their features into its Windows and DOS operating systems, it is likely that the collection of software tools incorporated in the new browser will prove highly popular, at the expense of manufacturers of competing stand-alone products.

The bundled utilities include programs to video-conference over the Internet, make telephone calls over the Internet and host Web pages. In addition, tools are included to help users "subscribe" to Web pages without having to call them up each time. Critically, although Mr Gates has vowed not to renege on a promise to continue to supply the Internet browser for free, a tactic adopted to try to knock Netscape, the former stock market darling and market-leader, off its perch, these tools at least offer the suggestion of a possible revenue stream. As one employee acknowledged during the session: "Bill has said nothing about those products remaining free for ever."

Netscape's share price has plunged to around $35, well below its immediate post-flotation 1995 high of $85.50, and the company continues to fight Microsoft through anti-trust courts in the United States, claiming uncompetitive practices. This is mainly centred on the "give-away" policy: Netscape charges more than $50 for its product. In addition, the company is concerned at Microsoft's ability to exploit the tight integration that is possible between an operating system such as Windows and the application programs, such as browsers, that run under it.

This is also a feature that worries analysts, though for the opposite reason. Internet Explorer is so tightly interwoven with the next release of Windows, now officially known as Windows 96 rather than its codename Memphis, that it makes the program too unwieldy. Wired, the influential magazine, observed that people were eschewing trial versions of the Microsoft's new browser, regarding it as "bloated". Peter Jackson, an industry columnist with PC magazine, has also described it as "insane". Since 1995, the so- called browser wars have seen Microsoft's share in the critical US market reach around 30 per cent.

The stand-alone version of the latest browser, which company sources say is due for release this month or next, should see that share climb further. By so seamlessly interweaving the browser with the next release of Windows, which is due in the first quarter of 1998, Microsoft is gambling that, with the Web just a click away, people will pour on to the Internet in sufficient numbers to provide the growth fillip that it needs. In the meantime, Mr Gates, no stranger to gambles, will be betting that once again, the pundits have got it wrong.