It'll be all right on the net

Despite the legal battles in the US, the British subsidiary of Microsoft is powering ahead for market share. Peter Koenig reports

Neil Holloway talks like Bill Gates. The managing director of Microsoft UK thinks like Gates. He even looks a little like him - a brainy man with a Masters of Philosophy in Operational Research and Control Engineering who has made peace with himself as a swot in an anti-swot world. Consequently, he is unlikely to get excited about Microsoft's quarterly results to be published on Tuesday, even though they almost certainly will be excellent. Analysts expect a 15-20 per cent improvement on the $1.9bn (pounds 1.2bn) in operating profits earned on turnover of $4bn in the same quarter last year. "Results reflect the past," he says.

Instead, Holloway is focused on the months ahead. On the positive side, underlying market demand for new technology is likely to remain strong. Also, with its Cambridge research centre and Gates's well-publicised visit to Downing Street last year, Microsoft has struck up a relationship with the Government.

The Government and the world's number one software maker see gains in pushing the UK towards a knowledge-based economy, deriving wealth from the digital revolution.

"Microsoft and New Labour have much in common," says Dean Bubley, a director of market research firm Datamonitor. "Both believe in high-concept messages. Both believe in their people being on-message."

On the negative side, Microsoft faces a resumption of its anti-monopoly courtroom battle with the US Department of Justice which is in recess until May, while Judge Thomas Jackson presides over another case. Regardless of the outcome, the concluding phase of Washington's effort to seek injunctive relief on Microsoft's inclusion of its browser in Windows will once again shine unfavourable publicity on the company.

In the face of these cross-currents, Holloway and Microsoft UK have a two-pronged strategy, part defensive, part offensive. The subsidiary has 1,000 employees - virtually all based at the Microsoft "campus" in Thames Valley Park, Reading.

The company does not break down its figures country-by-country, but the UK subsidiary says it is the most successful European operation. Since European business accounts for 25 per cent of Microsoft's business worldwide, you can estimate that Microsoft UK earned pounds 200m in operating profit on pounds 600m in sales in the year ended last 30 June. This is more than the profits of any IT company listed on the London stock exchange.

Microsoft has 15 million UK customers, but it sells directly to none of them. It manufactures software in Dublin and distributes it via a pyramid- shaped network selling consumer products such as computer games at the base, and operating systems to big business at the peak.

It is this customer base, and, in particular, the business part of it, that Holloway and Microsoft are working hard to defend against the bad publicity emanating from Washington. The US government's anti-monopoly suit, Holloway concedes, "is giving some customers concern and the wrong impression. Everything we do is for the customer. We compete legally."

Offensively, Microsoft UK is focused on winning market share at the big business end of the software market - and particularly from US rival Oracle.

"Microsoft is obsessed with Oracle, partly because they're next door in Thames Valley Park," says Bubley at Datamonitor. "Microsoft made a condition of its move to the park a change in street name. Otherwise their address would have been Microsoft, 2 Oracle Road."

Microsoft is also focused on Oracle, Bubley says, because the rival US company has a leading share of the UK database market - the market for software providing the foundations for big company operating systems.

Meanwhile, Microsoft is aiming to position itself at the heart of the UK's internet revolution. Noting the impact that Dixon's Freeserve has had on waking up the nation to the web, Holloway suggests the UK is only 18 months behind the US in embracing a "web lifestyle". The companies profiting most from this shift will be those that best associate themselves with the new technology, he says.

Microsoft's own network of websites - allowing car buying, home shopping, travel booking - now reaches 44 per cent of the worldwide web audience. That's big but less than the market leader, AOL. In the UK, Microsoft is signing up partners for its internet operation. Last month, for example, the company did a deal with WH Smith and BT to offer free access.

The internet, Holloway suggests, offers Microsoft the opportunity to increase its sales - if its software becomes integral as consumers and businessmen log on to the web. Simultaneously, the net poses a threat. Internet standards which can be applied on any computer could undermine Microsoft's dominance in the software market.

This is partly what the anti-monopoly suit in Washington is about. It is what Microsoft's competition with US rival Sun Microsystems is about. "What we're offering is an open app-roach to the net, a single language for all users," says Shankar Trivedi of Sun's UK subsidiary.

"Linux, which is an open operating system that competes with Microsoft Windows, is another threat," adds Tony Occleshaw, a UK IBM marketing manager.

But Holloway appears unruffled by the cross-currents. Indeed, he turns the challenges they pose outward. The FT-SE 100 companies still at the top in five years, he says, will be those who embrace the net.

TECHNOLOGY SECTORS

Mobile phones PCs Internet hosts*

Subscribers, % of population per 100 people per 1,000 people

US 25 35 38.4

Germany 13.3 17 8.8

France 15.4 16 4.2

Britain 17.8 20.0 12.6

Netherlands n/a 20.0 17.5

Sweden 37.0 18.0 26.4

Italy 28.0 11.5 n/a

n/a not available *Includes all hosts ending in `com', `net' and `org'

Source: Fortune magazine