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CEO trying to win Microsoft some friends

| Sunday, Oct. 5, 2003

For millions of consumers at home and at work, using a computer means using Microsoft.

Its Windows operating system powers more than 90 percent of the world's personal computers. Its programs for Internet surfing, word processing and spreadsheet calculations barely have competition. It is aggressively pushing into online gaming, entertainment and corporate systems.

So why is Chief Executive Steven Ballmer demanding that his troops rethink everything?

The ground is moving under Microsoft's omnipotent footprint, as the technology industry slows and emerging threats endanger what has been inexorable growth.

In the more than three years since Ballmer took over day-to-day control from Bill Gates, the company has overhauled its structure to force improved financial performance. It issued a modest dividend in January and then recently doubled it, hoping to make the stock more attractive to investors. And it eliminated employee stock options, a lifeblood of most technology firms.

But Ballmer, 47, also is driving what might be the most ambitious change of all: transforming the company's culture and image. Legendary for arrogant, boorish and sometimes illegal dealings, Microsoft seeks to improve its relationships with customers, partners and government regulators.

Ballmer knows Microsoft needs more friends to get where it wants to go, to be the center of a world where computing can happen wherever and whenever people want it.

"I think Bill and I both recognized we needed to take a different tack in terms of the way we relate to our industry and our customers," said Ballmer, who dislikes taking sole credit for any of the company's strategic thinking.

Stalked by Linux

Most dangerous for the company is fast-spreading competition posed by open-source software such as the Linux operating system. Open-source code is developed collaboratively and made freely available on the Web but also is being embraced and marketed by some of Microsoft's top competitors, such as International Business Machines Corp.

With their lower costs and greater ability for users to manipulate its code, Linux and other open-source variants are gaining traction with operators of corporate and government networks, an area Microsoft has targeted for aggressive growth with its server systems.

Meanwhile, businesses and consumers alike are howling for relief from an onslaught of viruses, worms and other attacks that seem to exploit Microsoft software with particular ease. Critics say Microsoft has sacrificed security at the altar of sales and profits. The company rejects this, but all its executives cite security as its greatest short-term problem, and it is pleading for patience.

That's a tall order for a company that might have $50 billion in the bank but little goodwill.

A 'kinder, gentler' Microsoft?

Which is why -- weeks before Microsoft Corp. announced its decision to eliminate employee stock options, and to treat the cost of those already awarded as an expense for accounting purposes -- top executives took an even more unusual step: Knowing that the move would undercut the interests of many technology companies, Microsoft officials called an array of Silicon Valley executives to ask how they might soften the blow of the announcement.

Young technology firms with little revenue to use for high salaries use options to attract and keep talent. Options allow employees the right to purchase company stock at a set price. If the stock goes higher, they can sell the stock and pocket the difference.

Microsoft's decision to break from that practice came as regulators considered whether to require companies to count options as expenses, a move that would sharply reduce earnings for many companies. Microsoft declined comment on that debate, saying only that it was acting on its own for business reasons.

"We did appreciate their reaching out," a Cisco Systems Inc. spokesman said about a conversation that sources said took place between Ballmer and Cisco Chief Executive John Chambers, an ardent opponent of expensing options.

Microsoft also has been methodically settling, or seeking to resolve, myriad legal cases against it. Not only did the company settle its major antitrust case with the Justice Department two years ago, it has since settled private suits with several competitors.

But many outsiders wonder whether Microsoft is the same company, only marketed in warmer, fuzzier shrink wrap.

"Is Microsoft a kindler, gentler company• I see no evidence of that," said Ken Wasch, head of the Software and Information Industry Association, which represents 600 companies and is appealing Microsoft's antitrust settlement because it says it is too weak. Wasch said Microsoft forced one company to withdraw from his organization by saying its "preferred" customer status was jeopardized by its membership -- an allegation Microsoft denies.

Wasch and others say Microsoft has simply moved to a strategy of spending more of its free cash on enhanced lobbying, campaign giving and legal dealmaking.

Microsoft now spends roughly $6 million annually in lobbying, discouraging governments from using open-source software and pushing its vision of anti-spam legislation.

Critics also say that despite the court findings of illegal conduct -- including a recent ruling that it infringed another firm's patented technology -- Microsoft dominates the software market more than ever.

Many familiar with the company say it will take a long time for Microsoft to build bridges to the industry.

"The bottom line is, when there was a ton of industry opportunity, people felt they could more actively afford to take swipes at Microsoft," said Linda Stone, a former vice president. "As opportunity has dried up, people are being more careful about whether they burn bridges. Unfortunately, I continue to hear from people the undercurrent of mistrust and concern. It is very much there. People want to be able to trust Microsoft and to trust Microsoft products. There is still work to be done to rebuild that trust."

Embracing new values

Ballmer insists he will achieve the goal, in part by reorienting the company's 50,000-strong work force. "Open and respectful" is now a Ballmer mantra for employee behavior with one another and with customers, partners and regulators.

Employees at a company known for bruising meetings are being evaluated in part on their embracing of the new values. Regular meetings with customers and outside developers to hear complaints and suggestions are required. Roughly 8,000 of the firm's workers received training in compliance with the Justice Department antitrust settlement.

"People in the company take their cue from their leader," said Brad Silverberg, a former Microsoft executive who left in 1999 to start a venture capital firm. "Other (Microsoft) executives behave in a much less confrontational manner than they used to. It's still an aggressive company; that's in the company's DNA. But Steve has brought the view of 'take the cooperative approach first.' "

The company's recent settlement of an antitrust lawsuit with arch rival America Online is an example of the new strategy. Microsoft agreed to pay a penalty of $750 million but got a valuable relationship in return: AOL Time Warner Inc. agreed to feature Microsoft's software for protecting its digital music and movies, a coveted growth area.

"It's a way of making clear that this isn't just about reaching an agreement," said Bradford Smith, Microsoft's general counsel, who has spearheaded some of its most contentious legal negotiations. "It's about building a new kind of relationship."

The decision on stock options, too, is testimony to how Microsoft has matured as a business.

Microsoft made hundreds of employees millionaires by handing out options at a time when it was growing quickly. But that growth has slowed. For the past year, the company has averaged roughly $8 billion in revenue and $2.5 billion in profit every quarter. With the go-go days of the stock market over, employees were seeing little return from options.

"You know how people talk about a little pebble getting in a marathon runner's shoe and it really becomes a big problem?" Ballmer asked. "We had to pay our people more sanely." The answer was to issue actual shares of stock to employees rather than options.

The open-source 'cancer'

Linux is another case study in Microsoft's approach to challenges.

Two and three years ago, Microsoft executives blasted open-source software as a "cancer" that threatened capitalism and was inherently insecure. That failed rhetoric is gone.

"We've moved from being emotional" to treating open-source as a reality Microsoft must compete with, said Martin Taylor, recently tapped to head Microsoft's effort to meet the Linux challenge.

Some in the industry say they are noticing.

"I am cautiously optimistic that they really are trying to change," said Tim O'Reilly, head of O'Reilly & Associates Inc., which publishes books and technical manuals about software from all manufacturers. "They've had this easy business for a long time. ... Now it's getting hard."

But O'Reilly isn't sure others quite believe it.

"Most people would say, 'Yeah, right,' " he said. And in a sign that Microsoft is still much feared, most major companies decline to discuss their relationship with it.

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