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Microsoft Chairman Bill Gates Talks About ‘Our Nightmare’

June 19, 1991

SEATTLE (AP) _ Some of Microsoft Corp.’s worst fears about its competition are coming true, Microsoft Chairman Bill Gates acknowledges in an internal ″state of the company″ memo.

″Our nightmare - IBM ‘attacking’ us in systems software, Novell ‘defeating’ us in networking and more agile, customer-oriented applications competitors getting their Windows act together - is a reality,″ Gates wrote.

In the eight-page, single-spaced memo sent out last month to his top people, Gates candidly describes trouble for a software company whose public image has been one of nearly unparalleled success.

Besides concerns about IBM and others, he mentions worries over a lawsuit filed against Microsoft by Apple Computer Inc. and a Federal Trade Commission investigation.

The memo was obtained by the San Jose (Calif.) Mercury News, which published excerpts this week. Microsoft spokeswoman Pam Edstrom declined Wednesday to release the full memo, but confirmed the accuracy of material quoted by the newspaper.

Gates wrote the memo in April after taking a week off to think about his company and the software industry, Edstrom said.

Gates’ candor in acknowledging his growing rift with International Business Machines Corp. was praised by Goldman Sachs & Co. analyst Rick Sherlund, even as Sherlund cautioned that bad feelings between the companies could hurt Microsoft’s stock price.

Microsoft stock closed Wednesday at $103.37 1/2 a share, down $8.12 , on the over-the-counter market after Sherlund released a report expressing his concern.

″There’s no arrogance here. Bill Gates is open-minded, intellectually honest and motivated by fear of competitors,″ Sherlund said.

Sherlund said he still recommends buying Microsoft stock because of new products in the works and expected strong earnings growth.

Microsoft is the world’s largest producer of personal computer software. In his memo, Gates underscores the company is betting its future on Windows, its highly successful software that makes IBM-type computers nearly as easy to use as Apple Computer Inc.’s Macintosh.

″Everything we do should focus on making Windows more successful,″ the multibillionaire co-founder wrote.

Microsoft developed MS-DOS, the original disk operating system for use on IBM-compatible computers. DOS became the industry standard and helped Microsoft achieve its meteoric growth in the 1980s.

Microsoft worked jointly with IBM to develop OS-2, a second-generation operating system designed to replace DOS. But the huge success of Windows, which works with DOS, has led to a parting of the ways: IBM is pushing OS-2 for its computers, while Microsoft is riding Windows’ popularity.

Working with IBM has forced Microsoft to accept ″poor (computer) code, poor design and other overhead,″ Gates wrote. But he said Microsoft ″will not attack IBM as a company, and even our public ‘attacks’ on OS-2 will be very professional.

″Eventually we need to have at least a neutral relationship with IBM. For the next 24 months, it may be fairly cold. We can emerge as a better and stronger company where people won’t just say we are the standard because IBM chose us.″

IBM had no comment, said spokesman Brian Doyle.

Apple has sued Microsoft, alleging Windows infringes on Apple’s copyrights. Meanwhile, the FTC is investigating whether Microsoft has monopolized the software industry.

Microsoft dominates the market for operating systems and is gaining ground in applications software such as word processing programs.

Gates wrote that ″it would be disastrous″ if the judge in the Apple case substantially ruled against Microsoft. He also said he is taking the FTC probe seriously.

″I am sure it will use up even more executive staff time than the Apple lawsuit has. However, I know we don’t get unfair advantages. I hope we can quickly educate the FTC on our business.″

Analyst Robert Kleiber of Piper Jaffray & Hopwood, a Minneapolis brokerage, noted Microsoft has long maintained it will win the Apple suit.

″This is the first admission that, ’Gee, we could lose it,‴ Kleiber said. ″I think it scares him to death, and it should.″

If the judge in the case hinders Microsoft’s development of Windows, ″then IBM has an open field for OS-2,″ he said.

Last July, Gates said Microsoft would challenge Novell Inc.’s dominance of the market for computer network software. His memo admits that hasn’t happened.

″We knew it wasn’t going to be easy, but it has been even harder than we expected to build a position in networking,″ Gates wrote. ″You will see us backing off on some of our spending level, but don’t doubt that we are totally committed to the business.″

This is the second time in recent weeks Microsoft acknowledged falling short in a competitive goal. Recently, the company reorganized its printer software section after failing in its goal to unseat market leader Adobe Systems Inc.

″I think Microsoft sometimes is guilty of overreaching,″ Sherlund said.

Ironically, Gates’ memo surfaced about the same time a memo by IBM Chairman John Akers was made public. In the face of declining market share, Akers told his employees Friday they need to work harder and realize they have ″a deeply personal stake in declining market share, revenue and profits.″

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