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Line in the Sand

How the industries most powerful companies protect their turf.

There's only one thing an industry giant hates more than a hot new technology that threatens its market hegemony . . . and that's a hot new technology being embraced as an open industry standard.

For Microsoft Corp., that worst of all threats has taken the form of thin clients/Java applets. Its arch rivals are trying to use these technologies to break Microsoft's lock on the client operating system world, not to mention its grip on the Web browser, network server and desktop application markets.

The Big One's counterattack is a textbook example of how industry godzillas wield their power to protect their turf.

TACTIC ONE:

Dis it and maybe it will go away. Microsoft initially labeled the thin client/ Java movement as a flash in the pan not worth serious consideration by corporate IT departments.

TACTIC TWO (if the nuisance persists):

Establish a placeholder, an approximate equivalent, preferably with a vague shipping date. Microsoft's first thin-client placeholder was the networked PC with zero administration. As the thin-client idea gained stature (60% of enterprises will have them by 2001, according to Gartner Group, Inc.), Microsoft unveiled a more serious offering. Code-named Hydra, this "Windows terminal" will use a proprietary protocol called T.Share to access application functions on the upcoming multiuser Windows NT 5.0 server. NT 5.0's latest projected shipment date is mid-1998. T.Share has no firm shipping date.

TACTIC THREE (if the nuisance simply won't go away):

Cooptation, or get it before it gets you. First, Microsoft purchased a Java license from Sun Microsystems, Inc. Then it released its own "improved" version of the object-oriented development tool.

This enabled Microsoft to meet any customer demands for Java, while at the same time effectively fragmenting and diffusing rival vendors' efforts to create an industry standard.

END RESULT:

Confusion, lawsuits, more confusion and a general slowing of the Java freight train. Redmond couldn't have choreographed it any better.

Companies are putting their thin-client requests for proposal on hold, waiting to see what Microsoft will deliver, says Arthur Spector, chairman of thin-client software vendor Neoware Systems, Inc., of King of Prussia, Pa.

"I haven't seen many companies with the ability to stop [computer industry] decision making the way Microsoft can," Spector says.

What follows is a sort of strategist's handbook examining the sources of strength the industry's big Kahunas draw from, how their rivals try to exploit their weaknesses (if there are any), and some of the tactics the leaders are using to fight back.

Godzillas emerge

Microsoft is far from being the only company with the clout to play the fear, uncertainty and doubt (FUD) card effectively. An epidemic over the past few years of mergers and acquisitions has created a few giants that wield tremendous power - usually not in just one market, but in several synergistic areas.

In internetworking/LANs, for example, 82% of industry revenues are now in the hands of four companies: Cisco Systems, Inc., 3Com Corp., Bay Networks, Inc. and Cabletron Systems, Inc., according to Robertson, Stephens & Company LLC, a mutual fund company based in San Francisco.

According to Gartner, roughly 60% of the Wintel server market worldwide is owned by four vendors: Compaq Computer Corp., Hewlett-Packard Co., IBM and Dell Computer Corp.

Market share tends to beget market share. Fortune 500 companies increasingly are building relationships with a few major players they can trust to provide stable, reliable products and good support, and that won't go under or get acquired in the next year or two.

For example, Quantum Corp., a manufacturer of disk drives in Milpitas, Calif., has standardized on vendors such as Oracle Corp. and Microsoft, says Ron McGowan, a communications architect.

"If we have an application that requires a database, we ask Oracle if they have a solution," McGowan says. Quantum's installed base of NetWare is disappearing as the company migrates its LANs and intranet to Microsoft Windows NT.

Customer eagerness to enter into these kinds of relationships is further convincing the vendor community that size matters. In the Wintel server market, "products are essentially similar, and the focus is moving to differentiation on price, brand recognition and added value that is currently defined by service, support and manageability," says Joe Barkan, a research director at Gartner. It doesn't pay to be small.

Breadth equals power

One company that has benefitted from being big is Cisco, which leveraged its dominance of the router market into leadership positions in other markets, mostly through acquisition.

It all started in 1993 when Cisco snapped up Crescendo Communications, Inc., which opened the door to the nascent Ethernet switch market. Not content with simply being a player, Cisco complemented its initial investment by acquiring a string of other switch makers. Today, it is a $6.8 billion giant that derives more revenue from switching than routing.

Emboldened by the success it had [throwing its weight around] in the LAN market, Cisco went off the board with the spring 1996 acquisition of multiplexer giant StrataCom, Inc. That purchase enabled Cisco to take the lead last year in the $6.6 billion mux market, with a 26% share.

Will Cisco stop there? Not likely. Its market capitalization is huge - some $60 billion - and the company still appears to be hungry.

Cisco is "a big machine that needs to keep feeding itself, moving in every direction it can," says Don Miller, former chief analyst of networking services at Dataquest, Inc., and current director of strategic competitive analysis at Bay. "But they are not alone [in this strategy]. 3Com and Bay are doing it too."

Even Cabletron, under new President and CEO Don Reed, is abandoning its practice of going it alone. Cabletron will be "a lot less conservative on the acquisition and partnership side," Reed says. Rumor has it the company may buy Gigabit Ethernet equipment maker YAGO Systems, Inc., in which it already has a 20% to 40% stake.

In terms of market power, size may not be as important as breadth. Consider how AT&T's hegemony is threatened by the pending MCI Communications Corp./WorldCom, Inc. merger. Although still less than half the size of AT&T, MCI WorldCom fields an interesting mix of service offerings, thanks to a spate of acquisitions WorldCom has made over the past few years.

For example, the merged company has a slew of Internet resources - including MCI's huge Internet backbone and WorldCom's UUNET Technologies, Inc., CompuServe Corp. and Advanced Network Services, Inc. facilities - and a strong local access presence through WorldCom's MFS Communications Company, Inc. and Williams Telecommunications Systems, Inc.

The mix makes WorldCom attractive to companies such as United Parcel Services, Inc., which currently uses AT&T and Sprint Corp. for the bulk of its network service needs, according to Philip Freyer, UPS' manager of domestic network architecture and design. AT&T's lack of a comparable local access presence will be a real hindrance if it hopes to maintain industry dominance, Freyer says.

The local exchange carriers, still competitively challenged, don't yet pose a threat to the interexchange carriers' (IXC) long-distance market, says Ken McGee, a vice president at Gartner. Rather, "they are acting as speed bumps to prevent [the major carriers] from achieving the full-service competition envisioned in the telecom act."

Meanwhile, IXCs are floundering financially. AT&T saw less than 3% revenue growth in the first nine months of fiscal 1997 over the previous year, McGee says. MCI didn't do much better, with less than 5% revenue growth.

AT&T's main competitive strength right now is "the supreme loyalty of their large customers: AT&T is the second most recognizable brand name in the U.S., behind Coke," McGee says. "It still has a wonderful connection with the word 'quality' in the perception of so many people."

What the carrier needs to do is "capitalize on that good will" by providing a full-service offering and a clear strategy "before customers run out of patience," McGee says.

That strategy apparently has been on hold since the series of upheavals in the executive suite last year.

The bundling ploy

Of course it remains to be seen if MCI World- Com can take advantage of AT&T's seemingly vulnerable state and walk away with some business. One of the power ploys the merged company likely will play is bundling: using dominance in one area to sell - sometimes almost force - product lines in an adjoining area.

Examples of fat cats using this tactic abound. Consider IBM and Computer Associates International, Inc., which are using their dominance of mainframe software to push their network systems management frameworks, says a network executive of a major aerospace company who has witnessed it firsthand. Perhaps the most famous recent example of bundling as an offensive tactic is Microsoft's attempt to bundle Internet Explorer into Windows 95.

"We use Netscape [Communications Corp.] browsers as well as [Internet Explorer]," says Ed Risinger, general manager of product development at Health Data Resources, Inc. (HDR), in Austin, Texas. However, integration could change his mind.

If Microsoft wins its current battle against the U.S. Department of Justice, using Internet Explorer will be much easier and, here's the rub, cheaper. "It takes time to install a Netscape browser," while Internet Explorer would run right out of the Windows box, Risinger says. Furthermore, "Netscape isn't giving its software away," at least not any more; "Microsoft is."

But bundling is a two-way street. For example, Netscape also is looking at bundling as a way to get an edge.

"As a leader in the Internet/intranet infrastructure market, it can leverage its Enterprise and Fast Track servers and browsers to get into accounts," says Mark Levitt, a research manager at International Data Corp., in Framingham, Mass.

What makes bundling and cross-selling work, of course, is full integration across a vendor's product lines.

When Microsoft comes out with its own version of a third-party intranet software tool that HDR has been using, "We'll go to it, even if it's not full-featured, because we know it will work better with Microsoft's operating system," Risinger says. "Their programmers know more [about linking to Windows] than third parties."

Still, analysts point out that having a full product line doesn't do you much good unless it's fully integrated, as Microsoft's is. Full integration means that different products work well together and revisions are in sync, and they all come together under a common marketing and sales strategy and support system.

Cisco, for example, has been marketing its broad range of LAN and WAN switches, hubs, routers, etc. as part of the IOS family. IOS is the core operating system of its original router group.

"Cisco has traditionally supported software across different product lines," says Linda Winkler, research engineer at Argonne National Laboratory.

"It's one of their key strengths. You don't get different rev levels depending on what level of hardware you have."

Unfortunately, "as Cisco keeps growing, and the number of platforms IOS runs on expands, that integration becomes more difficult," Winkler says.

As a result, the "IOS family" designation Cisco touts sometimes turns out to be little more than a label. Real integration "is absolutely critical for a corporation that wants to buy a Cisco solution," Winkler says.

MCI WorldCom also faces a mammoth integration project.

According to Gartner's October report about the carrier, WorldCom's acquisition of ANS, CompuServe, UUNET and now MCI "gives the cursory appearance of creating a world-class ISP."

But the carrier faces the gargantuan task of integrating the pieces into a cohesive structure, Gartner analyst E. Paulak says. One major task will be meshing the service organizations of each company; another will be integrating the various network infrastructures, many of which employ different makes of switches.

Drag of the anchor

Bundling is a powerful tool when you have a captive audience, which always is the case with the industry's heaviest hitters. But a huge in- stalled base can become a liability if it causes you to miss the next big wave. Witness IBM's early reluctance to acknowledge the ultimate importance of networked microcomputers.

Ironically, the company that trumped IBM when it made that mistake - Microsoft - is feeling the weight of its own massive installed base. Steve Sayres, Lotus Development Corp.'s senior vice president of marketing, says Microsoft's installed base of client operating systems and applications, such as Microsoft Office, keeps it investing in the status quo.

As proof, Sayres cites Lotus' embracing of the Java/thin-client revolution with the recent introduction of eSuite, a Java applet-based application suite that allows users to download program functionality as needed, instead of having to buy into Microsoft's monolithic bloatware.

"Oh yes, [Lotus' traditional productivity suite] SmartSuite sales will be affected by eSuite," Sayres cheerfully admits. But with Microsoft Office owning 90% of the suite market, "They have a lot more to lose" if Java applets take off.

Perhaps the most classic case of a vendor competitively hamstrung by its own installed base is Novell, Inc. "Novell dragged its feet on providing cross-platform network services [based on NetWare Directory Services]," says Neil MacDonald, research director in Gartner's networking group. Novell won't have pure NDS for NT until next year.

The problem is that by unbundling NDS and putting it on rival platforms - NT in particular - Novell does away with NetWare's chief competitive edge, MacDonald says. It may make market sense for Novell to de-emphasize NetWare in favor of NDS and other network services, but it doesn't sit well with Wall Street since NetWare offers better profit margins. Meanwhile, Microsoft is about ready to field its own global directory, which will erase Novell's main advantage over its rival.

While Novell waffled, Microsoft began eating NetWare's lunch with NT. "The network operating system has been replaced by client and server operating systems and applications that are network-smart right out of the box," says Michael Dortch, senior research analyst with The Robert Francis Group, a San Jose, Calif., research firm.

Indeed, the Novell example shows how even the seemingly invincible can fall prey to shifting technologies.

Even mighty Cisco is vulnerable in certain market segments. Miller says Cisco has yet to come up with a viable offering in the gigabit switch arena. Switches can handle traffic at 10 times the speed and one-tenth the cost of classic backbone routers, Miller says.

Last year, the network giant acquired Gigabit Ethernet start-up Granite Systems, Inc. for $220 million. However, Cisco has yet to announce a product or even a firm gigabit shipment date, Miller says. Indeed, rumor has it that Granite's technology hasn't panned out and Cisco is prowling after a second acquisition.

Word on the street is that Cisco is dragging its feet on gigabit switching because the technology will undermine its router base, Miller says. Cisco's routers provide 65% of the company's gross profit margins, according to David Passmore, president of Decisys, Inc. The Layer 3 switch market, already crowded and with a price war brewing, never will deliver anything close to that.

But Cisco recognizes that if it doesn't sell gigabit switches, 3Com, Bay and a host of other hungry small companies will, so it is diversifying to stay competitive.

And it also is diversifying to break into markets in which 3Com and Bay are stronger, such as remote access, small business and the consumer market segments.

The best defensive weapon Bay and 3Com have is knowledge of indirect channels. Miller says they are very well entrenched, and working hard to get closer to resellers.

Cisco, in contrast, still is learning the ins and outs of indirect sales to smaller customers, he adds. For example, "Their catalog looks like a phone book. Every SKU costs a distributor thousands of dollars to maintain. And how do they inventory this stuff?"

3Com now is launching a counteroffensive on the sales front. Its recently implemented "Direct Touch" program involves a restructured and expanded sales force that calls customers directly, "but in support of, not in competition with, the reseller," Miller notes. "The reseller gets the purchase order." That way, 3Com is able to introduce the kind of direct vendor-to-IT contact corporate clients often prefer, without sacrificing the good will of its distribution partners.

Indeed, a strong, extensive network of industry partnerships - with distribution channels, independent software vendors and third-party vendors - is one of the strongest defenses industry leaders have against encroachment by hungry rivals (see "Power Partners," page 37).

So rivals try to break those ties - or steal the partners.

For instance, in its effort to break Lotus Notes' dominance of the groupware market, Microsoft is pushing Exchange on the "huge following of business partners that understand Notes," says Gerry Smith, president of Changepoint Corp., a Toronto intranet-based groupware software company.

Smith should know. A high-level Lotus business partner himself, he's received several friendly overtures from Microsoft.

"My VP and I were flown to Redmond last summer for a couple of days of golfing, then my VP was flown [free of charge] to the Exchange Conference in San Diego."

Microsoft also is offering "free consulting services to select the 'proper' [groupware] architecture," Smith says.

"They want us to convert our core technology to theirs. They say, 'We'll send experts, help you pick the best.'"

Not that Microsoft is asking Lotus business partners to switch to Exchange outright.

"They're saying, 'We don't want partners to give up Notes or Domino because that might make them go out of business,'" Smith says.

"They want you to slowly add Exchange, and then slowly make Exchange more and more of your business."

The powerful are crafty that way.

Standards war

Crafty also may be an apt description of how the biggest and baddest industry godzillas use the standards-making process to better their own positions.

Of course Cisco, Microsoft, Oracle, Lotus and a dozen or so others are long accustomed to fighting off attempts by rivals to pry open their proprietary architectures and invade their installed base by means of industry standards.

The classic battle of this kind was IBM trying to defend SNA as a "de facto industry standard" against the TCP/IP onslaught.

These days, however, blatantly trying to stonewall, take over or derail a standards effort is a no-no: it gets users' dander up.

Instead, with all the finesse of campaigning politicians, the heavyweights' attempt to defang, or at least delay, standards that might weaken their selling advantage, even while they are attempting to paint their rivals as being proprietary, antistandard and, thus, anticustomer.

When Microsoft, for example, called on Sun to release Java to an industry standards group, vocal Sun CEO Scott McNealy compared the software giant's giving advice on standards to "W.C. Fields giving moral advice to the Mormon Tabernacle Choir."

And when startup Ipsilon Networks, Inc. proposed its IP switching as an industry standard, Cisco trumped with the FUD card.

"Cisco confused the issue by coming out with their own per-ceived competing technology, [tag switching], which wasn't at all the same thing under the covers," Miller says.

Of course, major players are not above the tried-and-true ploy of putting out their own "added value" version of a key standard, either as a ploy to undermine someone else's edge or as a way to keep followers in its camp.

Netscape and Microsoft and their respective gangs, for example, have come up with rival versions of Dynamic HTML.

The door is always open

One competitive ploy many of the biggest players use is the executive trump card. A Microsoft or Cisco vice president plays a little golf with the customer's chief information officer, who then applies a little pressure from above.

For example, when Compaq bought Tandem Computers, Inc. it gained the computer maker's direct sales force with direct channels to "CEOs, CFOs, CIOs, people high up in accounts that Compaq lacked," Barkan says.

Not that this tactic always works. "Various companies have tried getting in to our CIO to show the benefits of staying with or moving to that vendor," says Wayne Lemmerhirt, manager of technology services at Boston Edison.

"But our current CIO tends to be pretty hands-off on technology decisions."

It just goes to show, powerful or not, you, the customer, are always in the driver's seat.