The Next 800-Lb. Gorilla

By THOMAS McCARROLL

Who is the most powerful person in the computer industry? Arguably it is the frail, bespectacled, boyish figure shown below, the essential computer nerd, William Gates, 35. His Microsoft Corp., which he co-founded two years after dropping out of Harvard, is to computer software what IBM is to hardware -- and now the two companies, formerly partners, are contenders in one of the industry's most important battles.

Like IBM, Microsoft dwarfs its competitors. With $1.5 billion in sales and a market value of $12 billion, it is eight times larger than its nearest rival, Lotus Development. Gates is the world's youngest self-made billionaire, with 42 million shares of Microsoft stock worth about $4.3 billion. The company didn't get so big so fast all alone: its close tie to Big Blue propelled it to the top. A decade ago, the two companies teamed up to develop the IBM PC, with Microsoft contributing the disk operating system, or DOS. After the PC started to lose steam, the two joined to introduce a new system based on IBM's Personal System 2 machines and Microsoft's Operating System 2 software.

But PS/2 and OS/2 have failed to catch on, mainly because of glitches and constant delays. As a result, the duo that created the industry's hottest product of the 1980s is parting ways. IBM is developing its upgrade of OS/2, while Microsoft is making a separate version, setting up a competition for dominance in desktop computers, the most important segment of an important industry. "It's an interesting sideshow," says Gates. "But it will be the marketplace that decides the winner."

The industry has a considerable stake in this sideshow. OS/2 was supposed to be a new standard, but its weak showing so far has left the field open. AT&T, for instance, is pushing its Unix operating system, and Apple Computer is promoting a program of its own. This week Apple will introduce an advanced version of the Macintosh operating system.

IBM may win the race -- it expects to introduce its new OS/2 by year-end -- but that doesn't mean it will prevail. Microsoft is attracting a dedicated following to its successful Windows software, which lets users juggle a variety of programs at once. While Windows is not as muscular as OS/2, Gates sees it as a bridge leading customers from DOS to OS/2 in a smooth transition. He thinks that is important: "Switching overnight to OS/2 is too great a leap," he says.

Microsoft's battle with IBM is far from Gates's only concern. Prompted by his competitors, the Federal Trade Commission is looking into possible Microsoft violations of antitrust laws. At issue is whether the company's role as supplier of both operating systems (the basic programs that make a computer work) and applications software (the programs that do word processing, calculating and other jobs) gives it an unfair advantage. More than 80% of all personal computers use the company's DOS, while an additional 3% use OS/2. One rival, Go Corp., charges that Microsoft swiped its idea for a software system that operates computers through a stylus capable of writing on the screen rather than through a keyboard. Microsoft (along with Hewlett-Packard) is also the target of a suit filed by Apple charging the company with illegally copying the "look and feel" of its Macintosh graphics software.

Industry observers are not surprised by the shots fired at Microsoft; they expect more. Says Jonathan Yarmis, an analyst at the Gartner Group: "There's a Microsoft backlash out there." Such are the hazards of being awesomely big and powerful. Just ask IBM. The feds sued it years ago in an antitrust case that dragged on for 13 years before it was finally dropped. That's one rite of passage Microsoft would just as soon avoid.