WILL GATES GET THE NET?

By Philip Elmer-DeWitt

It has all the makings of a classic power grab. Bill Gates, the richest man in America and chairman of the world's largest PC software company, announces that his next business target is the Internet, the world's biggest-and most chaotic-computer network. The move instantly becomes topic No. 1 in boardrooms and on electronic bulletin boards around the world. The assumption is that Gates, whose software runs 9 out of 10 personal computers, will do to the Internet what he did to the PC industry: seize control of key chokepoints and leverage his advantage to extend Microsoft's domination.

Gates' strategy-as laid out in a series of public appearances over the past two weeks-certainly makes sense. Before the end of the year, Microsoft will begin offering "one-button" access to the Internet to anyone who buys Windows 95, the newest version of its wildly successful Macintosh-like point-and-click system (60 million copies sold). Given the Internet's well-deserved reputation as a difficult place to reach, Microsoft's promise of a one-stop, easy-to-use gateway ("just click on this button and you're there") is sure to attract a lot of first-time users.

The vehicle for this is Microsoft's first online service, the Microsoft Network (msn), which Gates unveiled this month. In a typical Gates marketing ploy, the network software comes bundled with every copy of Windows 95. This gives his offering an edge over every other online service promising access to the Internet. "The numbers are pretty simple," says Allen Weiner, an analyst at Dataquest. If only 10% of the 30 million people expected to buy Windows 95 this year click on the button that lets them connect to msn-and through it, the Internet-that's 3 million customers in the first year, more than Prodigy and America Online have amassed between them in nearly a decade.

But can Gates really control the Internet? For a variety of reasons-some structural, some cultural-that may not be as easy as it seems. "Microsoft would have a better chance at controlling the weather," says Brad Templeton, president of ClariNet, which makes a nice profit selling news wire services to Internet users. The Internet, he explains, has no central network operating system that Microsoft can patent and control. Moreover, the Internet is devoted to open-that is to say, nonproprietary-software systems. A week after the Internet community discovered that the gif (Graphics Interchange Format) system used to exchange pictures over the network contained a patented compression scheme and that the patent holder was demanding royalty payments, somebody came up with an alternative: gef, a graphics-exchange format that worked just like gif but was patent-free.

Even if the Microsoft Network becomes one of the most popular on-ramps to the Internet, that still doesn't give Gates dominion over the whole network. As Microsoft is quick to point out, the Internet access business is intensely competitive; already CompuServe, America Online and Prodigy are scrambling to catch up to dozens of small, feisty Internet access providers like Netcom and the Pipeline that promise faster service at lower prices, and these companies could soon be joined by some outfits that are even bigger than Microsoft and have a closer relationship to their customers: the phone companies.

But Microsoft is exploring other ways to make money off the Internet. Last October it announced that it was buying Intuit, maker of the leading check-writing (Quicken) and tax-preparation (TurboTax, MacInTax) programs. But the acquisition was challenged in federal court last week by five anonymous software companies that argued that the deal, and a related agreement between Microsoft and Visa, will allow Gates to corner the market on online financial transactions, taking a cut of every bill paid and every purchase made in the online "shopping malls" springing up on the Internet's World Wide Web.

Gates is not the only one trying to horn in on this market. Every major bank and credit-card company sees financial transactions on the Internet as a huge business opportunity. There are even plans afoot to replace the expensive Electronic Funds Transfer System used by banks to exchange credit with a system of encrypted transactions carried over the cheapest available open network, which is to say, the Internet.

There are some who argue that Gates may be overreaching by taking on the Internet-that online services could become, as an America Online executive put it, "Microsoft's Vietnam." Dave Winer, president of a Silicon Valley software company called UserLand, sees the extraordinary growth of the Internet as a rebellion against Microsoft. "The users outfoxed us," he says. "While the software industry was following Bill Gates, the users went another way. They took control. And once the users take control, they never give it back."

And judging from the traffic on the Usenet newsgroup called alt.fan.bill-gates (but hardly a fan club), the last person in the world to whom Internet users would willingly yield control is the chairman of Microsoft. "The Net has a culture," says John Perry Barlow, co-founder of the Electronic Frontier Foundation. "Everyone who goes there takes on some of it. And that culture has a strong immune response to Bill Gates and Microsoft."

-Reported by David S. Jackson/San Francisco

With reporting by David S. Jackson/San Francisco