THE SOFTWARE REVOLUTION--Part 1

The Internet changes everything. Coming soon:

Cheap, Web-ready mini-programs. No wonder
the giants are jumpy
Imagine that to read this magazine, you needed a special program for the text, another program
to view the photographs, and yet another to look at the charts. Or, to watch your favorite TV
shows, you needed a CBS viewer to watch David Letterman and an NBC viewer to watch
Seinfeld. Oh, yes--you'd also wind up buying a new, ``upgraded'' viewer every year or two. And
to make sure that viewer does its best, you'd buy a new TV, too.

You wouldn't stand for it. But this is precisely what computer users have been doing for years.
At the root of this situation is the way that software is created, distributed, and consumed.
Programs such as spreadsheets or word processing packages are written for a particular type of
hardware and operating system--so your Windows Excel spreadsheet won't work on your
Macintosh. And even if they're written for the same operating system, programs from different
software makers won't work easily together. Worse, programs from the same suppliers don't
necessarily work easily together because data must be arranged in a particular way for each:
Your spreadsheet package can't deal with the text from your word processing package, and vice
versa.

One way software makers have gotten around this is by creating ``bloatware''--ever-fatter
packages that throw in dozens of new features. With each upgrade, the customer has less need to
look elsewhere. Today, the most popular business software comes in ``suites,'' collections of
programs sold as deeply discounted bundles surrounded by gobs of new code to make it appear
that the programs actually mesh with one another.

This may not be the best solution for computer users who just want a better way to get at the
information they need. But it's great for PC and software makers. The escalating demands of
bloatware drive sales of ever-more-powerful computers, creating an unholy alliance between
software and hardware makers. This fall, for example, millions of consumers who want
Microsoft Corp.'s Windows 95 operating system will spend billions to trade up to PCs using Intel
Corp.'s speedy Pentium chips.

Why do customers go through this? They have few alternatives. The ``Wintel'' standard (PCs that
run Microsoft Windows and use Intel processors) represents 80% of PCs sold, providing a
standard ``platform'' of hardware and operating-system software that hundreds of PC makers sell.
That keeps prices low and ensures that there will be thousands of programs available. Wintel is
also a huge improvement over the bad old days when customers were locked in to IBM or
Digital Equipment Corp. machines because they used software that ran only on those brands. But
even with Wintel, computer buyers are locked in to the platform: They get advances only when
Microsoft and Intel deliver them, and they pay whatever Microsoft and Intel determine they
should.

What if this cycle could be broken? What if you could find the information you're after without
having to take into account what kind of program to use, what computer it runs on, or what kind
of format it's in? What if software as we know it were to disappear? What if software could be
reinvented?

Well, that's exactly what's beginning to happen--and at a pace nobody in the computer industry
anticipated. The force that's shaking the foundations of the old software business is the Internet
and its graphical subnetwork known as the World Wide Web. First, the Internet's TCP/IP
communications standards made it possible for tens of millions of computers using different
operating systems and applications programs to ``talk'' with one another--whether they're on a
local-area network or positioned at opposite ends of the globe. Then, the Web's HTML
(hypertext markup language) gave all these computers a lingua franca for displaying information
in graphical ``pages.''

FALLING INFORMATION WALLS. In the two years since the Web and the Mosaic program
for viewing its pages emerged from research labs, the Web has turned into a huge virtual disk
drive. It's crammed with every possible form of information--from online magazines to digitized
film archives to radio programs--all available at the click of your mouse on a blue ``hyperlink.''
The same Web document is accessible to anyone with an HTML browser, whether it's on a Unix
workstation, a Windows PC, or a Macintosh. Says Rusty Rahm, president of StarNine Systems, a
maker of Web software for Apple computers: ``On the Internet, nobody knows you're a Mac.''

Suddenly, the barriers that have kept information from flowing between different brands of
computers and software have begun to crumble. The next step will be critical: using the Web not
only to make the same information available to all wired machines but to let them share the same
programs. If that can be done, there will be a basic shift in the software business no less seismic
than the fall of the Berlin Wall. It, too, portends a new world order and vast new opportunities.

The new software order will reflect the character of the Internet itself. Barriers to entry will be
minimal: Anybody with a network link can play. Costs of goods sold will be the price of sending
some bits down the wire. Bloatware blockbusters costing hundreds of dollars may give way to
software on demand--snippets of new programming that come across the Net like E-mail. In
short, the Internet, says Eric Schmidt, chief technology officer at Sun Microsystems Inc.,
``enables the deconstruction and the construction of a new economic model for the software
industry.''

WINTEL'S DISCONTENT? What of the old model? In the face of the Web--a truly universal
standard--the prevailing Wintel standard doesn't look so unshakable. And the huge profits that
Microsoft and Intel get by setting the standards don't look so safe. Since September, the
hardware business has been buzzing about low-cost ``Internet appliances'' that will challenge
Intel PCs.
Now, Microsoft is in the hot seat. On Nov. 16, Rick G. Sherlund, the influential Goldman, Sachs
& Co. analyst, dropped Microsoft from the firm's recommended list, citing slower sales growth
in conventional PC software and warning of the rising challenge to the giant from Internet
software suppliers. The Web, he noted, ``is a serious threat to Microsoft's ability to set standards
for important parts of the industry.''

The news of Sherlund's downgrade sent Microsoft shares tumbling 7%, to 87 3/8 in two
sessions--and boosted Internet stocks. In an ironic twist, the already white-hot shares of Netscape
Communications Corp. passed 110 1/2, making company founder James H. Clark the newest
software billionaire.

Despite this dramatic reversal on Wall Street, William H. Gates III, the first software billionaire,
is not exactly on his way to oblivion. All the Internet software upstarts combined are a mere
speck compared with his $6 billion empire. And now, his organization has gotten the Internet
religion--big-time. Gates has made it clear to all his troops that the Net and the Web are now
Microsoft's highest priority.

All Microsoft's products, from Windows to Word to Excel, are being extended to embrace the
Net. Gates's new book, The Road Ahead (page 13), is largely about the Net. And at Comdex, the
giant computer-industry show held in mid-November, Gates used his keynote speech to sketch
out ways in which Microsoft plans to build a new set of Net software on top of its existing
programs. ``The Internet is nothing but good news for software,'' he said. ``When you get low-
cost communications, you want more software to help people share information and collaborate.
It means the PC is a more relevant device to a broader set of people.''

Gates's challenges may be more structural and managerial than technical. Microsoft finds itself in
a position similar to that of IBM a decade ago, when the PC revolution began threatening the
mainframe business: Even as he tries to move into the new market, he can't afford to let up on
efforts to stay on top of the old industry. Operating systems and packages such as Microsoft
Office are where all the revenues are now--and the source of the 85% gross margins that support
the massive organization. What's more, Gates concedes that having the lead in PC software may
not land him near the top of the new order. ``We're in a business where no amount of success
guarantees future success,'' he says.

Meanwhile, thousands of programmers and computer designers are racing to prove that on the
Web, there's a better way--a chance to end software lock-in forever and perhaps make bloatware
obsolete. The breakthrough technology? It could be a programming language from Sun
Microsystems called Java.

Once a computer--no matter what brand--is equipped with Java ``client'' software, it can run any
Java application that comes across the Net. Click on a hyperlink to your bank to check loan rates
and you'll get the data as well as a Java ``applet,'' a special application program to calculate what
your monthly payments would be for different amounts and different loan lengths (page 82).
Soon, little Java programs may hit your PC the way E-mail does. ``The Web turned the Internet
into a giant disk drive,'' says Mark Pesce, a San Francisco creator of Web software and a Java
enthusiast. ``Java turns the Internet into a giant processor.''
JAVA'S MASSIVE BUZZ. Java embodies two key attributes of the new software business. It is
designed specifically for the Net, and it is an object-oriented programming tool, based on the
object language C++. Object technology turns conventional software on its head. Since the
earliest days of computing, programs and data have been rigidly separated. The financial
information you want to assess and the program that does the number-crunching are completely
independent, yet useless without one another. With object technology, information and
programming are merged. These ``objects'' behave the way objects in the real world would: One
called ``checkbook'' might tally up your checking account, for example.

Object programming is ideally suited for the Net era--when computers will function more as
multimedia communications devices and less as glorified calculators and typewriters. With
objects, information comes to the forefront, and the program that places it on your screen
recedes. ``The result of this is that software takes its place as a means rather than an end,'' says
Clifford J. Reeves, director of IBM workgroup architecture.

While Java is generating a massive buzz in the computer industry, it is just one of many new
programming schemes that have suddenly become practical on the Web. Steven P. Jobs's NeXT
Computer Inc., for instance, is reorienting its object-programming software for the Net. ``The
two most exciting things right now in software are objects and the Web,'' says Jobs. IBM and
Apple Computer Inc. have been promoting a distributed-object scheme called OpenDoc. Apple is
now working on technology called CyberDog that lets developers link OpenDoc objects to the
Internet. And separately, IBM is developing a framework for embedding different types of
objects in Web documents.

There will be Java rivals, too. While considering licensing Java, IBM is working on its own
``Web-executable'' language. It's a combination of a new programming language called Bart and
LotusScript, the development software that will ship with an upcoming release of Notes, IBM's
Lotus subsidiary's groupware program. Netscape--which will bundle Java into the next release of
its Navigator browser--has its own language, called LiveScript. It's based on Java, but easier to
use. And Microsoft says it will have a Java equivalent in its Visual Basic language--once that is
adapted to the Net.

From tiny one-person shops to startups staffed by prominent Silicon Valley executives, the Net is
teeming with new Web software companies. Most wouldn't have a prayer in the conventional
software market. But the Net represents a green field where no software maker dominates. ``The
Internet changes everything,'' says J. Neil Weintraut, managing director for technology research
at Hambrecht & Quist Inc.

Start with something as simple as distribution. Today, software makers spend huge sums to crank
out disks, put them in appealing packages, and move them through wholesalers to store shelves.
Then, they spend millions more on advertising to get customers to go into the stores and buy. On
the Web, a customer simply clicks a few onscreen buttons, and the software comes back across
the line. When there is a new version of software, ``you turn on your network computer and it
will show up. There is no store to go to. There is no installation,'' says Ellison. Today, it can take
anywhere from several minutes to several hours to download a program, but high-speed
communications will make electronic distribution more practical.
The way you pay for software will change, too. Instead of paying a one-time license fee, which
entitles you to perpetual use of a program, you may pay for software the way you pay for a
magazine. For example, software companies may offer subscriptions that, for an annual fee,
entitle you to unlimited usage and the latest updates to a program or group of programs. At the
same time, all sorts of network services--stock quotes, digital photo archives, bill-paying
services, and the like will be delivered online, along with software to use them. ``What you're
really selling is a service fielded over the Internet--the software comes for free,'' says John
Landry, a former Lotus executive and now an IBM consultant.

Eventually, all we'll think about is the content--we'll assume the software is there. ``The lines
between content and applications are blurring,'' says Marc Andreessen, the 24-year-old
programmer who helped dream up Mosaic, the original Web-browsing software, and is now
vice-president for technology at Netscape. Helping the process will be Java and other Web-
programming systems that make it possible to ship ``interactive content'' across the Net. An
example might be an electronic catalog that includes a Java applet for ordering. When you hit the
``buy'' button, the program will execute on your computer--then vanish when the transaction is
complete. Scott McNealy, Sun's CEO, calls it disposable software.

Bloatware, on the other hand, is just about the opposite: It's big, it's not cheap, and it requires a
long-term commitment. And because of these characteristics, the biggest companies are almost
guaranteed to win the bloatware game. After an investment of thousands of programmer-years of
effort, Microsoft or Lotus or WordPerfect brings out a new, bigger release--loaded with features
that most customers will never use, such as math equation editing. The latest Microsoft Office
suite, for example, needs 55 megabytes of disk space and a Pentium-class computer to run at
peak form. And installing these hefty programs has become a drawn-out affair.

For corporations, this has helped push the annual cost of supporting a PC user to about $8,000,
according to consultants Gartner Group Inc. Increasingly, corporations are weighing the value of
upgrading software every two years or so. This year, many corporations are taking a go-slow
approach to Windows 95 because of the huge costs of upgrading. ``Customers can't afford to be
on this treadmill of bigger, better, faster,'' says Mark A. Tebbe, president of Lante Corp., a
systems integration company in Chicago. Adds Thomas P. Kehler, CEO of Internet software
maker Connect Inc.: ``The software industry has been arrogant.''

The Web may be the method to stop this madness. Instead of waiting two years for the next
massive update to your favorite office suite, you may get the latest features instantly off the Net.
Or, instead of buying a program you may only use occasionally, you may be able to rent it. The
code will come across the Net and will be usable for a specified period. Think of it as just-in-
time software.

The same concept may also extend to operating systems--with serious consequences for how
hardware is designed. If schemes such as Java catch on, computers might no longer need ever-
bigger operating systems--or the expensive Intel chips they use today. Low-cost Internet
appliances, perhaps based on video-game players, could get by on simple, streamlined operating
systems that call out to the Net for additional features as needed. ``I see the PC going through
this era of complexity and back to simplicity,'' says Ronan D. McGrath, chief information officer
for Canadian National Railway Co. in Montreal.

It's an idea that has a lot of appeal in Silicon Valley--not least because it has the potential to undo
the dominance of the Wintel standard. One of the most fervent supporters of the idea is Oracle
CEO Lawrence J. Ellison. Oracle has developed an operating system that takes up just 1
megabyte of main memory, Ellison claims, vs. as much as 8 megabytes for Windows 95. He says
the program will be given away by Internet services providers and built in to computers and
consumer-electronics gadgets by next summer. After that, says Ellison, it's downhill for the PC.
``I really think that Windows 95 marked the zenith of the personal-computer industry.''

``A DARWINIAN DEVICE.'' Ellison is also a big backer of Java, which is built into the planned
Oracle operating system. He says the new setup will have special appeal for corporations that
want to cut PC support costs. Improvements to the software will simply show up across the Net.
``We're talking about enormous savings of not only dollars but time,'' he says.

Predictably, Intel CEO Andrew S. Grove dismisses the notion that masses of customers will give
up their Pentium PCs for cheap Internet cruisers. In fact, he says, those PCs helped make the Net
so popular. ``Where the hell was the Internet before there were 30 million multimedia PCs out
there?'' he demands. The PC, he adds, is ``a Darwinian device'' that will adapt, as it always has.
Indeed, even if somebody can produce a $500 I-way Yugo, there may not be many consumers
willing to give up all the other things a $1,500 PC can do to buy it.

Grove, whose management mantra is to stay ``paranoid,'' may be better prepared for a fight than
his Wintel partner. A quick switch to a software market of cheap network applets could quickly
turn Microsoft's size advantage into a millstone. Its sprawling 18,000-employee organization
may be the most potent software-development force on the planet, but it is also the world's
biggest bloatware factory--which needs megahits, not lots of cheap applets, to survive.

THE SOFTWARE REVOLUTION--Part 2

The Internet changes everything. Coming soon:
Cheap, Web-ready mini-programs. No wonder
the giants are jumpy
Continued from Part 1

FED UP WITH THE MANIA. Microsoft, too, may be a prisoner of its own success. With an
installed base of 100 million computers running Windows, the company puts more and more
resources into keeping new versions of the program compatible with previous ones.

In Win95, a big chunk of the 15 million lines of code are there just to ensure compatibility.
The new competition has no such baggage. Java--and programs like it--are ``a direct assault on
Microsoft's whole paradigm,'' says Robert Aston, president of market researcher Market Vision
in Santa Cruz, Calif.

Leading the assault, Sun is busily seeding the Java software market. It's selling Java licenses at
$125,000 a crack--and downloading free HotJava browsers with Java clients to workstation and
PC users on the Net. Licensees include Oracle, Macromedia, Toshiba, Borland, and Spyglass.
Sun is also making Java freely available for research, education, or evaluation purposes.

The Java mania grates on Gates. ``What's new about [Java] vs. other programming languages?
Why is BUSINESS WEEK writing about Java?'' he says. ``Just having another computer
language doesn't change the dynamics of any of these things.'' But Doug Henrich, Microsoft's
director of developer relations, says the company ``is looking hard'' at licensing Java, since the
market is clamoring for it.

For now, Microsoft is racing to get its own Web software going. It's pushing Visual Basic as the
programming language for developing Web applications. A complementary software scheme,
called Object Linking & Embedding (OLE), lets developers create objects--say a spell checker--
that can be moved from one program to another. Originally designed for use on stand-alone PCs,
OLE is being extended to operate across networks--no easy task. Blackbird, the proprietary
``authoring'' tool originally designed to create multimedia content for the Microsoft Network, is
being reworked for the Web.

Because its tools are already used by thousands of developers who have invested hundreds of
hours learning the intricacies of Windows software, Microsoft can be assured that many will
follow it to the Internet. There is already a thriving market for ready-made Visual Basic and OLE
objects, such as spell checkers or chart objects, that developers can drop into their programs.
Microsoft would like to extend those to the Net--before another scheme catches on.

At this point, Wall Street is betting on the challengers. The stories (often exaggerated) of Java's
potential--along with a booming market for Web servers--has helped Sun's stock more than triple
this year since June. Netscape's shares continue their gravity-defying rise, reaching a new high of
$120 on Nov. 20. That gave the startup--with projected sales of $47 million this year--a market
value of more than $6 billion, exceeding that of $11 billion Apple Computer.

No wonder Netscape is providing the business model for the new software industry. It won 70%
of the browser market by giving its product away on the Net. Now dozens of startups are doing
the same. Take Progressive Networks Inc., a Seattle-based startup that makes software for
delivering real-time streams of audio over the Net. The company's Real Audio player--which is
needed to play the sound clips--can be downloaded for free from links to dozens of Web sites.
``The marching orders are: Get big fast, subjugate profit--even revenues. Just get your product
out there,'' says Hambrecht & Quist's Weintraut.

How will these strategies ever pay off? Netscape has started to sell Navigator for $40 in stores,
and bulk sales to corporations helped it turn its first profit--ahead of schedule--in September. But
the master plan is to cash in by selling the lucrative ``server'' software that companies use to
create and run Web sites.

SEEDING THE BROWSER MARKET. In its own way, Netscape hopes to gain the type of
leverage on the Web that Microsoft has with the Wintel lock-in. Having seeded the market with
millions of Navigator browsers, it is feverishly adding extensions to the HTML standard so that
Web pages programmed with Netscape software will look their best only when seen with the
Netscape browser. Anybody can use the extensions, but by the time they do, Netscape will be
adding something else. That creates the potential for locking in operators of Web sites with the
Netscape server. ``When you see a Web page that says Netscape 1.1-enhanced, you're looking at
the value of Netscape's stock,'' says David Winer, a veteran software developer and
commentator.

Not to be out-Microsofted, developers there are working on their own browser and server
software. The browser, called Internet Explorer, has been available since shortly after the August
release of Windows 95, as part of an add-on package called Microsoft Plus! And it has been
shipping with new Windows 95 PCs. A new version, Explorer 2.0, is now available. Like
Netscape, it includes proprietary changes to the HTML format to enhance graphics and improve
performance--and plant the seeds of software lock-in.

Microsoft could afford to lose the browser market. But it's determined not to give Netscape the
strategically important server business. It is testing a Web-server program, dubbed Gibraltar, that
it expects to release early next year. Gibraltar is based on the two-year-old Windows NT but
adds features for handling HTML documents. Another product due next year, called Catapult,
will add security features. The server market, expected to zoom from just $20 million this year to
$300 million by the end of the decade, ``is much more up for grabs,'' notes Sherlund.

Like its new competitors, Microsoft is giving away software to get a position in the Web market.
Some 500,000 copies of the Internet Assistant, a program that converts Microsoft Word
documents to HTML, have been downloaded free from Microsoft's Web site. In addition,
Microsoft just came out with Word Viewer, a freebie for viewing or printing Microsoft Word
documents on the Net without having Word installed on your PC.

Microsoft isn't the only software maker to feel the effects of the Net software revolution. Lotus,
now an IBM subsidiary, is furiously attempting to adapt its information-sharing Notes program
to the Web--before cheap Web-based products displace it. Lotus is trying to convince
corporations that Notes offers more than they can get with simple Web tools. It's also adding
features to smooth the flow of information between Notes and the Web and to let the Notes
``client'' view Web information. A likely next step: drastically cutting the price of the Notes
``client'' software.

``RECREATING WINDOWS.'' As the old gang learns new tricks, so do the newcomers. The
next version of Netscape Navigator 2.0, due in December, will include tools for developing Web
applications, E-mail, and workgroup software gained from the company's purchase of Collabra
Software. In addition, Netscape will bundle ``plug-in'' programs, including Java, Adobe's
Acrobat document viewer, and the Real Audio player. Netscape is also exploring other areas,
including such applications as word processors. The danger: In its attempt to be more like
Microsoft, Netscape could succeed--in the wrong ways. ``Pretty soon, you end up recreating
Windows,'' says Sherlund.

So who will come out on top in the new software business? Perhaps no single company. If the
Web revolution really creates a level playing field, then the days when a few giants call the shots
could be gone forever. Let the games begin.

It's Everyware!

The Internet and its World Wide Web have created an infrastructure for delivering information to
computers virtually anywhere. Now, the same thing is happening to software, thanks to Web
programs such as Sun Microsystems' Java. The result: A revolution in software.

SOFTWARE TODAY

HARDWARE LOCK-IN: Programs written for a specific type of computer ``platform'' lock
customers into hardware that runs the software they need. The ``Wintel'' standard (Intel-based
PCs using Microsoft Windows) gives a wide choice of PC brands. But customers are locked in to
the Wintel platform.

UPGRADE TREADMILL: Every two years or so, applications and operating-systems

developers trot out upgrades and cram in new features that push the limits of hardware. To
handle a major upgrade such as Windows 95, millions of customers are forced to replace
computers that still work perfectly well.

DISTRIBUTION: Today, software comes loaded on the hard drive of your computer when you
buy it or in a box from a software store. This complex distribution chain adds to cost and often
forces consumers to buy more than they want.

BLOATWARE: Packaged software--programs such as word processing packages--have

mushroomed into ``bloatware.'' They're huge--some more than 50 megabytes--slow, and
crammed with features that most people never use.

IN THE INTERNET FUTURE

HARDWARE-INDEPENDENT STANDARDS: A package written using a Web-compatible

software language, such as Java, will run just as well on a PC as on a Mac--or on a future
Internet appliance.

SOFTWARE ON DEMAND: In the networked era, computer buyers can jump off the upgrade
treadmill. Instead of waiting for the creator of your favorite program to add a key feature or fix a
flaw, you can buy it on the Net from the software supplier--or an enterprising competitor--as
soon as the improvement or patch is ready.
OBJECT TECHNOLOGY: Java and other new programming systems are ``object-oriented,''
which means that data and the software needed to use them are merged into so-called objects. An
object called ``quarterly sales,'' for example, might have the data and the programming needed to
construct a bar chart.

APPLETS: Forget bloatware: You'll be able to purchase (or even rent) little bits of software for
specific tasks as you need them. Many applets will be object-based and may be intended for a
one-time use only--say, an applet for ordering a free sample from a publisher over the Internet.

The Shifting Balance of Power

WHO MAY WIN

NETSCAPE: Its Navigator browser could become the Windows of the Web.

SUN: Java is gaining a fast following among programming's vanguard. The challenge: Turn Java
into a moneymaking business.

SMALL DEVELOPERS: Using the Net to distribute software opens the market to small
developers that could not crack the old business.

WHO STANDS TO LOSE

MICROSOFT: The software giant has the most to lose if it can't extend its influence to the Web.

IBM/LOTUS: The Internet provides a low-cost way to do many of the basic tasks performed by
Lotus Notes. A Net-friendly Notes is a must.

RETAILERS: Some consumers will continue to shop in stores, but more and more software will
be distributed over the Net.

By Amy Cortese, with John Verity in New York, Kathy Rebello and Rob Hof in San Francisco,
and bureau reports