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Microsoft Corporation (MSFT) Catches a Wave, and the First Shot in the Software Patent Wars

On this day in economic and business history …

Microsoft Corporation (NASDAQ:MSFT) CEO Bill Gates has a great track record of anticipating computing trends. He founded Microsoft to provide a programming language for the primitive Altair 8800, a direct predecessor to the PC. The launch of the PC put Microsoft and its DOS operating system at the crossroads of the greatest technological proliferation since the 1920s, but it might never have been possible without a combination of great timing and incredible luck. However, by 1995, Gates began to realize that Microsoft would miss the boat on the next major computing revolution, and that possibility might pose the greatest threat to his company’s long-term survival.

On May 26, 1995, Gates sent his top lieutenants a long memo that would become known as “The Internet Tidal Wave.” In this memo, he laid out what was happening and why it was so important that Microsoft Corporation (NASDAQ:MSFT) not miss the wave. Here are a few of the more pertinent excerpts:

Our vision for the last 20 years can be summarized in a succinct way. We saw that exponential improvements in computer capabilities would make great software quite valuable. Our response was to build an organization to deliver the best software products. In the next 20 years the improvement in computer power will be outpaced by the exponential improvements in communications networks. …

Now I assign the Internet the highest level of importance. In this memo I want to make clear that our focus on the Internet is crucial to every part of our business. The Internet is the most important single development to come along since the International Business Machines Corp. (NYSE:IBM) PC was introduced in 1981. It is even more important than the arrival of the graphical user interface (GUI). …

Most important is that the Internet has bootstrapped itself as a place to publish content. It has enough users that it is benefiting from the positive feedback loop of the more users it gets, the more content it gets, and the more content it gets, the more users it gets. …

I think that virtually every PC will be used to connect to the Internet and that the Internet will help keep PC purchasing very healthy for many years to come. …

The On-line services business and the Internet have merged. What I mean by this is that every On-line service has to simply be a place on the Internet with extra value added. … The amount of free information available today on the Internet is quite amazing. Although there is room to use brand names and quality to differentiate from free content, this will not be easy and it puts a lot of pressure to figure out how to get advertiser funding. Even the CD-ROM business will be dramatically affected by the Internet. Encyclopedia Brittanica is offering their content on a subscription basis. …

Once a format gets established it is extremely difficult for another format to come along and even become equally popular. …

A new competitor “born” on the Internet is Netscape. Their browser is dominant, with 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system. They have attracted a number of public network operators to use their platform to offer information and directory services. We have to match and beat their offerings including working with MCI, newspapers, and others who are considering their products.

This memo reached the public during Microsoft Corporation (NASDAQ:MSFT)’s antitrust case, which had been instigated by (among other Microsoft competitors) Netscape. Though nothing in the memo implies underhanded tactics were to be wielded against the browser upstart, it still cast Gates and Microsoft in a negative light in the press.

Microsoft CorporationMicrosoft Corporation (NASDAQ:MSFT) did manage to gain significant early browser share as a result of its intensified (and occasionally underhanded) Internet focus, and the company now earns roughly a quarter of its revenue from Internet-related products and services (primarily in the server market). However, Microsoft has yet to move beyond Windows and Office, the two key products that Gates feared might become obsolete if they failed to gain a significant role in enabling Internet use. Its direct forays into online dominance — MSN and the Bing search engine — have produced disappointing results.

Coding new protections
A different sort of tidal wave began rising on May 26, 1981. That day, the U.S. Patent and Trademark Office awarded programmer and attorney Satiya Pal Asija the first software patent in the United States. Asija had originally programmed a natural-language interface called Swift-Answer all the way back in 1969, when International Business Machines Corp. (NYSE:IBM) mainframes were still the norm and the minicomputer era was only starting to gain steam. At the time, software was ruled unpatentable, but Asija took this as a challenge to be overcome, in this case via legal training. He attended law school, specializing in (what else?) patent law, and filed his patent shortly after attaining the bar in 1974.

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