It had already been a crazy week on planet Internet: digital upstart America Online had snapped up Batman, Sports Illustrated and 13 million cable homes while barely wrinkling its corporate chinos. Now a knot of journalists in the tiny television studio in Building 127 on the sprawling Microsoft campus were being handed a press release with yet another newsbreak from Bizarro-world: Bill Gates was quitting as Microsoft CEO, a job he'd held almost since the PC industry's birth and his puberty. Then Gates himself appeared, in his usual garb of sweater, slacks and spectacles. But the world's richest man did not immediately explain that he was changing his title to chairman and chief software architect, handing the CEO-ship to a man worth only $25 billion, president Steve Ballmer. Instead he talked enthusiastically about how much he was relishing the firm's biggest challenge yet: marshaling all its resources to produce a new bet-the-company generation of software that will harness the power of the Net.
Only then did he introduce his successor, who made sure that people got the message. "The most significant point of departure isn't the management change," said Ballmer. "It's what we see as the revolution on the Internet."
But whose revolution is it? Microsoft's view of the opportunities offered by the digitization of the globe differs sharply from the approach of the newly minted old/new media team of Steve Case and Gerald Levin. Instead of seeing the Web as a resource-rich data frontier waiting to be tamed by a geek jihad in Redmond, Case and Levin view the Net as the ultimate playground, where entertainment goes interactive and those with content to sell and pipes to send it through will be the winners.
So why the need to merge? For AOL, the biggest lure was broadband, a high-speed entryway to homes. Time Warner simply needed outside help to get Internet customers and know-how. But both Case and Levin are enthusiastically betting that if a company can draw millions of consumers on the Net, it also makes sense for that company to own movies, music, magazine articles and John Rocker fast balls--so it can milk online consumers for plenty of bucks. The venture isn't about creating new technology; everybody already expects content and commerce on desktops and in living rooms, on palm devices and mobile phones. The buyout is about exploiting that technology to ensure that an array of AOL devices will beam out Fortune magazine articles and trailers for "Lethal Weapon XV"--and track your interests so advertisers can target you for even more.
"It's like the music business in the '70s, where there was incredible value that was only unlocked by the compact disc," says Bob Pittman, the veteran of both companies who will be co-chief operating officer in the new venture. Pittman sees the buyout as a googleplex of opportunities big and small. A big one would be having Warner Music take the huge leap into digital distribution. A more modest move would be using AOL's online service to renew subscriptions to Entertainment Weekly and other periodicals. There's also bound to be package deals on advertising and cross-promotion of old and new media products. "That's the easy stuff," says Pittman.
Or is it? Competitor George Bell, the president of Excite@Home, thinks that while AOL was smart to get access to Time Warner's cable customers, acquiring the world's biggest media company may not have been necessary. "I don't believe you need to own proprietary content to be able to develop and distribute it across a network," Bell says. Yahoo! president Jeff Mallett agrees: "It's not as though all of a sudden, from a consumer perspective, there's a wonderful treasure chest of content and services from Time Warner that hasn't seen the light of day on the Web." Pittman has little patience for those who predict that synergy will work no better on the Web than it did in the past. "We're not completely stupid," he says. "We have complementary assets that will unlock value that neither company can deliver on its own--synergies so major that they won't work unless you get all the assets in one place."
Still, despite instant pundit predictions that other Internet portals would suddenly be desperate for old-media properties of their own, there appeared to be little desire to do so. Yahoo, for instance, quickly quashed speculation that it would use its huge valuation to hunt for a mighty but lesser-valued old-media duck like Disney.
Then there's the basic cultural difference between the companies. Some time ago, AOL realized that what kept its users bound to the service was not stuff like sports or weather--you could get that anywhere on the Internet--but the information and interaction that its users themselves generated. By hosting hundreds of chat rooms, sponsoring the most popular Instant Message service on the globe and giving Granny an e-mail address that she'd never figure out how to change, AOL kept its audience and saw growth accelerated by the Network Effect (the more people who sign up, the more valuable the service becomes). Some of AOL's competitors think that it might lose its legendary focus when it turns its attention to selling Madonna songs, People subscriptions and Tom Hanks movies.
But lots of people will want songs and movies over the Net. Once the Internet gets faster and more ubiquitous, it's reasonable to think that the mammoth new company might indeed make a mint from its media properties. "Anyone who wants to reach a consumer in their home now has to do it in the face of the greatest collection of media assets being combined with the No. 1 online company," says William Savoy, president of Vulcan Ventures. If such synergy didn't make sense, why would privacy experts already be wringing their hands about the implications of the merger? Their worries about AOL Time Warner's accumulating a database with everything from your reading habits to your day-trading logs are a perverse confirmation that Case and Levin are on to something.
Not that Bill Gates would agree. While both Microsoft and AOL share a vision that the Net will be everywhere, Gates and Ballmer think the key to unlocking value isn't owning a movie studio, but producing the software that will make the whole caboodle click. Microsoft sees its future as producing and selling services and tools that will bind together applications, Web pages and databases. The magic that will enable this to happen is an open standard called XML, which tags information in such a way that it can be manipulated by all sorts of different programs. Some people think that another necessary ingredient is a computer-language Esperanto like Sun Microsystems' Java, but Microsoft disagrees, and will use an approach that fits snugly with its newly (finally!) completed Windows 2000 operating system.
In a letter to employees last Thursday, Gates described the effort as just as important as the shift from arcane command lines on the screen to the now-familiar mouse-and-windows Graphical User Interface. "If we and our partners successfully execute on our goals, a great Internet User Experience (IUE) will change the way everyone receives healthcare service," he wrote. "You'll be able to keep all of your information in a secure and private place out on the Web. You'll be able to easily pay your bills or address issues with your insurance company, receive notification when a medical appointment is needed, and incorporate those appointments into your calendar--automatically, wherever you are and whatever device you are using."
That's an example of a so-called Next Generation Windows Service. (Note to new CEO: get sexy new codename.) The idea is to seamlessly integrate all the world's digital information, so everything communicates with everything else. Ideally without error messages.
"The problem is really hard, a triple backflip with a high degree of difficulty," says Sun Microsystems chief scientist Bill Joy, who agrees on the vision--but thinks Microsoft won't get there, because it wants to rig the software so it works best with Windows. Obviously, Joy isn't convinced by Microsoft's insistence that its processes will be open. If that's so, he says, "no one will work with them. You don't voluntarily work with someone if you think they want to kill you."
No wonder Gates figures that this challenge alone was plenty for him. Microsoft's new chief software architect claims that he'd enjoyed all his CEO duties, and that he "wasn't gritting his teeth" even when venturing to D.C. to talk to politicians who couldn't tell a GUI from a URL. But he clearly seems relieved, almost giddy, at the prospect of not doing it anymore. Friends and family have confirmed that the Justice Department suit took its toll on the chairman. And by last summer, both Gates and Ballmer were admitting the failure of a 1998 reorganization designed to give Gates sufficient time on software. So Gates told Ballmer his idea of leaving the helm so he could work full time on products and tech strategy.
"It surprised him quite a bit," says Gates.
"It blew me away," says Ballmer.
Don't expect a different Microsoft under the 43-year-old MBA who bailed from Stanford Business School in 1980 to help his Harvard buddy manage a dodgy start-up. With his high-decibel, hit-'em-again ethic and an underappreciated pragmatic wisdom, Ballmer has already put his imprint on the company, and for some time now has been sharing the decision making with his boss. "The change is more evolutionary than anything else," he says. (And both Gates and Ballmer vociferously deny that the change had anything to do with the DOJ case or last week's leak that the prosecutors wanted to break the company up--a solution that would be "reckless beyond belief," howled Ballmer.)
Gates's self-directed demotion is not without risk. His strength as CEO went far beyond technical acumen. He was the ultimate quarterback, surveying the technological gridiron at a glance and barking out calls to execute the play. Then he'd use his deep knowledge of what was happening in Redmond to focus Microsoft's acquisitions, partnerships and business plans. "Bill has an amazing personal capacity to keep things in his head and make the point of integration," says Ballmer. But now that the company is so big and the challenge so large, "it can't all be in one person's head."
What's more, nobody's head can know for certain which strategies will lead a company to Internet glory in the 21st century. Just consider two once-reliable institutions, both vaporized only two weeks into new century: Time Warner and Bill Gates's job title.