December 9, 2002

In Software, Still Testy After All These Years

hey are like an old divorced couple, I.B.M. and Microsoft. They have a long history of mutual admiration and animosity. Formerly partners, they still cooperate from necessity in a spirit of wary pragmatism, but they are fierce antagonists.

Now, the rivalry is heating up and, once again, the battlefield is software. Friday's announcement that I.B.M. plans to pay $2.1 billion for Rational Software, a leading supplier of software tools, is another significant step in I.B.M.'s aggressive drive to build its prowess in software based on Internet standards. In so doing, I.B.M. is positioning itself as the main challenger to Microsoft and its dominance of the software industry.

"Microsoft and I.B.M. are competing over who defines the dominant systems model of computing for the next 20 years," said David Cearley, a senior vice president of the Meta Group, a research firm.

For I.B.M., the current competition is something of a second chance. Microsoft famously outsmarted I.B.M. in personal computer software. In 1981, I.B.M. had ensured the upstart Microsoft's succcess by selecting its software to run the I.B.M. PC. Then, in the late 80's, the companies agreed to work together on personal computer operating systems.

Under the agreement, Microsoft's Windows would focus more on simpler systems while I.B.M.'s OS/2 was intended as a more robust system running on more powerful PC's, especially in the corporate market. The partnership finally collapsed in acrimony in 1992. Though I.B.M. kept pushing OS/2 for years, Windows became the industry standard and a monopoly, and Microsoft became as powerful in the personal computer era as I.B.M. had been in the mainframe era.

This time, I.B.M. and Microsoft are the leading rivals in the unfolding era of networked computing. "So here we are again with these two companies," Mr. Cearley observed. Within networked computing, one crucial market is the software that runs the larger data-serving computers that power corporate networks and the Internet. I.B.M. has aggressively promoted Linux, a variant of the Unix operating system that is distributed free. Linux is not only a low-cost alternative to commercial versions of Unix, but it also presents the biggest challenge to Microsoft's server software.

Still, Microsoft is moving beyond its mainstay desktop market by making solid inroads into the lucrative business of corporate computing. So far, though, big data centers still run largely on mainframes, which remain an I.B.M. stronghold.

"Here we come," said Bill Gates, the Microsoft chairman.

Displacing I.B.M.'s mainframe technology, Mr. Gates emphasized recently, will not come quickly for Microsoft. But he regards the steady trend as inevitable. "This is the decade that it is going to happen," he said.

A second vital market is for the layer of software — known as a technology platform — on which programmers write applications for networked computing. Such applications may include, for example, the programs that allow a regional grocery chain to monitor its stores' inventories and automatically place orders with suppliers, or enable a corporate personnel department to keep employee benefits records current among its branch offices.

One reason I.B.M. has embraced Linux is to undermine the considerable advantage Microsoft has because of the fact that millions of programmers worldwide have grown accustomed to writing software that runs on the Windows platform, using Microsoft's easy-to-use software tools. (The purchase of Rational should help I.B.M. catch up in the tools race.)

In a tactic that could also help circumvent Microsoft's greatest strength, I.B.M. is seeking to move the platform layer of software to a level above the operating system, known as middleware. I.B.M.'s middleware offering is called WebSphere, and it is built with a version of the Internet programming language Java, J2EE. Java was created by Sun Microsystems, but I.B.M. researchers contributed a lot of technology to J2EE.

A Java-based platform like WebSphere can run on many different operating systems. Microsoft has its own technology platform for writing networked applications, called .Net, but it is more tailored for the company's Windows operating systems.

The payoff from networked computing that Microsoft, I.B.M. and many other companies are pursuing is expected to come from Web services — clever software that could bring a new level of automation and productivity to all kinds of online transactions among companies, suppliers and consumers. The software would use the Web to find and share data in electronic databases of companies or individuals, then automatically do things like making doctors' appointments, restaurant reservations or procurement purchases.

I.B.M. executives argue that a networked computing world is more technologically diverse than Microsoft's model can handle. They say the benefits to companies and consumers will come more quickly by using open-technology standards, like Linux and Java, that are not controlled by a single company.

And I.B.M. veterans say the predicament that the shift to networked computing poses to Microsoft is familiar to anyone who experienced I.B.M.'s loss of clout years ago as the mainframe was no longer the focal point of computing. "Heck, we'd love it if the world was still all 370 or 390 mainframes," Samuel J. Palmisano, I.B.M.'s chief executive, said recently, chuckling. "Monopoly is great — if you have one."

"But," added Mr. Palmisano, who championed I.B.M.'s Linux strategy, "that world is over."

At Microsoft, the company's executive team has identified two principal competitive threats: I.B.M. and free software like Linux.

Feisty and combative, Mr. Gates says he finds I.B.M.'s software unimpressive — a patchwork of programming projects, not as coherent or as integrated as Microsoft's competing offerings. "WebSphere is a marketing term for I.B.M.'s platform," Mr. Gates said.

"We have nothing against free software," Mr. Gates insisted. But, he added, it just so happens that the commercial model works better in most cases for both producers and consumers.

Good software, he conceded, is running on Linux systems, including computerized special-effects for Hollywood movies and gene-sequencing research. "But that is because something has been built on top of it," he said. The Linux technology itself, is "sort of Unix of the 1970's," Mr. Gates said. "There's not one iota that's changed."

But what most irks Mr. Gates is the suggestion that using Linux is ultimately cheaper than Windows. Windows, he says, is a richer platform with more services and tools for writing programs quickly and efficiently. Corporate software projects running on Linux, he asserted, are more labor-intensive, often requiring specialized programming and expensive consulting services.

"You take Linux and run WebSphere on top of it — that's called expensive," Mr. Gates said.

But Mr. Gates does agree with I.B.M. on one thing: the main competition is the other guy. With corporate customers cutting costs and reducing the number of suppliers, Mr. Gates said, "In most cases today, it's narrowed down to two platforms worked on: I.B.M. platforms and Microsoft platforms."

Irving Wladawsky-Berger, an I.B.M. vice president for technology strategy, views the market much the same way. "I don't think it is arrogant to say there are really only two companies that can set broad strategic directions in computing — I.B.M. and Microsoft," he said.

That these two companies stand so well positioned today is remarkable. Neither were leaders in the first of wave of Internet technology of the 1990's. Yet both adjusted quickly — even if Microsoft's tactics were the subject of a federal antitrust suit that the company lost.

But the front-runners in supplying the basic technology for Internet computing — the "four horsemen," as Wall Street dubbed them — were supposed to be Sun Microsystems, EMC, Oracle and Cisco Systems. All four have faded badly, though, while Microsoft and I.B.M. have held up remarkably well in the current technology slump.

True, the diverse technical ecology of networked computing will leave room for many other suppliers. I.B.M.'s WebSphere, in particular, still faces competition from other makers of Java-based middleware platforms, including Sun, BEA Systems and Oracle.

And the networked environment has also prodded I.B.M. and Microsoft into new forms of cooperation. Earlier this year, the two led the founding of the Web Services Interoperability Organization. The purpose of the organization is to agree on common standards for communications and data exchange so Web services applications from different companies can talk to each other.

Still, the two companies approach the networked computing with very different technical philosophies — a gap unlikely to be bridged. "To really take advantage of Microsoft's technology, you have to move into the Microsoft world," said John Swainson, I.B.M.'s general manager for WebSphere. "In that world, any non-Microsoft technology is a second-class citizen."

Even with its networked .Net technology, the Microsoft lock-in mentality, honed with Windows, remains intact, I.B.M. executives contend. "Once an application is written to the Microsoft platform, it can never come out," said Ambuj Goyal, chief of strategy for I.B.M.'s software group. "It's like a lobster trap."

Microsoft and I.B.M., it seems, are trading wins and losses in different markets. Fortis Health, a health insurance provider in Milwaukee, has over the last year moved applications off an I.B.M. mainframe computer and onto a large Unisys computer running Windows. Roger Jones, the chief information officer for Fortis Health, said, "Windows has been moving up into the data center for years, to the point where it can handle big applications." The shift from mainframe computing, he added, should save his company several million dollars over five years.

In San Francisco, Sara Garrison is senior vice president for network and open systems at Inovant, the information technology unit of Visa International. Visa's global credit card system handled 28.5 billion transactions last year. "We're always pushing the limits of what technology is capable of," Ms. Garrison said.

Over the last year, Visa started a big project to automate the tracking, retrieving and correcting of disputed payments across its vast network. Ms. Garrison chose WebSphere and other I.B.M. offerings over the competing bids from Microsoft and others on the project. I.B.M.'s research labs and services units are also working on the Visa project. But Visa also uses a lot of Microsoft technology, and Ms. Garrison calls Microsoft's .Net technology "a developing player" in her domain of high-performance networked computing.

Perhaps the only certainty is that the I.B.M.-Microsoft rivalry will not end any time soon. Mr. Gates laughed when asked about Microsoft's sometimes friendly, often antagonistic relationship with I.B.M. — a corporate relationship that has run more than 20 years. "When I was born, there was I.B.M.," he said. "And when I die, there'll be I.B.M."