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A new era--but don't count Gates out yet

Bill Gates may be stepping aside, but the company's aggressive record leads many to believe that the move is part of a grand strategy to revitalize.

Bill Gates may be out, but he's anywhere but down.

While some speculate that Microsoft's co-founder is simply taking a Microsoft 2.0: Gates
steps aside less taxing job after 25 years of fierce competition, Microsoft's aggressive record leads others to believe today's top-level shift is just the first step in a grand strategy to revitalize the company and outflank its enemies.

Gates today relinquished his CEO title to president and longtime friend Steve Ballmer, taking on the new position of "chief software architect" while remaining chairman. By doing so, he gives up one of the most powerful positions in the world at a time when his company is enjoying both unprecedented wealth and daunting challenges.

Although Microsoft's stock and market share in many segments continue to expand, the company faces serious challenges from the government, America Online, the rise of Internet devices, rentable software and competing operating systems such as Linux, to name a few.

How will Microsoft survive the onslaught? Whatever strategy unfolds, the newly unveiled "Next-Generation Windows Services" (NGWS) will be a key part. NGWS is what you get when you cross Microsoft's Windows operating system with Sun Microsystems' vision of a future where most software runs on central servers--rather than your local desktop.

Analyst Anne Thomas Manes, of Patricia Seybold Group, said Microsoft's moves are the company's realization that the Net, and handheld devices, are changing business as we know it.

"You will no longer use the desktop machine as the center of your universe. Your office will be some nebulous thing on the Web...something you can access through any type of device," she said.

Microsoft has "some new brainchild that (Gates) wants to focus on. He thinks it's so big and important that he basically doesn't have time to run the business anymore," Manes said.

Today's rapidly evolving technology landscape threatens Microsoft's biggest revenue sources--Windows and its Office software suite. For years, Microsoft has raked in enormous profits by selling sets of software into each computer. In the future, more companies will bypass Windows, relying on simpler computers to tie in to big, centralized servers where most of the software actually runs.

Microsoft has struggled with this resurgence of "network-centric" computing--away from the self-contained desktop PC--and Ballmer will lead the response, said Summit Strategies analyst Dwight Davis.

"The world is changing around Microsoft. They're tapping Ballmer to be the key driver in this new strategy," he said.

Ballmer's increased presence will be felt elsewhere in the company, although Gates will retain much power, Davis speculated. "Internally, it's going to be Steve Ballmer cracking the whips around the halls of Redmond, but in terms of an icon to associate with Microsoft, that's still going to be Bill Gates for the foreseeable future."

Though the model of hosting programs on central servers at companies called "application service providers" (ASPs) is still nascent, it's coming on strong. Microsoft, feeling the heat, has made several multimillion-dollar investments in ASPs, including a $50 million investment yesterday in Digex and a $10 million investment Monday in Corio.

"My guess is they're Microsoft's day in court looking to create yet another platform to solve the Internet problem," said Ransom Love, chief executive of Linux seller Caldera Systems. Microsoft is concentrating its attention on "yet another Internet platform," having found that Windows and even Windows NT aren't sufficient.

Some also speculated that stepping down as CEO will help defuse some personality conflicts and other tensions in the pending Department of Justice antitrust case.

"The biggest issue facing Microsoft today is whether or not to accept an AT&T-type settlement that involves breaking the company up or to continue the present litigation," said James Love, head of the Consumer Project on Technology. "Many people think that the barrier to a breakup is more personal than financial."

Ballmer dismissed such suggestions today, scowling at the notion that the change in leadership comes to accommodate the court.

"This obviously has nothing to do with that," Ballmer said on a conference call. He said it would take the entire management team to come up with "clever ways to settle" or to defend the legality or "righteousness of what we do."

Another key battleground will be in homes. AOL, which this week announced plans to acquire Time Warner, is racing furiously to develop interactive TV applications and content. If successful, these "smart," easy-to-use set-top boxes could displace PCs as the primary conduit to the Web in homes.

Microsoft has been pushing TV-Internet technology for years through its WebTV subsidiary. Although well known, WebTV has only recently passed the 1 million mark in subscriptions. Like AOL, Microsoft is also working with hardware makers to develop screen phones and other Internet devices.

The arrival of Linux has also provided a serious challenge to Windows. Through Windows NT, Microsoft tried to extend its empire from the desktop computer to more powerful servers, but most analysts agree that NT still has a ways to go before climbing beyond low-end servers. Linux, meanwhile, took some of the wind out of Microsoft's sails: It's cheaper, can be installed on as many computers as wanted, adeptly handles many Windows NT tasks, is popular in the same low-end systems and with its Unix roots, is at home on the Internet.

If some or all of these changes occur, the company could be shaken to its foundation.

"Microsoft has a hard future ahead of it: Between the DOJ and the open-source movement, the industry is changing, and it finally looks like Microsoft won't be at the center of it," said Rob Malda, head of the Slashdot discussion site frequented by Linux fans.

News.com's Joe Wilcox contributed to this report.