Is something wrong at Microsoft? It isn't fending off an emerging challenge to its monopoly. And it can't extend its dominance into new sectors. Is this the AT & T syndrome?

Chief Executive, The, April, 2004 by Russ Banham

Pity poor Mike Rowe. The 17-year-old high school student and part-time Web site designer in Victoria, British Columbia, cleverly registered his personal site as www.mikerowesoft.com. He couldn't have anticipated that this would incur the wrath of Microsoft, which posted a 25-page letter to the startled youngster threatening legal action. Improbably, Microsoft warned him that its customers would be confused by Rowe's domain.

[ILLUSTRATION OMITTED]

The headline-grabbing story was another blister on the reputation of an organization seemingly intent on alienating the people to whom it sells. After the Rowe story broke, Microsoft went into overdrive to mitigate the public fallout, offering to cover the teenager's costs of redirecting traffic from his old Web site to a new one and giving him a free Microsoft Xbox video game console.

But Band-Aids notwithstanding, it's been a tough year for the software giant, with headaches ranging from allegations of patent infringements to billion-dollar lawsuits to European and Japanese antitrust actions. Following their brush with federal antitrust regulators, Bill Gates and Steve Ballmer don't appear to have regained the kind of momentum--and respect--the company once enjoyed.

Most recently, Microsoft was forced to play ER to eradicate viruses like the Blaster and SoBig.F worms that infected networks and mailboxes worldwide in 2003, and in February part of the source code for some versions of its Windows operating system was leaked over the Internet. The source code, an operating system's blueprint--the equivalent of the "secret recipe" to Coca-Cola--was available for downloading. Not only could hackers divine additional flaws in Windows, but if competitors get their hands on it, they could conceivably find out how Windows works and copy it.

[ILLUSTRATION OMITTED]

On the competitive front, the company's server business is losing market share to Linux-based servers, and its core Windows operating system is being challenged by Linux, particularly overseas. Microsoft also is losing money with Xbox, its stab at Sony's PlayStation 2 game console; and its Internet MSN venture is losing subscribers, down 1 million between October 2002 and October 2003. Although Microsoft announced record sales in the fourth quarter of 2003, its bottom line slipped. Profits in the quarter dropped 16.9 percent to $1.55 billion from the comparable period in 2002.

Not that anyone is predicting serious financial trouble for the Redmond software giant, thanks to its monopoly position on the desktop. But the company may well suffer from a longer-term backlash, given that rivals are gleefully ready to take advantage of every Microsoft misstep. "When Microsoft was a young startup launching Windows against Big Blue IBM and its OX2, it was the underdog, the company that got the emotional pull," says Mike Gotta, senior vice president at the Stamford, Conn.-based technology research firm Meta Group. "Today, a lot of people, customers and vendors just don't like Microsoft. The anti-Microsoft thing is growing."

The biggest imponderable is what is happening at the highest levels of the company. It has been four years since Gates relinquished his role as CEO to become "chief software architect." In that role, Gates vowed to develop software to "make things a lot better" for the world by 2010. The jury is still out on whether that's happening--and whether Balmer will be able to deliver on his lofty mission "to enable people and businesses throughout the world to realize their full potential."

With every new embarrassment, the possibility grows that Gates and Ballmer are distracted, or worse, simply at a loss of how to defend their company's position or extend its reach into new market segments. Despite repeated requests, the company declined to comment for this article.

Linux: Clearly Gaining

How intense is the Microsoft dislike? If you typed the words "Microsoft" and "bully" in the company's own MSN search engine on Valentine's Day, you would've reaped 24,060 hits. Had you keyed the same words into Google, you would've accessed more than double that number. Microsoft recently announced its intention to integrate search functions into the next version of Windows, code-named Longhorn, giving Google some competition.

Leaving aside comparisons with Netscape and the browser battles of the mid-'90s, the big question is whether the market will allow Microsoft to extend its monopoly into new product segments. "Microsoft leverages its monopoly to crush competition," charges Scott Piraino, a Fairbanks, Alaska-based independent Lindows.com analyst. Lindows is the software seller that used the open source Linux code to offer its proprietary software operating system, only to be sued by Microsoft in 2002 for allegedly taking advantage of its Windows trademark. "They just hate it when some pesky upstart dares to compete against them using Linux as a base," Piraino says.

Linux is the thing that strikes fear into Microsofties. The computer operating system developed by Linus Torvalds is continuously maintained and enhanced by a worldwide network of software programmers who are out to give Microsoft a run for its money. While Linux has ambitions to take on Microsoft on the desktop, it has been more successful in the Web server market, where its prime attraction is its ability to operate on low-cost Intel microprocessors as opposed to more expensive proprietary chips. Matt Eastwood, research director of IDC, says Linux servers grew in both revenue and shipments by nearly 50 percent in 2003 from the previous year, the sixth consecutive quarter of growth for the open source system. Linux's share of the Web server market increased from 23.5 percent in 2002 to 27.6 percent in 2003, while Microsoft's market share fell from 64.6 percent to 62.6 percent. And IDC projects Linux's share to rise to 45 percent in 2007, as Microsoft's share falls to 50 percent. "Far and away, Linux is the fastest growing operating environment in the server world," Eastwood says. "It was only in 2001 that Linux first surpassed NetWare in total server shipments and only in 2002 did it surpass Unix. This is an amazing success story when you consider that Linux started from such a small base."