Was it only December that Microsoft Chairman Bill Gates said that an Internet division would be "like having an electricity division or a software division"? Microsoft, which has clearly taken the heat for lacking an internet strategy, has since been taking steps to meet the challenge of the rapidly growing Internet market.

Microsoft made its latest big announcement on February 20 and announced — surprise! — an Internet division. This announcement comes after an internal reorganization (that received some, but not too much attention) and follows hard on the heels of the MCI/Microsoft joint venture for internet access. Is this a new theory of business leadership: "management by major announcement"? Or is there some pattern here?

In the study of large organizations (a category to which Microsoft surely now belongs), there is an axiom that strategy, structure, systems and staff must all be aligned for the organization to achieve its goals. (These are four of the fabled Seven S's.) In this analysis, we summarize the recent internal changes in Microsoft's structure and focus on what kind of alignment is taken place here.

Our focus is on the implications for the consumer entertainment markets, but to accomplish the objective of this analysis, we must also touch on business markets. Our conclusion is that Microsoft has been forced to downgrade its consumer efforts in order to retain its hold on the corporate market. Our forecast is that while Microsoft may regain much of its lost ground in the corporate market, we are not as confident of its ability to dominant the consumer landscape.

Microsoft announced the restructuring of its Platforms Group around three divisions: Desktop and Business Systems Division, Internet Platform and Tools Division, and Consumer Platforms Division. Separately, and in an internal announcement, Microsoft created an Interactive Media Division that will consist of business units from the now dissolved Microsoft Consumer Divsion. A glimpse of the Before (prior to January 1) and After (after February 20) state of the company is provided in the organization chart.

Desktop and Business Systems.
Headed by SVP Jim Allchin, this Division will have responsibility for the Windows product family including future releases of Win95, Windows NT workstation and server products, and the Microsoft BackOffice suite of server products.

Internet Platform and Tools.
SVP Brad Silverberg has overall development and marketing responsibility for client software, libraries, development tools, and server products that are focused on developing, running and managing internet applications. Microsoft will announce details of its Internet applic;ation and tools offerings at its Professional Developer's Conference, March 12-14, in San Francisco. This division also picks up the systems group from the Microsoft Network unit.

Consumer Platforms Division.
SVP Craig Mundie has two product areas of responsibility: systems software for non-PC devices and integrated software systems for public network operators. Mundie, who has been responsible for Microsoft's interactive television projects (developed in conjunction with TCI and tested in a Seattle field trial), reports that he is taking his broadband technologies down to Internet narrow and mid-band levels.

Interactive Media Division.
Headed by SVP Patty Stonesifer who built the CD-ROM publishing division, this unit will have responsibility for creating and marketing interactive entertainment and information products across channels including Internet, Microsoft Network, and CD-ROM versions. In fact, the Microsoft Network will be part of this division -- as will the MS/NBC joint venture, the DreamWorks Interactive joint venture, the Michael Kinsley on-line magazine, and other strategic partnerships. 2. WHAT HAPPENED? (AN OUTSIDE VIEW)

The original Microsoft campaign theme was "a PC in every home and on every desk." In achieving this objective, Microsoft has long wanted to be in the consumer market, for reasons which are completely understandable. A company can grow for a long time in the consumer market and still have growth potential as McDonald's (the hamburger chain) has shown. For a commercially motivated CEO, there is no larger growth opportunity than the consumer market (unless it might be the prospect of the Chinese consumer market).

We believe Microsoft thought that the consumer market was taking off. That's why ...

• it launched an interactive TV effort (under Craig Mundie) and launched the Microsoft Network as a competitor to the established semi-consumer on-line networks like Compuserve and America-On-Line.

• Mr. Gates appeared on the platform with Messers. Spielberg, Katzenberg, and Geffen to announce DreamWorks and Microsoft's move into entertainment

• it devoted resources from its Win95 team to accelerating Windows graphics -- so that it could be a better game platform.

Microsoft executives may have even thought that the internet was a consumer phenomenon.

The problem is that there are more PC's on desks than in consumer homes. Studies by Alexander & Associates over the last 3 years have repeatedly shown that consumer adoption of PC's has been stuck in an upper income ghetto that may in some ways be comparable to a BMW or Mercedes market. Microsoft is a supplier of parts and services to that market. It's a good market and it can afford to buy a lot of things. But it would be a mistake to consider it a mass market -- like music or television or movies.

While Microsoft executives were mesmerized by the siren call of the consumer market, the real market went right past them. Galvanized by the introduction of graphical web browsers popularized by Netscape Communications (and Mr. Gates' aggressive and highly focused rival from Silicon Graphics, Jim Clark), businesses discovered that intracompany communication by computer networks could be an easy and effective way to improve company administration. Businesses spent money to develop their "intra-nets" based on the open systems philosophy of Netscape, often using systems from Sun Microsystems and even IBM! In a flash, the entire market took two giant steps away from the Intel/Windows/Microsoft hegemony.

The consumer market, on which Microsoft had lavished time and resources, did not emerge. The internet was not a consumer product. And companies were adopting non-Microsoft systems and learning non-Microsoft technologies with extraordinary speed. Clearly, something had to be done.

3. AND WHERE IS IT ALL HEADED?

Microsoft has been lucky. The Windows NT system has slowly earned a reputation as a solid platform for internet hosting and corporate workstations. NT has increasingly been adopted by corporate IT managers who want to stay in the Microsoft orbit. Moreover, the new Intel "p6" -- the successor to the Pentium -- is widely regarded as a good workstation processor, well suited to the NT operating system.

With NT and the p6, Microsoft has a corporate product to challenge Netscape and Sun. We believe that all of Microsoft's reorganization revolves around this point.

Microsoft needs an "intra net" capability for the corporate market, which it can now build around Windows NT. The MCI announcement is a transport capability that will enable Microsoft "solution providers" to build packaged wide area network solutions for large, multi-location corporate intranets. What Microsoft needs to do now -- and what it's reorganization is all about -- is to focus on the corporate intranet markets. The consumer businesses are (at least for now) secondary. The objective is clearly to bring the sophisticated technical capabilities of Microsoft's products (eg, Visual Basic) into line with and supportive of corporate intranet requirements.

This is a need that the company recognized late -- but probably not too late.

4. AND THE CONSUMER -- WHERE DOES HE/SHE STAND?

When Jim Clark was deciding whether to move toward interactive television or in the direction of the internet, he drew a 3x3 matrix, a version of which is shown in the chart below. This matrix divides up the interactive television world into hardware and software, from the consumer to the head-end of the transmission system. It is a seminal exhibit.

The core of this matrix is the Network Operating Software, the software that delivers the programs, bills the customer, pays the supplier, and manages the network. In the interactive television environment of the future, the NOS could be the key, critical, controlling factor in new television/consumer multimedia medium of the future.

There will be tremendous struggles for that core -- but in the end, that is still not a consumer market. It may not even be the most important market a software company could be aiming at.