By Peter Wolchak

Microsoft Corp. is living through interesting times. On the positive side, the company recently announced solid revenue numbers and rolled out the red carpet for the launch of its flagship product, Windows XP. It is also promoting .Net, its vision of a future in which the Internet seamlessly delivers software, data and services in real time.

Less happy for Microsoft are a long series of wellpublicized security holes in its software and widespread criticism over a revamp of its software licensing policy that have taken their toll on the company’s reputation. And looming on the horizon is a potential economic downturn that could hit Microsoft especially hard as it looks to Office and Windows upgrades to drive its revenue.

On the day before the official release of Windows XP, Microsoft Canada president Frank Clegg expressed confidence in his company, excitement about its new product and determination that poor economic forecasts should not deter business. But over lunch with Backbone editor Peter Wolchak, he also admitted there were areas where his company needs to work harder.

Backbone: Microsoft’s recent revenue statement puts the company at six per cent growth compared to fiscal Q1 last year. Is that a good result?
Clegg: Considering where the industry is overall, yes. But I’m even more excited about the Canadian numbers: our last three quarters have been the best we’ve ever had. The quarter that ended in September was our second best, the one ended in June was our best and the one ended in March was our third best.
Backbone:Why the recent upswing?
Clegg: There are two reasons. One, if your company is in cost-cutting mode we can save you a lot of money because the server software we’re shipping is a lot less expensive than other server environments.Two, if you’re in growth mode we can show you how to develop your systems more quickly. So I can talk to either type of customer. Obviously it’s more fun when everyone is in growth mode but half of my meetings lately have been about efficiency, containment and cost reduction.
Backbone: We’re moving into a period of economic uncertainty. What do you foresee for Microsoft in the near-term and how did the terrorist attacks affect your planning for the Windows XP launch?
Clegg: We had to make decisions after the tragedy of Sept. 11, and as a company we did a lot of good things.We donated directly to the relief effort and we also decided to put more investment into the XP launch.You only announce a new operating system once every few years so we haven’t slowed this down at all and we are optimistic. [Our business partners] are saying customers are coming in to get XP and our retail partners are [positive]. For example, I was out at Radio Shack the other day—they’ve decided to extend their digital camera line because of the multimedia functionality of Windows XP.
Backbone: So is Microsoft making a statement with its launch of XP?
Clegg: Absolutely. We scheduled the launch [to occur in] New York a year ago and we had a debate recently about whether that’s appropriate now. We talked to Mayor Giuliani and he said: “Please, come to New York. I want to use this as an opportunity to say that New York is open for business.”

I want our people to feel filled with opportunity and be focused, and I don’t want the terrorists to be successful with what they’ve done. If we overreact and everything slows down then they’ll think they won.
Backbone: How important is Windows XP to your business plan?
Clegg: It’s the cornerstone of the future because it impacts everything we do on the desktop. It’s important, for example, because it offers 10 times the reliability of Windows 98 or 95, which is an incredible statement for a business or a consumer. Also,Windows and Office are 65 per cent of our revenue, so there is a short-term revenue importance here and a longterm momentum importance.
Backbone: When you talk to a company about Windows XP, what core messages are you trying to get across?
Clegg: First, we can have a huge impact on your world today; second, there are new things we’re doing; and third, XP is the future.

The improvements today are 10 times the reliability over Windows 95 or 98. That’s a huge improvement and it resonates with business users. We also have ease-of-use improvements, so adding a printer to your computer will take half as much time.We’ve calculated that an average user in a Windows XP environment, versus a user in a Windows 2000 environment, will save 40 hours per year [doing routine tasks]. If you figure out how much your time is worth, you can pay for Windows XP in two or three months.

As for new features, we have a function called Remote Install, so instead of a tech support person taking two hours to deploy a desktop—one hour to install the software and another hour to load applications—we can do it remotely in as little as 40 minutes.

For the future, we’re spending a lot of time explaining the .Net vision to companies and this is the desktop for .Net. So with XP you’re positioned for the future.
Backbone: How will .Net help businesses?
Clegg: The Web does a good job of sharing information—I can go to a Web site and pull down information—but we haven’t done a good job of allowing applications to share information.

For example, suppose my business has an inventory control system. My customer can send me an order and I can process it and that works now, but we have to [create that link manually]. What if you have an application that tracks orders and inventory quantities, and when an order comes in, I ship it, you receive it and update your inventory—and all this is done without any human interaction. I’ve just taken a lot of the handholding and a lot of the communication and let the application take care of them. That’s the framework .Net creates.

Or, for example, you want to transfer a payment through a bank. You can do that today—you can set up a transfer from you to the bank to me, but you are responsible for authentication and security. But put .Net services in front of that and all the authentication is taken care of by Microsoft. You and I [in our business relationship] worry about me shipping you what you need, the banks worry about the money and Microsoft handles all the consolidation and synchronization. You can do this anywhere—I could give you travel examples, mortgage examples, any type of application.
Backbone: Is .Net well understood by the business community?
Clegg: No, it’s not. So we’re going to keep talking about it and showing examples. This is a large, complicated undertaking.
Backbone: Windows XP has built-in support for wireless technology. How important will wireless be in Canada?
Clegg: I think it will be very significant. In Canada, our broadband Internet penetration is one of the best in the world and I think [that’s because] Canadians are very good at recognizing when something is a good deal and is efficient. Wireless will be a good deal and I think it will be accepted. But really, who the heck knows? So our job is to make it so easy to do that people will take advantage of it.
Backbone: Microsoft has taken a lot of criticism for its Software Assurance Upgrade program, in which business customers adopt a new software upgrade and fee schedule. Microsoft CEO Steve Ballmer said publicly the company has heard a lot of objections and as a result has twice extended the deadline by which customers must sign on to the plan. What have you heard in Canada?
Clegg: The complaints you hear coming from the U.S. or from the U.K. are not different from what I’m hearing here, but I don’t think I’m hearing them as loudly or as frequently.

We made a decision [to extend the deadline] and you’re kind of in a box when you do those things: the ones who have already made the change may not be happy with you and yet you’re [addressing people who have concerns]. In hindsight, we could have done a better job of explaining this.
Backbone: Is this an unfortunate time to be changing licensing costs?
Clegg: If we had known, would we have scheduled this for 19 days after Sept. 11? Clearly we wouldn’t have…but we launched this in May and how could we undo it after Sept.11?
Backbone:Will Microsoft change its mind and cancel the upgrade program?
Clegg: No. This program makes sense. Forty per cent of customers will get a better deal [through this program], for 40 per cent it’s neutral and for 20 per cent, if they continue on their current plan, this may cost them more money. Where it causes you grief as a customer is if you plan not to upgrade for three years.
Backbone: Microsoft’s security reputation has taken quite a beating lately. Outlook has been hit by a number of viruses, Code Red attacked Internet Information Server (IIS—a Microsoft Web server) and now Gartner Group has said publicly that companies should find an alternative to IIS. How do you respond to security concerns?
Clegg: Let’s be clear: Gartner didn’t say this, one individual at Gartner, who didn’t have all the facts, said this. Then it gets spun,
sometimes by our competitors, that Gartner says to get rid of IIS.

Clearly, if you’re going to get visibility [as a hacker] you’re going to go after the company with the biggest market share. There is no point in going after someone who has two per cent of the desktops and two per cent of servers, so Outlook, Windows and IIS will be targets.

Having said that, we [recently] launched a program on our Web site where a customer can find out what they need to do to get current on security, and customers using Windows 2000 Service Pack will get security patches every two months. So we’ve created things to help you get current and things to help you stay current.

Also, we disclose every problem we hear about right away. Even if we don’t know how to fix it,we’ll tell the world about it.
Backbone: The criticism hasn’t been that Microsoft doesn’t respond quickly to security problems, but rather that those
problems exist in the first place. It costs time and money to keep up with the constant stream of patches. Why can’t Microsoft create less vulnerable software?
Clegg: You can go to our corporate headquarters and actually watch people trying to break into our server network, and there are thousands of those going on at the same time. So what can I do about that? How long should we delay the shipping of XP [for example] to work on security? We’ve got Compaq and Dell and HP and Intel saying: “C’mon, get that thing out the door, we’ve got Pentium 4s ready to go, we’ve got digital cameras ready to go.” So you have to make a trade-off.

We’re putting more resources into doing this better. But I could make it bulletproof and users wouldn’t want to wait for it and I don’t know if they’d buy it. Say you wanted to add a driver and the software said, “Sorry, you can’t” [for security reasons]. I could give you Windows 2000 Data Center [Microsoft’s most secure operating system] and I could guarantee you 99.9 per cent availability, but any application that runs on that has to be pre-certified, any device has to be precertified, so do you want that? A bank does... but there’s a
trade-off for security and our studies say people don’t want that level [of hassle].
Backbone: Microsoft released an interesting study in May 2000 that found the average Canadian worker spends 48.7 hours a week at the office, and spends more hours in front of a PC than five years ago. Do Microsoft products increase productivity?
Clegg: If you upgrade to Windows XP we’ll take 40 hours off your work year, so that’s one thing. Also, in Office we identified a dozen common tasks and we’ve cut the time in half for many of those.We’ve also added Remote Assistance, so you can pass over control of your computer to me to fix a problem, but I could also take control of your machine to show you how to do something really cool.
Backbone: For years, every software vendor with an operating system or office suite, including Microsoft, has promised to increase efficiency but your own study says we’re working harder and longer.
Clegg: But think about what you’re doing on your PC versus five years ago. I write a document and, in the Old Economy, I distribute it to my team, they send comments back and I have to pull all that information together.

Now, with Office XP, I can have the software track all the changes, so I’m sending documents out [more often] than I would have previously.

This is actually a positive spiral: I have a good experience and decide I should do more. So it’s not a bad thing that I’m spending more time in front of my PC; I’m making a conscious decision that I can do something faster by doing it with a PC than by phone or mail.We’re doing 10 times more than we used to.