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Sorting Through the .NET Confusion

Microsoft has said that .NET is its most important initiative, a "bet-the-company" three-to-five-year plan for its own business and the Internet in general. But the company hasn't always been clear about what ".NET" really means. Since its June 2000 announcement, the initiative has created confusion among partners, analysts, and even Microsoft employees.

Signs of trouble appeared at the initiative's June 22 launch when Microsoft Chief Executive Steve Ballmer felt compelled to wrap up a day's worth of presentations by saying:

For some of you, though, I'm going to suspect that you still are asking yourselves a few questions. One question might be, and I'll be as direct as I can be about this, what is .NET?

Ballmer's suspicions were correct; as Fortune correspondent Brent Schlender later observed:

Every executive—including Gates and Ballmer—had difficulty explaining succinctly what the new strategy really was. Give them an hour and you began to get an idea, but even then I felt like one of the blind men feeling the elephant.

The confusion arises in part because .NET is so large in scope and so rapid in its evolution, and also because Microsoft has stuck the .NET label on three distinct but related initiatives: a vision for how software architecture will evolve to more fully exploit the Internet’s potential, a software platform that Microsoft is delivering to support the vision, and a set of hosted services designed to support the vision and market the platform (and, of course, to make money). When Microsoft folks discuss ".NET," they often fail to clarify which facet of .NET they are talking about.

Microsoft partners and competitors need to understand all elements of .NET if they are to identify the opportunities and threats that Microsoft will create from now through the end of 2002, and customers need a firm understanding of the platform to evaluate the new products that Microsoft will ship over the next 12 months and beyond.

An Overview of .NET

Microsoft's three-pronged .NET strategy follows the same tried-and-true path used to establish Windows’ dominance.

• First, rally software developers with a vision for the future compelling enough to move them to adopt a new software architecture and set of tools.
• Second, provide developers with a software platform that supports that vision, even if it takes a few iterations and massive investment to assure it is on par with or superior to competitors’ alternatives.
• Third, deliver a set of offerings built on top of the platform as a means to demonstrate to others what is possible (i.e., proof-of-concept), to discover and repair bugs and deficiencies in the platform, and to stake out the most potentially lucrative markets for oneself.

Establish a Vision

Starting in the mid-1980s, Microsoft began to espouse the vision that the graphical user interface (GUI) would become the next major trend in personal computing. Microsoft wasn’t alone in its belief—Apple was also a strong proponent of this vision—but it is fair to say Microsoft faced many detractors at the time who doubted GUIs could deliver on the promises of enhanced personal productivity and usability.

With .NET, Microsoft is also espousing a vision, this time about how the Internet can make businesses more efficient and deliver services to consumers. The key tenet: a new kind of application called a "Web service" will become the engine for business on the Internet. Parts of this vision are shared with other key players in the industry, including Microsoft’s fiercest competitors. Other portions of the vision are somewhat controversial. (See "The .NET Vision" section.)

Supply a Software Platform That Supports the Vision

The second element of the strategy pioneered with Windows is to supply developers with a software platform that supports the specific vision. For GUIs, this was a new layer called Windows that ran on top of the existing MS-DOS operating system, and a set of development tools for building applications on top of the Windows layer. With .NET, Microsoft is introducing a new software layer, called the .NET Framework, on top of its current operating system, and is revamping its development tools and many other products to create a platform particularly well suited for building Web services. (See "The .NET Platform" section.)

Deliver Offerings Built on the Platform

The final element of the strategy is to deliver a set of product or service offerings that run on the platform. To promote use of Windows, Microsoft began selling a line of Windows-based applications, such as Word and Excel. These applications helped fuel consumer demand for the Windows platform and became the de facto interface style for third-party developers. And, of course, these applications eventually grew to become the single largest contributor to Microsoft’s bottom line.

With .NET, the accompanying offerings are revenue-producing "hosted services" running at Microsoft’s data center, rather than shrink-wrapped products delivered on CD-ROM. These services will include adaptations of current products, such as Encarta and (eventually) Office; "premium" extensions to existing MSN online services, such as a personalized Internet-based music "radio channel"; adaptations of existing online fee-based services, such as bCentral; and an entirely new set of yet-to-be-defined services. These services, Microsoft hopes, will prove its new platform is ready for the most demanding of customers and will show developers how to make the most of it. However, they could also augment Microsoft's slowing PC software business with a steady, growing revenue stream from subscription and transaction fees. (See the ".NET Hosted Services" section.)

Why .NET Is Important

The .NET vision, platform, and hosted services all are important to secure Microsoft’s future growth and to reenergize its own employees. For Microsoft’s customers and partners, .NET is the key to understanding the company's products and business moves for the foreseeable future.

Microsoft: Growth and a Rallying Point

The near-term growth opportunity driving .NET is the enterprise server software market. Microsoft executives have long known that the maturing of the PC hardware market was inevitable, and that sales of PC desktop operating systems and applications would plateau, or at least slow considerably. Server-based products are the single largest mid-term (5+ years) opportunity to grow revenue and profits. Here is a large and rapidly expanding market where Microsoft had only a small presence—meaning there was opportunity to both ride a growing market as well as to take market share from competitors.

To expand further into the server market, however, Microsoft must convince companies that its server software can provide the same high levels of reliability, scalability, and security as the currently dominant Unix and mainframe platforms, and give companies compelling reasons to move off those competing platforms. The solution: substantially reengineer Microsoft's own platform to attack the fragility and performance issues that have plagued Windows applications to date, and promote a new class of server applications—Web services—for which the reengineered platform is uniquely suited. Then, the company will build large-scale hosted services on the platform to demonstrate to enterprise customers that the platform can do the job.

Beyond servers, a longer-term growth area is also driving .NET: turning the hundreds of millions of Internet users and millions of small-and medium-sized businesses into an annuity revenue stream. Microsoft built this huge audience via its MSN Web sites, but has long struggled to "monetize" the relationship. The solution: create hosted services that can deliver unique capabilities for which millions of customers will pay a small monthly fee.

Finally, .NET has already proved important as a flag for rallying the company's employees. Historically, the people at Microsoft have done their best work when they have been in the midst of a grand quest, whether that was the late-1980s campaign to bring GUIs to the masses or the mid-1990s fight to bring Windows onto the Internet. .NET now provides a quest for the opening years of the 21st century: rebuild the company's software platform from the ground up to realize a vision of a "third-generation Internet" built on Microsoft blueprints and powered by Microsoft services.

Customers: Upgrade and Decision Point

For companies developing and hosting software on the current generation of Windows technology, the second element of .NET, the platform, is the most important. With this platform, Microsoft is tackling some longstanding problems that have hurt productivity and relegated Windows to the edges of corporate IT systems, on desktops and departmental servers. The core component of the platform, the .NET Framework, promises to sharply reduce the likelihood of the most common kinds of application bugs and security holes. It offers significantly improved application deployment technology that could eliminate most installation conflicts and adds important new safeguards against viruses and worms.

However, the platform also brings radically changed APIs and tools for developers and new protocols and management technologies for IT. Consequently, it represents an important technical fork in the road, forcing companies to decide whether to keep working with the current Windows platform (which Microsoft will continue to support for some time after it ships the .NET platform), retrain people for the .NET platform, or move toward competing platforms, such as Java.

Partners: Opportunities and Boundaries

For Microsoft partners, the .NET vision outlines the next range of business opportunities that Microsoft sees. The platform will create opportunities for software companies and solution providers to emulate companies like eBay and Corel who have built partnerships with Microsoft by filling gaps in the platform or by promoting the platform through early adoption. However, Microsoft's plans for hosted services also place some bounds on what the company's partners can safely do with the platform—unless they want to end up as Microsoft competitors.

Competitors: Embrace and Challenge

For competitors such as IBM, Oracle, and Sun, which have promoted the Java 2 Enterprise Edition (J2EE) platform for server applications, the .NET platform is the sincerest form of flattery, adopting many of the ideas of J2EE with extensions and adaptations to Windows. With Microsoft's development tools, marketing expertise, and strong developer base behind it, however, the resulting platform presents a formidable threat. Microsoft's plan to host large-scale services on the platform also represents a significant threat to Internet portals, above all to the newly combined AOL/Time Warner empire. However, even companies such as IBM that are threatened by parts of the .NET effort have found opportunities to cooperate with Microsoft on shared elements of the .NET vision.

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