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ANNALS OF COMMUNICATIONS
The New Yorker - May 12, 1997

THE MICROSOFT PROVOCATEUR

For a decade, Nathan Myhrvold, Bill Gates’s corporate gadfly, has been writing copious, bombastic, brilliant, and confidential memos for his boss. To read them is to understand a lot about Microsoft—and the future.

by KEN AULETTA

 Nathan Myhrvold is Bill Gates’s favorite geek. “I don’t know anyone I would say is smarter than Nathan,” Gates says. “He stands out even in the Microsoft environment.” But the thirty-seven-year-old Myhrvold, the chief technology officer of the company, is considerably more than a resident geek. Perhaps no one at Microsoft is closer to Gates: he is building a new house near Gates’s on Lake Washington, and he was a co-writer of Gates’s 1995 best-seller, “The Road Ahead.” Myhrvold, who has worked for Microsoft since 1986, is Gates’s strategic planner and futurist, but he also closely supervises development of the company’s software. Often, these roles are meshed. “He is one of the few people who can work on a peer level with Bill,” Pete Higgins, the vice-president of Microsoft’s interactive-media group, says.

Myhrvold, a chubby, red-bearded man with rimless eyeglasses and a high-pitched voice, also seems to enjoy surprising people. Last February, speaking to some six hundred computer-literate folks attending the seventh annual Technology, Entertainment, and Design Conference in Monterey, California, he might have been expected to discuss the hotter industry subjects of the moment—bandwidth, push technology, intelligent agents, Web browsers, or some new variation of  Windows, which Myhrvold, to Microsoft’s great profit, helped to develop and market. Myhrvold, however, chose to address paleontological mysteries; namely, dinosaurs—“how they got a date, for example.”

He strolled about the stage, wearing rumpled black pants and a bulky white sweater; when he tapped his notebook computer, a picture of a dinosaur filled an overhead screen. Myhrvold said that he wanted to deal with a grander mystery. “The first issue to discuss is the biomechanical issues associated with reproductive behavior,” he said. “Or, put more plainly, How did they fuck?” Myhrvold ignored the laughter and went on to discuss the shape and heft of an apatosaurus, whose hips alone, he noted, weighed fifty thousand pounds, making coupling dif-ficult. But he also wanted to be sure that no one missed the point of his biological digression: dinosaurs had ruled the earth for a hundred and fifty million years. Cracking a whip that he used to demonstrate the function of an apatosaurus’s tail, Myhrvold said, “With that I conclude—unless someone wants to come up and talk about Microsoft as a dinosaur.”

The common image of Microsoft, though, is not of a dinosaur bound for extinction but of a business giant run by automatons who narrowly focus on a solitary goal: conquest. Gates bears some measure of responsibility for this. “Bill is one of the most focussed people you ever met,” observes Bran Ferrin, who oversees research and development at Disney and is a close friend of Myhrvold. “Microsoft is often accused of having no taste, which is sometimes true. Bill is focussed on making Microsoft great.” And in this zealous pursuit Microsoft’s wealth and commitment to technology have made it possible for the company to catch up even when it appears to be out of touch, as it was for a time with the Internet.

Myhrvold, whose favorite adjective is “cool,” does not conform to the Microsoft stereotype, although he has master’s degrees in geophysics and space sciences and also in mathematical economics, and a doctorate in theoretical and mathematical physics. His hobbies seem endless: he is an amateur paleontologist (hence the dinosaurs), a cosmologist, a zoologist, an environmentalist, a photographer, a fossil and book collector, a formula-car race driver, a bungee jumper, a sky diver, a fly fisherman, a mountain climber, and an epicure. He is an accomplished chef, too. Until recently, he cooked two or three times a month as an apprentice at Rover’s, a distinguished Seattle restaurant, and then disappeared for three weeks to earn an advanced culinary degree from the esteemed La Varenne, in Burgundy. Food is a particular obsession. The house Myhrvold is building is said to include one of the largest private kitchens in America.

To walk into Nathan Myhrvold’s modest, two-module office in Building 9 on Microsoft’s Redmond, Washington, campus is to sense that three men live there—a geek, a child, and a business warrior, whose disobedient curly hair and beard lend him the look of a dishevelled scientist. He has all the standard geek equipment: gray industrial carpet, three souped-up Gateway 2000 desktop computers with an Aten CS-104 switch box, two laptops, a laser-jet HP printer, a satellite television, two cellular phones, more magazines than a newsstand, piles of boxed software and books, a blackboard, and the main on-off switch from the original computer built by John von Neumann in the forties.

There is a sameness about nearly all the offices at Microsoft, but Myhrvold’s might also be a children’s museum: there is a cast of a Tyrannosaurus-rex brainpan, a Gigantosaurus tooth, two-foot-long models of various dinosaurs, insect fossils, and photographs of galaxies and of the gravitational lensing of a quasar. There are framed pictures of Myhrvold on the cover of the magazine Wine Enthusiast, of his winning team at the 1992 world barbecue championship, and of  his twin sons.

Yet Myhrvold is no less a warrior-capitalist than Gates, and one also sees the warrior in the memos that Myhrvold sends Gates: they contain bookmaker lingo explaining how he hopes Micro-soft can get “a vig” by charging when-ever a Microsoft platform is used to make a transaction over the Internet. “Every job Nathan has had included help-ing me decide our strategy,” Gates explained in an E-mail response to questions.

Since joining Microsoft eleven years ago, Myhrvold has held a variety of positions, but his domain has always been research. He has also continued to be very much the provocateur inside the company, adopting the stance of the Insider as Outsider. Besides writ-ing what Myhrvold reckons are fifty to a hundred daily E-mails, several times a month he composes lengthy memorandums (which can run to nearly a hundred single-spaced pages) that question what Microsoft is or should be doing. Although the names of senior Microsoft executives appear at the top of each memo, Myhrvold concedes that “for broad-strategy memos my primary audience is Bill.” The memos can be an irritant. “Just because someone has a license to step on your toes doesn’t mean you’ll be excited by it,” said Richard F. Rashid, a Microsoft research vice-president who was a professor of computer science at Carnegie Mellon before Myhrvold recruited him, in 1991. The crushed toes are accepted at Microsoft, not just because Myhrvold is an F.O.B. but because his boyish enthusiasm and humor render him less threatening. Colleagues enjoy his E-mail missives—with stories of being strip-searched in Japan because he was carrying Sudafed, or of driving his Hummer to Montana to hunt fossils.

The role of official gadfly is not commonplace in corporations; and Myhrvold, in any case, is different from most gadflies. Linda Stone, a former Apple employee, said that in her job there she and other executives constantly wrote memos questioning things. “The difference is that Nathan writes these memos and is then empowered to act on them,” Stone, who is now the director of  Micro-soft’s virtual-worlds group, said. At Microsoft, Myhrvold oversees a research-and-development budget of more than two billion dollars, and is one of nine members of the executive committee.

I have nearly fifty of Myhrvold’s confidential memos, which span the past decade and, cumulatively, are the size of a large textbook. They cover impenetrable technical subjects, like “Win 32 as a Scalable OS Architecture,” that have led to billions in Microsoft revenues. They include the math formulas that Myhrvold uses to solve software problems. And they attempt to predict the fate of entire industries, among them banking, publishing, and film.

“I love Nathan’s memos,” Gates E-mailed me, going on to say of his friend, “He can explain quantum gravity, why we shouldn’t do a new media effort, why the Hummer is a great car, what algorithm we should use for encryption, how he hired some amazing people, and the crazy food he plans to cook that night.”

Reading the memos chronologically, one can look at some of the business decisions that Microsoft faced during the years it grew to a nearly nine-billion-dollar giant that in 1996 earned two billion one hundred and ninety-five million dollars. It’s easier to understand the company’s path to success: a rare marriage of technical and business prowess. The memos also show how Microsoft constantly places bets on the future—on Windows, for example, which aimed to steal a market opened by Apple’s inventive Macintosh software, and is a bet that Gates credits to Myhrvold. And from the corner of one’s eye one can see the ceaselessly striving, sometimes ruthless corporate culture that Nathan Myhrvold personifies.

When Myhrvold began writing memos, in the eighties, most were of a technical nature, addressing such issues as how to improve the company’s original disk-operating system—MS-dos—and Windows. In the summer of 1990, Microsoft had fifty-six hundred employees, generated a billion one hundred and eighty-three million dollars in revenues and two hundred and seventy-nine million dollars in profits, and had sold more than forty million copies of MS-dos. It had yet to make a serious strategic error, though it was often accused of rushing inferior products to stores in order to dominate the market. Its pro-ducts were not always user-friendly. Gates conceded in a 1990 Fortune inter-view, “One of my guys once said, ‘We make the world’s best plumbing, but we never think about the toilet seat.’ But that’s changing.”

Myhrvold’s mission was to think about the future. He knew that the looming question for Microsoft was not the number of software programs it sold for P.C.s but its share of the market for all microprocessors—from desktop computers to telephones and on to pocket-size organizers. “How much of the world’s chips hold our software?” he asked in “Visions for Consumer Computers,” a forty-four-page memo written in the summer of 1991. Myhrvold predicted that miniaturization and digital technology would, over the next five years, cause the personal computer to merge with consumer-electronic devices.

He also pushed to concentrate on developing software for video on demand. He was captivated by the vision of a five-hundred-plus-channel universe entertained by industry executives like John Malone, of Tele-Communications, Inc., Gerald Levin, of Time Warner, or Raymond Smith, of Bell Atlantic. Since movies, programs, and data would be stored in giant servers and “accessed on demand,” Myhrvold wrote in the memo, “you no longer have to arrange your schedule around the broadcast timetable. This basically eliminates most of the need for a VCR, or for Blockbuster Video rental stores, because the Net gives you access to what amounts to a gigantic on-line video store—all past TV shows, movies, and lots of other rich data collections.”

Myhrvold then turned to what he called “the truly personal computer—something which has the size and weight appropriate to be carried with you at all times.” This wireless “digital wallet,” as he called it, would allow anyone to communicate, untethered to a wire, by voice, video, fax, E-mail, or pager. The device would be a clock, an alarm, a schedule manager, a notepad, an archive of phone numbers and records, and a library of music and books. The digital signature produced by this wallet would have a personal I.D. for security, and could replace cash, credit cards, checks, and keys. He believed that the obstacles were economic and human, not technological. “The cost will not be very high—it is pretty easy to imagine a total cost of manufacture in the range of $100 to $250 on introduction, which means $400 to $1000 retail price,” he wrote. He guessed that keyboards would be superseded by devices capable of recognizing handwriting.

It’s clear now that this memo was overoptimistic. Handwriting recognition imploded in 1993, when Apple introduced a handheld Newton Personal Digital Assistant: it was such a technical failure that Garry Trudeau could not resist lampooning it in “Doonesbury.” Myhrvold concedes that he was too hopeful about video on demand—in part, because the technology lagged. But, he says, “interactive TV will come back.” He’s not sure when, or whether it will come over the Internet, but he believes that Microsoft will exploit its own software to deliver it.

One secret of Microsoft’s geometric growth has been its ability to market upgrades for its software—a built-in obsolescence that was frankly acknowledged in a September 8, 1992, memo. Microsoft’s current basic business, Myhrvold wrote, “is retail sales supplemented by upgrades.” This served two purposes: “Upgrades represent the closest thing we have to an annual fee or subscription. This is a powerful way to draw revenue from the installed base, and to keep them loyal to our product.”

The focus of the memo was on exploiting “new business models” to insure a revenue stream similar to that of software upgrades or of pay-per-use. Examples of pay-per-use businesses, he explained, were telephones, faxes, and cable TV. He expected these to “expand enormously in the next five years.” Any information, be it news or banking services or mail-order shopping, would require, he wrote, “PC based servers,” and there lay Microsoft’s strength.

Such devices required a billing-and-collection system. Since this was “a huge business opportunity for Microsoft,” he proposed “forming such a transaction and billing service as a joint venture with a financial services company which has expertise in the mechanics of running this sort of operation.” The ideal partner for Microsoft, Myhrvold suggested, would be a worldwide bank. And why might it want to join with Microsoft? Because “we provide the necessary technology,” he wrote. Then Myhrvold showed how Microsoft could use its customer base as leverage: Microsoft “can bundle the node in every copy of Windows” and “put the necessary hooks into every relevant consumer device.” Such leverage, of course, is why competitors have accused Microsoft of monopolistic practices. Although an alliance like this hasn’t taken place, Myhrvold says, “it’s still a good idea.”

In the early nineties, Myhrvold rarely mentioned the Internet. He might use the phrase “the Net” or “the information highway,” but what he meant was interconnectivity itself—interactive TV, or connecting computers to others through what we have come to call intranets, or systems linking computers to on-line data banks. Myhrvold was deluging Gates with memos urging Microsoft to seek more alliances, and to prepare for a war with consumer-electronics companies.

At first, Microsoft more or less ignored the Internet. Gates and Myhrvold were sometimes baffled by this seemingly anarchic world. And in 1993, when Microsoft decided to build its own on-line service, the Microsoft Network, it was beset by false starts, name changes, and altered plans. Not that the Microsoft team wasn’t aware of how fast the world was changing. By 1993, Microsoft had come to hold a more expansive view of who its potential adversaries might be. Randall Stross, in his underappreciated 1996 book, “The Microsoft Way,” wrote, “We might say that 1993 was a watershed year for Microsoft, in that for the first time when the company looked to the future, its leading rivals were no longer the then much smaller software companies.” Now its rivals were giants like Time Warner and A.T. & T.

Sometime during this period, Myhrvold was assigned a role that went beyond technologist or strategic gadfly—beyond that of the voice in Bill Gates’s ear. Microsoft, residing on its own campus, with its own E-mail system and its own cafeterias and cappuccino machines, began to heed his alarums and to initiate alliances.

Myhrvold recalls, “Bill said, ‘This consumer stuff won’t happen unless you go do it.’ So I spent more time deal-making.” He became the person at Microsoft who met with potential partners—for example, with DreamWorks SKG, to develop interactive games, and with Tele-Communications, Inc., to invest in the Microsoft Network.

For Nathan Myhrvold, the life of  Microsoft was changing nearly as rapidly as his own life had. Born in 1959 and reared in Santa Monica, California, he had been a boy without a boyhood. His brother, Cameron, who is twenty-two months his junior, recalled, “He had to act the age of the other kids, who were older”—a result of his having skipped four grades of public school. Finishing high school at fourteen, Myhrvold went to Santa Monica Junior College, then transferred to U.C.L.A., where he majored in math and received a master’s degree. Then he went to Princeton and earned another master’s degree and his Ph.D. At Princeton, he met his future wife, Rosemarie Havranek, a Bronx-born graduate student in Romance languages.

Stephen Hawking, of Cambridge University, offered Myhrvold a postdoctoral fellowship, and Myhrvold held it for a year, beginning a friendship that continues to this day. But in 1984, needing money for his family, and enticed by a venture capitalist who wanted to back a computer-software project that he had worked on as a graduate student, Myhrvold took a leave of absence and became, at the age of twenty-four, president of Dynamical Systems Research. With Cameron and three other people, he set up shop in the attic of a house in Berkeley, California, and developed a simple software system that in 1986 caught I.B.M.’s attention.

Myhrvold also caught Microsoft’s attention: the company was desperate to keep I.B.M. from abandoning its commitment to Microsoft software. Bill Gates agreed to purchase Dynamical Systems Research for $1.5 million in Microsoft stock. (It is now worth two hundred and sixteen million dollars; Myhrvold’s current stock holdings and options are worth about two hundred million dollars.) Myhrvold relocated to Seattle and went to work for Microsoft as director of special projects. His first task was to write a memo. His colleagues got used to his ideas and to the memos, typed at a manic pace, as they did to his high-pitched giggle—“somewhere between Santa Claus and an evil dwarf,” one colleague says.

Today, Myhrvold is open to just about anything, except talking about his relationship with his father. The family broke up soon after Cameron was born; the brothers were reared by their mother, an elementary-school teacher. When I asked Myhrvold about his father, he became uncharacteristically terse. “I didn’t really meet him until I was twenty-five,” he said. He had managed to track his father down at a West Coast law firm and had visited him. A few months later, he saw his father one more time, he said coolly, and had not talked to him since.

By 1993, Myhrvold was convinced that the world had entered what paleontologists call a transformative epoch. He likened the Information Age to the start of the Industrial Revolution, and on September 8, 1993, he distributed a thirty-page memo that so enthralled Gates that he showed it to others, including his friend and fellow-billionaire the inves-tor Warren Buffett. It was called “Road Kill on the Information Highway,” and it is still widely quoted in the Microsoft community.

Twenty years in the future, Myhrvold predicted, computers would be a million times as fast:

At its essence, this is the secret of Microsoft and the personal computer industry. Despite the incredible advances that had occurred in mainframes and minicomputers, the people involved—many of them quite brilliant—could not grasp the fact that the advances would continue and that this would stretch their business models to the breaking point . . . and _nally that software would be a central locus of value. . . . If you are in the hardware business you must be very agile indeed to keep your footing. The implementation technologies change so fast that you are always at an incredible risk of becoming obsolete. It is very hard to change a manufacturing business fast enough because of the large investment in tooling up for what will soon become yesterday’s technology.

This, in brief, is why I.B.M. faltered. And it is why Microsoft, established in 1975, thrived. Yet, Myhrvold warned, the highway threatened companies like Microsoft, too. “Our own industry is also doomed, and will be one of the more significant carcasses by the side of the information highway,” he wrote, unless it could learn to “exploit a certain degree of synergy” between the information highway and personal computers.

What is striking today is that Myhrvold (and Microsoft) failed to envision how the Internet, particularly the World Wide Web, would provide just that sort of synergy. In fact, the Internet was not mentioned in Myhrvold’s “roadkill” discourse; his “information highway” was defined not as a single universe (the Internet) but as a series of separate planets, with each, Myhrvold hoped, reliant on Microsoft software.

In his memo Myhrvold offered some unsettling pictures of possible product lines:

Consider spoken conversation. Although we may quote each other when we say something memorable, that is the exception rather than the rule. People tend to treat speech as an ephemeral medium—if we want to count on being able to revisit it in the future we go to special effort to take notes or record it. In the near future we will have the capability to record and index it all. . . . The next generation of digital VCRs coming out in 1994 will hold 100 gigabytes per tape, which means that a single piece of media with a cost of about $10 should be able to hold all of the conversations an individual has for their entire lifetime.

More capacious memories and newer digital-compression advances would also make the storage of video possible:

The Rodney King case showed the power of video tape in recording a situation. How long will it be before every police car, or individual policeman, is equipped with a digital video camera, with non-forgeable time and location stamps? Commercial airliners have long had a “black box” or flight recorder, but why not extend this for buses, cars—even for individual people? . . . A couple more years of price/performance improvement and we could carry a device like that with us. The digital storage capacity would be enough to record everything we say and do. . . . Such a device could carry your entire life on it—the ultimate diary and autobiography.

At this stage you may wonder why do this? Indeed, the notion of never being outside the range of digital recorders operated by Big Brother can sound pretty sinister. It would be very easy to regard this as the ultimate threat to privacy and personal freedom.

On the other hand, the pressures to use the technology to record our lives could become intense:

Insurance companies would love to have the black box recorders on your car—both to trace it if stolen (there are several systems, such as LoJack, that do this today) and to provide information in accidents. It isn’t hard to imagine having half-price car insurance if you have a car with a recorder in it. . . . Medical malpractice insurance might be cheaper (or only available) to doctors who record surgical procedures or even office visits. Many employers will want to use these recorders as a management tool. Bus and trucking companies have an obvious interest in whether their drivers stay within the law and are on time. The public at large may insist that the police record themselves in the course of their work.

Advances in computing technology, he wrote, were critical to the next advance: the distribution of information. He diagrammed the profound impact that a new distribution could have:

The clearest precedent is the invention of the printing press. Great works of science and literature—Euclid’s geometry, Plato and Horace, the Bhagavad-Gita, the Iliad and Icelandic Sagas—all existed long before the printing press, so  humans were clearly able to conceive them, but they had a very limited customer base.

He stated the belief that “we are on the brink of a revolution of similar magnitude. This will be driven by two technologies—computing and digital networking. . . . The result of these two technologies will drive the cost of bandwidth per customer down by enormous factors. . . . This is the key to changing the economics of distribution, and it is central to the entire notion of the ‘information highway.’ ”

Myhrvold next pictured how this high-way might render certain industries “roadkill”—banks, for instance, could be supplanted by some version of the digital wallet. Newspapers, he sensed, were in “probably the worst situation of any form of print media.” They were vulnerable because they had to rely on advertising revenue. The advent of television had siphoned advertising dollars, and this trend would be compounded by the impact of the information highway on classified advertising, which had previously supplied newspapers with fifty to eighty per cent of their revenues, and which would decline as readers found that they didn’t need to “wade through the fine print in search of the car, home or job that they want.”

Magazines are “less dependent on advertising than newspapers, and stronger editorially because magazines often find a niche,” Myhrvold went on, citing golf, music, fashion, and beauty. On the other hand, he wrote, “television broadcasters are some of the most likely fodder for roadkill of any of the current media companies.” They would not die overnight, he cautioned, but more choice would inevitably constrict the mass audience.

Microsoft and Myhrvold were focussed on external investments. Myhrvold the businessman worried that Microsoft had strengths it was not exploiting, particularly its extraordinary pool of cash. This worry occasioned a March 7, 1994, memorandum: “It is a testimony to how non-capital intensive the software business is that we have nearly $2.5 billion in cash that grows at $100 million per month and to date we haven’t found a direct use for it in our business.”

In eighteen pages Myhrvold set forth various ideas, and enumerated Microsoft’s options. It could put five hundred million dollars in a fund, raise an equal amount from a well-known investor or from institutional investors, and make strategic bets. It could do more deals and joint ventures. It could buy a company to acquire its technology. It could buy distribution. It could buy content. In any case, he warned, Microsoft had to “staff up ourselves or rely on external people,” because deal-making was “going to be a fundamental skill for the next decade.”

Looking back, Myhrvold thinks he and Microsoft made a mistake by not creating such an investment fund. “I never took the time to do it, and other things came up,” he said. “And if we had invested five hundred million dollars in 1994 and raised five hundred million in media, it could be worth ten billion dollars today.” Microsoft has hardly been harmed, however. Myhrvold notes that its stock is now worth six times what it was in 1994. Today, Microsoft sits on a cash reserve of more than nine billion dollars.

There are many theories about why Microsoft executives were late to fully comprehend the Internet. “They live in a world of their own, breathing nothing but their own fumes,” says John Perry Barlow, a writer for Wired and other publications, and a former lyricist for the Grateful Dead. Perhaps Microsoft missed out because the company was thriving, or because its reliance on internal E-mail to communicate walled it off. Furthermore, key executives like Myhrvold and Gates were in their thirties—a decade removed from people like Marc Andreesen, Netscape’s chief programmer, and the college generation that helped to popularize the Internet. It also infuriated Myhrvold and Microsoft that the Internet was free. They saw it as a flower-child culture that disdained profits and copyrights—and Microsoft.

Yet by early 1994 the Internet had become what Gates would describe to Business Week as “an underlying rumble.” The rumble grew louder when Gates’s technical assistant, Steven Sinofsky, visited Cornell on a recruiting trip that February. Business Week recounted that a snowstorm closed the local airport and Sinofsky was forced to return to the campus, where he discovered that students were dependent on the Internet for their E-mail and their course lists. Sinofsky reacted like Columbus setting foot in the New World—and championed the Internet when he returned to Redmond.

At Microsoft’s semi-annual management retreat that April, Gates began to steer the software giant toward the Internet, telling his executives that they must invest more in it. Still, the interactivity that Microsoft talked more about was interactive TV. In May, the company announced the de-velopment of an interactive-TV server, called Tiger, but did not focus on developing a browser for the Internet, as Netscape would. Microsoft was also preoccupied with a four-year probe by the Justice Department and the Federal Trade Commission, which entailed endless depositions and turning over truckloads of documents as the company tried to prove that it was not guilty of monopolistic tactics. In July, Justice announced a consent decree in which Microsoft agreed to alter a few business practices.

The Internet alarm should have rung louder for Microsoft in October of 1994, when Netscape downloaded its browser on the Web—free. That month, Gates sent his executives a memo, headed “ ‘Sea Change’ Brings Opportunity,” that sought to identify trends that would affect his company: graphical computing, “electronic communication with office documents,” and the advent of voice-activated commands. Gates did not, however, cite the Internet as a “sea change.” In fact, in three single-spaced pages he mentioned the Internet twice, and then only in passing, when speaking of the growth, first, of private corporate networks (intranets), and then of “public networks (including Internet and online services).” If over the next two to three years Microsoft succeeded in getting the number of users of its “high end” software to twenty-four million customers, Gates wrote, and the “installed base” could be induced to upgrade regularly with new Microsoft products and enhancements that anticipated the “sea change,” then Microsoft would continue to enjoy boundless growth.

Microsoft, however, was beginning to feel defensive about the Internet, as can be seen from a somewhat sour memorandum, “Impact of the Internet,” that Myhrvold circulated on November 15, 1994. The memo, which ran to sixteen pages, started off with a bow to Steven Sinofsky’s epiphany at Cornell: “The Internet is an example of a rare and very potent phenomenon—the birth of a new platform.” Then came the swipe: “The Internet . . . has generated plenty of fear, loathing, excitement and above all—hype. Most of what you hear about the Internet is, in my opinion, quite misguided. . . . Perhaps the best place to start is with a definition of what the hell the Internet is.”

Myhrvold went on to say that “in principle it was not much different from the telephone system.” The many local and long-distance telephone companies “all interoperate one way or another so that your call goes through, and you get billed,” he continued. “The Internet is getting more similar to this sort of arrangement every day and will converge more in the future.” And with this “interoperability” comes another advantage: “It means that there is a single address to get to people anywhere in the world (actually to physical nodes, not people—this is a huge problem down the line for cellular and nomadic computing).”

Was the Internet competitive with the Microsoft Network? Myhrvold insisted that it was not, because “it is a trans-port service,” and Microsoft “had to use every and any form of transport.” He shrugged off what he saw as the alien culture of the Net—“enforced by many opinionated people who are its self-appointed guardians.”

The Net’s combination of free content and sparse advertising led Myhrvold to be dubious—as he had been all along—of  its commercial potential. “Nobody gets a vig on content on the Internet today,” he wrote. “The question is whether this will remain true.”

Although Myhrvold seemed ambivalent, he concluded his memo on an optimistic note. Since Internet users are P.C. users, “this is a huge advantage for Microsoft because these are the people that we know and serve today,” he wrote. “This simple fact is not one that is widely appreciated. The distinct cultural aspects of the current Internet make a lot of people think that it will somehow be different, but it is very hard for me to see how it possibly could be.”

Microsoft’s key strategist and seer had been writing memos for years about computers and appliances that would connect everyone, yet he did not see that the Internet was in fact achieving that goal and now threatened to reduce Microsoft itself to roadkill. Despite Microsoft’s considerable power—in 1994, eight out of ten personal computers relied on Microsoft’s operating system or software, and the company’s four billion six hundred and forty-nine million dollars in revenues exceeded the combined total of all its software competitors’—the growth of its traditional products appeared to be flattening.

By early 1995, Myhrvold had become alive to the dangers of neglecting the Internet. In a January 29th memo—“Upcoming Sea Changes”—he made it clear that if  Microsoft concentrated only on upgrades it would expire. Among the major “just over the horizon” changes he spelled out was “connectivity to everyone”—through E-mail, the Internet, a modem, or a wireless connection. This linkage would ineluctably alter Microsoft’s business model. “Very rapidly we have to think of the entire world wide network as the platform that software is written to, not the individual machine,” he wrote. As an example, he mentioned electronic commerce. “Imagine what will happen as companies start doing a large portion of their business over the Net. How much of their existing infrastructure will work?” Thus “universal connectivity,” he predicted, would transform Microsoft’s business. In short, the Net—not a P.C. running Microsoft Windows—could become the platform.

By the end of May, Gates, in another internal memo, was warning that the Internet was “the most important single development” in the computer business since the I.B.M. P.C., in 1981. He had, in short, drastically changed his notion of a Microsoft Network as a proprietary place: “The On-line services business and the Internet have merged. What I mean by this is that every On-line service has to simply be a place on the Internet with extra value added.”

A week later, on June 1st, Gates gathered Myhrvold and forty other Microsoft executives for an Internet sum-mit at the Red Lion Inn in Bellevue, Washington. And toward the end of the year, with Gates’s concurrence, Myhrvold organized a secret summit with Warren Buffett and Buffett’s partner, Charles Munger, to discuss possible future consumer-content services on the Internet.

As Microsoft chased the Internet, Myhrvold began to lay the philosophical groundwork for this quest. “The magazine business is a terrific analogy to many aspects of content on the Internet,” he said in a July 16, 1995, memo, for what mattered was the “brand.” Myhrvold went on to say that book publishers did not have a recognizable brand—writers did. Furthermore, with the possible exception of  Disney, the brand in the film industry belonged to a movie, and not the studio. But the magazine business, he argued, was different, because most magazines reached an identifiable niche audience and an author might have a following as well. “We must learn to manage the process of creating brands, in the same way that we have learned the process of setting defacto standards in our platform business, or creating world class desktop applications,” Myhrvold wrote.

In a memo distributed on August 7th, Myhrvold tried to identify the editorial brands that Microsoft might offer. The animating principle, he said, should be to use “the unique aspects of the new medium to do something that you simply cannot get in a paper magazine.” Although ESPN and Sports Illustrated both covered sports, they did it very differently: each exploited its medium. So he proposed that Microsoft develop content for—in this order—computers, business, sports, general news, travel, cars, local news, the Yellow Pages, nature, geography, and food. What was crucial, he said, was to locate “editors” with a brand name of their own, and to decide whether to ally with them. Later in 1995, Microsoft did both, hiring Michael Kinsley to edit Slate, its on-line magazine, and allying itself with NBC to form MSNBC, a twenty-four-hour cable news chan-nel and on-line service.

In a November 27th memo—“No More Middleman”—Myhrvold asserted that the Internet would revolutionize many businesses, for it offered direct access to customers, a cheaper way to distribute products, and a way to open new markets. The combination would “create what we call ‘friction free capitalism’—an extremely efficient market which allows buyers and sellers . . . to find each other with greater ease and lower costs than ever before.” He likened the inexpensive distribution and direct customer access found on the Internet to “a giant and more efficient version of what the postal service offers.” He went on, “When companies can communicate directly with their end customers in a cheap and easy manner, it threatens the role of the middleman or pure merchant that traditionally sits between the large manufacturer of a good and the final customers.” He predicted that retailers like Egghead Software and Tower Records would become “quite ridiculous from an economic standpoint,” and he wrote, “The cost of carrying inventory will weigh heavily on retailers of all sorts. Wal-Mart successfully beat small town merchants because they created a vastly more efficient warehousing, ordering and inventory carrying system, driven largely by a superior computing infrastructure. A ‘virtual Wal-Mart’ which presents goods directly to customers on the Internet, or via Internet catalogue kiosks in physical store locations, could extend this model even further.”

Inevitably, he prophesied, we would return to an era of customization: “Before the industrial revolution, the only way we got our clothes and essentially any other good or service was from specialized businessmen who would manufacture a custom product. Tailors made our clothes while the butcher, the baker, and the candlestick maker supplied us with their eponymous goods. . . . Retailing as we know it is really a very recent invention, created in response to the economic efficiency of machine made goods.”

Of course, Myhrvold went on to explain, the push toward customization collided with customers’ desire for one-stop shopping. But he and Gates were certain that direct contact with customers would allow the Internet to recast businesses. (Indeed, by 1996 electronic retailers were collecting five hundred and thirty million dollars from the Internet, and Forrester Research estimates that this will soar to seven billion dollars by 2000. Dell Computer now sells a million dollars’ worth ofP.C.s and other equipment a day; Cisco Systems’ sales total five million dollars a day on its Web site, and by using the Web the company claims that it saves five hundred and thirty-five million dollars a year.)

On December 7, 1995, Gates stood before reporters and announced, “The sleeping giant has awakened.” From that day forward, he said, Microsoft software such as Windows 95 would be geared to access the Internet as easily as it accessed a file. Microsoft would now target its entire range of products at the Internet, including the Microsoft Network, and would offer its Web browser for free. And, under the direction of  Nathan Myhrvold, Microsoft would aim an astonishing $1.5-billion R. & D. budget—nearly twenty times the size of Netscape’s annual revenues—at the Internet. “My goal is to prove that a successful corporation can renew itself and stay in the forefront,” Gates had written in “The Road Ahead.”

The Microsoft moves were greeted with skepticism. In Forbes, the Internet true believer George Gilder described Microsoft as a company growing fat and suffering from “middle age.” Myhrvold himself remained a skeptic—which, to be sure, was part of his job. On January 10, 1996, he sent out “A Penny for Your Thoughts,” an eight-page missive that attempted to debunk “another poorly thought out Internet pipe dream”—the notion that there was a pot of gold for Microsoft on the Internet because customers would flock to make tiny transactions. He noted that the software to accomplish this was not yet at hand, since authentication and other billing and security issues remained unsolved.

Another skeptical Myhrvold dispatch to Gates appeared on July 2nd, titled “How Long Can It Last? Internet mania—rational and irrational.” Why had Myhrvold written it? We talked about this over a meal at Fullers, one of Seattle’s best restaurants, with Myhrvold greeting the arrival of each of nine courses with “cool.” He recounted that he had recently reread the classic book “Extraordinary Popular Delusions and the Madness of Crowds,” which explored such manias as the speculative panic over tulip bulbs in Holland during the seventeenth century. His message was “If you aren’t careful, you’ll end up focussing on the wrong things.”

His July memo started, “I’ll state right up front that I am a fan of the Internet, however even a fan and believer has to wonder how long the current spate of hype can last.” He also wondered when the novelty of the free Internet would be overtaken by a wish to get something more. “Suppose you’d tried to sell HBO in 1950. At that stage people wouldn’t have had the time to become jaded with broadcast TV. It is hard to know for sure, but I suspect that you could not have bootstrapped premium cable-only channels much earlier.”

Myhrvold continued, “The lure of easy gold makes people go crazy with speculative fever, which usually results in taking the profits out of it. In the California gold rush of 1849, the guy who made the big lasting fortune wasn’t a gold miner—it was Levi Strauss, who wound up selling pants to the miners.” He proposed that Microsoft make multiple investments in the Internet, and then wait. “A contest to see who can hold their breath the longest should be fine by us,” he wrote.

By July, Microsoft’s applications-and-Internet-client group had swelled to twenty-five hundred employees, exceeding the combined employment of  its seven largest competitors, including Netscape; Microsoft’s two-billion-dollar R. & D. budget for 1997, Fortune noted, exceeded the revenues of all but three software companies. Early this year, Zona Research concluded that twenty-eight per cent of  Web users relied on the Microsoft Internet Explorer as their primary browser (a statistic that Netscape disputes). When I asked Myhrvold why he’d been late to spot the Internet phenomenon, he offered this E-mail response: “When you predict the technological future, as I do, you basically are like an insurance salesman, futures trader or gambler.” When I mentioned complaints that he hadn’t got it right, he wrote, “This is like calling your insurance agent to complain that you haven’t died yet, so why’d he sell you life insurance.”

Myhrvold’s role at Microsoft, meanwhile, was changing. In October of 1996, Gates reorganized the top management structure, lifting some of Myhrvold’s operational responsibilities and concentrating his efforts on research. “I have a great deal of respect for Nathan’s creativity and imagination,” a former senior Microsoft executive, who insists on anonymity, says, “but I do not think he usually does a good job of connecting the world of the possible to the world of the actual.”

Within Microsoft, many believe that Myhrvold’s management responsibili-ties were reduced because they were a distraction from his strength; few see any diminution in Myhrvold’s clout. “Nathan isn’t too hung up on how I put him to best use,” Gates replied to a question about the change. “He has always run the research group which he built and will define the future of the company. He is probably having more impact in his current role than ever before but it’s hard to compare. No one is confused about Nathan being the key person helping me drive our advanced technology plans.” Gates decided, Myhrvold says, “that we needed more secret sauce—more technology.”

In addition to overseeing Microsoft’s R. & D. investment, Myhrvold set out to triple in size the company’s pure-research division, which today employs two hundred scientists. This spring, Microsoft will announce the creation of a parallel research facility in Europe.

Myhrvold has not, however, retreated into a scientist’s cocoon. He visited the New York Stock Exchange and the London futures exchange to help concoct new software products, and spent a couple of days observing Tom Brokaw putting together his nightly newscast. Last spring, he disappeared for a week to observe the office of the DreamWorks SKG co-owner Jeffrey Katzenberg, which resulted in a fourteen-page missive, “My Week with Jeffrey: Hollywood on a hundred phone calls a day.”

Myhrvold’s “Jeffrey” memo reveals the range of his interests, and also the parochialism of Microsoft. In March, 1995, Myhrvold had helped to steer Microsoft into a partnership with the three rulers of DreamWorks—Steven Spielberg, David Geffen, and Katzenberg—in order to develop interactive games and entertainment products. But Myhrvold knew that he needed to better understand how a Hollywood content factory functioned. “Our business is getting closer to entertainment every day,” he wrote in his memo.

 For a week, Myhrvold acted like an anthropologist watching the natives. “One of the things that was strange for me in being a fly on the wall is that I’m used to talking. It was hard not to,” he says. In his memo, he concluded that Hollywood is different because there are few long-term relationships. People come together to work on a movie or TV show, then part, whereas at most companies “managers up and down the line act to create a stable environment.” In Hollywood, though, “agents, lawyers, and business managers act to insure that there is an unstable environment. . . . The core of the business lies in external relationships—that is where the work is really done. Jeffrey has more external perspective to his work than anybody at Microsoft—even our sales executives worry more about internal issues (for example, managing the sales force) than they do with pressing the flesh with external parties.”

In contrast with Microsoft’s reliance on E-mail, he described Katzenberg’s love af-fair with the telephone, which he had come to see as a form of virtual schmoozing:

 He is a master with this particular instrument of communication, which is not surprising given how much he uses it. The stories you read about Jeffrey making 100 to 150 phone calls a day are true. . . . His three secretaries have headsets and try to fill any free time during the day with calls—they will keep calling people back or try to arrange times and then when they get somebody put them through to Jeffrey with a brief comment about why he’s talking to them. All in all it is a very efficient process. . . . Jeffrey calls to check in with people, and they with him, often regardless of need. These phone calls are like the banter people exchange in the halls at work, and last about as long. Jeffrey cruises these virtual halls, and others cruise his, maintaining the network of personal relationships from which the fabric of the entertainment industry is woven. . . .

Somebody at DreamWorks told me that in Jeffrey’s days at Disney his time was so pressed that they found it necessary to actually rehearse the calls that they wanted to make to Jeffrey in front of a mirror until they got enough points packed into the smallest duration. . . . I couldn’t help thinking of all of the people who have pre-meetings to rehearse a review with Bill. The big difference is that the message on brevity seems to [have] escaped our folks so far.

Myhrvold was struck by the limits of  Katzenberg’s control over television and film, where directors, writers, and ac-tors have control. In producing animated films, by contrast, Katzenberg “was in total control,” Myhrvold went on. “Jeffrey is truly making Prince of Egypt ”—an animated feature that will be released in December, 1998“although there is a team of 500 talented people working on the movie, it is clear that Jeffrey Katzenberg is the single most important person on the team.” Myhrvold seemed to perk up when he was discussing animation. “Animation is a bit like software in that it is made up of a large team of talented people who work as steady employees,” he wrote. “If we made Excel the way that ‘Prince of  Egypt’ is being made, then every dialog box would be reviewed by Bill.”

Katzenberg describes having Myhrvold around for a week as “a riot.” He says, “Nathan and I look at the world from such completely opposite points of view. It’s amazing because he is gi-gantically thoughtful and intellectual. He looks from the clouds down. Me, I’m so linear. It was one laugh after another.” Another interpretation is offered by someone who admires Myhrvold and has read the “Jeffrey” memo: “These guys have made so much money and been so successful, yet they only know how to do that. It’s like someone from Mars looking at someone from Jupiter.”

Nathan Myhrvold knows that the skills that made Microsoft successful in software—technical proficiency, rapid response—are not transferrable to what the company calls the content business, which relies more on a bottom-up rather than a top-down model. Increasingly, as Microsoft moves to expand its services and product base it is competing with, among others, its longtime partner the chip-maker Intel, which is also investing in content and multimedia. As Microsoft vies to carry out more transactions, it competes with banks, and as it vies to create software for “digital wallets” it bumps into consumer-electronics companies like Casio. As it moves into games, it bumps into one of its biggest customers, Compaq, which has allied with Fisher-Price to make smart toys. In devising cheaper voice services on the Internet, it is competing with the telephone companies. And in news and information it runs up against CNN and its parent, Time Warner, and also Rupert Murdoch.

A battle with more lasting consequences will be that of transforming the personal computer into a broad con-sumer product rather than a device used in only thirty-six per cent of American homes. The reason that the computer market is not double what it is, Nicholas Donatiello, Jr., said in a keynote address to the Agenda 97 Conference, in Phoenix, is that the computer is not per-ceived as entertainment. Donatiello, the president of the market-research firm Odyssey, declared that unlike other universally accepted products the com-puter confused consumers: “Television was the baby of radio. It was radio with pictures—it was better radio. In the same way, the car was the baby of the horse. Movies were the baby of theatre. The telephone was the baby of the telegraph. So what’s the P.C. the baby of? The P.C., I’m sorry to say, the P.C. is the baby of the mainframe computer.”

Aware of this immense challenge, Microsoft spent four hundred and twenty-five million dollars last month to acquire WebTV, which manufactures a device that allows the Internet to be accessed on TV sets. Myhrvold had warned in an early memo of battles between the computer and the consumer-electronics industries, and the struggle to come could pivot on who owns the expected hundred-and-fifty-billion-dollar market for digital television. Microsoft, Intel, Compaq, and other computer companies have proposed their own digital-TV standards to rival the one already devised by the consumer-electronics industry and embraced by many broadcasters. The computer industry is willing to gamble that consumers would rather have a cheaper box that could be either a computer monitor or a TV than have the less complicated, high-definition-TV set that the consumer-electronics industry favors.

“Both are not sensible proposals,” says a key network official who is holding out for “a hybrid between the two.” For the consumer, the danger is that ex-pensive TVs and computers will not be able to communicate with one another. For the warring companies, the risk is extinction.

Victories in these contests, Myhrvold thinks, will not rest just with those who best master the science. “Perspective,” he likes to say, quoting a former Apple programmer, “is worth thirty I.Q. points.” Seated in front of the large computer monitor in his office recently, Myhrvold said, “There’s a tumultuous compression of time scales, where the hype and hoopla—the general-press and public-interest—people have been living in the future. All you get is ‘Bell Atlantic and T.C.I. are going to take over the earth!’ And then, ‘Oops. No, they’re not.’ And: ‘The cable companies are King!’ And: ‘Oops. No, the cable companies are broke!’ . . . The noise is much stronger than the signal. A year ago, people were writing Microsoft off. Netscape and the Internet were going to kill us. We were dead meat. That was premature. Some people have said more recently, ‘Oh, my God, they’ve won! It’s all over!’ That’s premature, too. Striking the right balance is such a funny thing. You have this high-frequency oscillation. If you try to take a medium path through it, half the time you’re a crazy Luddite. The other half the time you’re a crazy optimist. I’d rather be both—God damn it—than just change with the wind and say, ‘Oops! Oh, I guess the next new thing is x.’ Or: ‘Push technology.’ That was the big thing last month—‘The Internet is all going to push.’ Oh no, it isn’t!” Myhrvold was speaking at the hyper-text speed of the information revolution. If any of the Microsoft people were asleep, surely they would have been awakened by Myhrvold’s high voice and rollicking laugh, which travelled down, and around, the maze of corridors. ©

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