By Elizabeth Corcoran
Washington Post Staff Writer
Sunday, October 18, 1998; Page A1

REDMOND, Wash. - Ted Stefanik felt that he was finally riding a winner.

It was the autumn of 1995, the early days of the Internet gold rush. Stefanik and about a dozen other hard-core computer programmers were working 80-hour weeks, racing to execute a simple but big idea: software that would allow anyone to create a site on the World Wide Web.

They knew that if they did it right, they could make their company, Vermeer Technologies of Cambridge, Mass., a player overnight. Stefanik had worked at three other start-up companies without hitting the jackpot.

Now he had a shot with FrontPage, the software he and his colleagues had bled to create. The release hit big: rave reviews, 275 purchases at $695 a pop. They were gunning for sales of $35 million in three years.

Programmer/developer Randy Thompson sits at his computer amidst numerous empty soda cans. (TWP)

Just three months later, Vermeer had ceased to exist. Ted Stefanik and two-thirds of his colleagues were packing up to move cross-country.

Microsoft had made an offer for the company. And joining the software behemoth, the FrontPage team knew, would be better than competing against it.

Within the high-tech industry, Microsoft is widely feared for the brutal way it uses its wealth and power. But as Stefanik and his colleagues settled in, they discovered that Microsoft sees itself - and acts - more as a skittish start-up than as the most dominant corporation in the business.

This wary, driven personality is one of the keys to Microsoft's phenomenal success over the last 25 years. It is also in the background of the antitrust lawsuit scheduled to open tomorrow in federal court in Washington.

The lawsuit, filed by the U.S. government and attorneys general from 20 states, alleges that Microsoft has tried to protect its monopoly in personal computer operating systems through a variety of illegal practices, notably by trying to crush a competitor in the market for Internet browsing software. Microsoft Chairman Bill Gates has replied the suit attacks innovation.

The case will examine Microsoft's dealings with some of the best-known companies in the computing business - Netscape Communications Corp., Intel Corp., America Online Inc. It may write the rules for competition in the Information Age, much as the case against Standard Oil established the ground rules for Industrial Age capitalism in 1911. A victory for the government could allow it to force drastic changes in Microsoft's business practices.

Programmers Mike Angiulo (right) and Julie Larson (left), despite a single wall separating their offices, talk to each other and two other colleagues via e-mail. (TWP)

Those practices are a direct reflection of the company's corporate culture.

By any measure, Microsoft is a giant: It has made the personal computer a mass-market item and changed the living, working and playing habits of hundreds of millions of people, much as cheap oil did a century ago. Microsoft now has 27,000 employees. Its stock is valued at $260 billion. Its Windows operating system - the software that underlies the basic operations of a personal computer - is in 90 percent of the world's PCs. The tiniest changes in Microsoft's flagship products can send shock waves throughout the industry, sometimes wrecking smaller companies' hopes of finding their niche.

But inside Microsoft, people think of themselves as working for a constellation of small companies - companies that need their commitment and their adrenaline to survive. They have a blistering optimism about what computers can do for the world, and an almost evangelical faith in their own roles in that envisioned future. Like most small companies, Microsoft is driven by nervous energy and the paranoid belief that it is always vulnerable and must press the advantages it has.

This edginess may be traced straight back to Gates - a CEO who will not concede that a 90 percent market share amounts to a monopoly. It is one of Microsoft's defining traits, the primary force in its corporate culture.

To its competitors and critics, Microsoft's combination of edginess and power is like a teenager with a machine gun.

Pausing in the office hallway in the morning to chat and get a bagel, are (left to right): Mike Angiulo, Ted Stefanik and Mike Smith. (TWP)

"If ever there was a case that raises consumer-welfare issues, this would seem to be it," said Sen. Orrin G. Hatch (R-Utah) in a statement in Congress last summer. "Microsoft has a 90 percent share of a world market; there are reasons to think that share will endure; Microsoft has engaged in restrictive practices; and many of those practices do not appear to have any efficiency justifications that would benefit consumers rather than the company. Where you find a dead body, a bloody knife, fingerprints and a motive, there may have been a crime."

People imbued in the Microsoft culture, however, see the company as a classically capitalist institution. "The Microsoft value system is work very hard, be very smart and be very competitive," says Mike Maples, one of the company's top three executives until he retired in 1995. "People believe they're doing the right thing, that they're helping the world. Sales are a simple indicator of success."

Ted Stefanik, a bear of a man who tops six feet, arrived in Redmond with a grudging respect for the company. He was one of more than 30 Microsoft employees or ex-employees who agreed to be interviewed for this story, which was reported between March and August.

"In late 1991, I hated Microsoft with a passion," Stefanik says. Windows 3.1, an early version of its franchise product, "was such a piece of trash," he says with a purist's disdain. "The problem is, Microsoft doesn't stop when it comes out with a bad product. Microsoft focuses."

In the Microsoft universe, FrontPage is a tiny but rising star. It is not involved in the antitrust litigation. Yet its short history - from acquisition to development to market dominance - offers a look at how Microsoft's corporate culture works and how Microsoft competes.

Vying for Vermeer

In 1995, Chris Peters was the only senior executive at Microsoft who had built his own Web site. It was hard work. Peters, one of Microsoft's first 100 employees, had started as a programmer and risen to a vice presidency, from which he'd run various Microsoft businesses. He was only 37 and still dressed like a long-haired college undergraduate.

He was toying with the idea that Microsoft should create a tool to help people build Web sites when Vermeer released FrontPage. The software, Peters says, "was way ahead of me." It "was better than perfect. It was very much designed for the common person." Soon he was on the phone to Vermeer's founders, Charles Ferguson and Randy Forgaard, in Cambridge.

Marc Andreessen had beaten him by one day. The co-founder of Netscape - whom Time magazine would put on its cover as the man who was bringing the Web to the masses - had told Vermeer that he was interested in its product.

Both companies started negotiations with Vermeer, but in the end, it was Microsoft that clinched its deal. Peters, who wore sneakers and liked to swap stories about programming, had offered Vermeer a few compelling advantages.

One, oddly, was that Microsoft was seriously lagging behind Netscape in building Internet-related software. The Vermeer team worried that their work might get swallowed up by Netscape's. Microsoft would be virgin territory.

Another advantage was a pledge from Peters that he would guide them through the Microsoft bureaucracy. Little would change for them, Peters predicted. "Today," he told them, "you go to work, press the elevator button and go into a crummy office" squeezed between a physical therapist and other non-techies. Microsoft's offices were nicer, but more to the point, everyone around them would be writing software, working on ideas that they could borrow. "There's just more stuff to steal," he cracked.

Money played a role, too. Netscape and Microsoft were both offering to pay in stock, and Vermeer's founders ultimately bet that Microsoft's stock would appreciate more.

The deal closed in January 1996. Microsoft paid handsomely for Vermeer - with stock worth an estimated $130 million at the time of the deal. Most of the start-up's three dozen employees would be millionaires if they stayed with Microsoft for at least two years.

The Sunday night after the deal closed, Vermeer sent Ted Stefanik out to Microsoft, like a space probe to a new planet.

A Campus Community

The place where Stefanik landed is only a 20-minute drive east of Seattle, but it is a community unto itself. Microsoft's 260-acre campus in the shadow of the Cascades features both handsomely kept lawns and construction cranes. (One insider's rule: As long as construction crews are building, keep buying Microsoft stock.) Many of the three dozen buildings are X-shaped, the better to provide window offices to valued employees. Modern art dominates the office decor. Outside Building 16, there's a courtyard paved in flagstones engraved with the name and release date of 340 Microsoft products. Many more flagstones are still blank.

It was in Building 16 that Stefanik set up FrontPage on a computer and began to discover some of the comforts of his new home. Programmers are the first citizens in the Microsoft kingdom, and they are treated accordingly. Did he need more computing power? Someone would deliver it. Did he need any particular office gear? A coffeepot? As more of his FrontPage colleagues arrived in the ensuing weeks, the team was assigned an "admin," a energetic woman whose job was to eliminate hassles and solve problems, so that the programmers would be free to do one thing: write software.

Plunging into Microsoft, the FrontPage team found that they were relatively old hands on their new ranch. Stefanik, for instance, was 36. The average age at Microsoft in fiscal year 1996 was 33.8 years; it has inched up to 34.4 today. But the FrontPagers' relative maturity did not stop them from using the ping-pong table in their lobby or importing the Vermeer print from their Cambridge offices, an emblem of their outsider origins.

The Vermeer team knew that as Microsoft's fleet of programmers has grown older, it has also grown richer. The corporate uniform exemplified by Chris Peters's jeans and T-shirts belies a breathtaking affluence.

Microsoft watchers estimate that the company has created 5,000 millionaires and three billionaires (Gates; his co-founder Paul Allen, who serves on the board of directors; and Steven A. Ballmer, the company's president). Many have used the money to buy exotic cars and baronial houses, not to mention some totally excellent electronics.

That much money has an interesting repercussion: It bonds the employees to Microsoft - and to one another. It's hard to criticize the company that made you richer than anyone in the history of your family, and it's easier to swap stories about the cars and the houses and the electronics with other people who have them.

By virtue of its location and wealth, Microsoft is somewhat isolated from the rest of the industry. For many people - particularly recent college graduates - joining the company is an immersion experience. Many of them grew up as nerds, their intelligence either ridiculed or ignored; at Microsoft they're surrounded by people just like them. "It's hard to be a social misfit in Microsoft, because we're filled with social misfits," quipped one manager.

Continued on page two