Microsoft's Got A New Go-To Guy For Server Software And Justice Relief

May 28, 2006 (08:05 PM EDT)

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When Microsoft needed an executive last fall to manage its third-largest and fastest-growing business, it tapped senior VP Bob Muglia to build bridges between the company's rough-and-tumble engineers and sometimes overlooked marketing staff. This month, Muglia, an 18-year Microsoft veteran who took over the company's key server software and development tools business in October, took on more responsibility, becoming the point man in Microsoft's still-simmering antitrust battle with the Justice Department that's dragged on for more than a decade.

Customers move to the head of the line with Muglia

Customers move to the head of the line with Muglia

Photo by Andy Reynolds
Muglia, 46, is taking on a higher profile at Microsoft as the company tries to settle its legal problems with the U.S. government, tamp down antitrust concerns in Europe, and better-position products such as the Windows Server operating system, SQL Server database, and Visual Studio development tools in a war of attrition against IBM, Linux, Oracle, and other open source software.

Muglia will be center stage next year, when Microsoft ships the long-awaited update to Windows for servers. During a keynote speech at Microsoft's Windows Hardware Engineering Conference last week, he introduced a second test version of Longhorn Server, the next version of Windows for servers. "There's a trend towards industry standardization, it's unstoppable, and Windows is leading in that space," he said.

On June 11, he and Microsoft CTO Ray Ozzie will kick off the company's TechEd conference in Boston, introducing a new version of Windows for supercomputing clusters. Meanwhile, Muglia is spearheading an effort to market more effectively to CIOs by demonstrating how Microsoft's server products can address business problems, from logging users securely into networks to merging IT systems after an acquisition.

One goal is to counter IBM's enormous presence in the business market. "They know how to speak to those customers and have a business conversation that Microsoft has struggled with," Muglia says. "We've been criticized, and rightly so, for saying, 'We have this cool new technology and why don't you take advantage of it?'" without sufficiently explaining how products fit into a company's operations.

Alan Nunns, general manager of global technology and strategy at Chevron, says the oil company has been working with Microsoft to assemble "customized stacks" of server software that can manage its roughly 100 million documents and engineering files. Microsoft's business products have become more flexible, Nunns says, letting Chevron use common software components in applications that track safety and production at oil fields around the world. "Those capabilities are really being driven by products that Microsoft creates," he says.

Where The Growth Is

Revenue in Microsoft's servers and tools division grew 16% to $2.8 billion during its third quarter, ended March 31. That outpaced the company's 13% overall revenue growth during the quarter, and put the server group's sales behind only Microsoft's flagship desktop Windows business and information worker group, which contains the ubiquitous Microsoft Office line. But while the server division is nearly as big as the Office group, which generated $2.9 billion in revenue during the quarter, it's only half as profitable, mostly due to the longer time it takes to close sales of its complicated products. It's a business Microsoft is counting on for growth, though, on both the top and bottom lines.

"Our growth potential is very strong in this organization," says Muglia, who predicts double-digit percentage growth in revenue and profit margins in years to come. Windows Server's installed base grew nearly 18% from 2004 to 2005 to just over 15 million, according to IDC. That's faster than the overall growth rate for shipments of Intel- and AMD-based servers. Windows on x86 affords customers wide price advantages over Unix, and differences in the performance between x86 hardware RISC continue to shrink. Microsoft's SQL Server database also is capturing share from IBM's DB2 and Oracle. Microsoft released a new version of SQL Server late last year; sales of the database were up a whopping 30% last quarter compared with a year ago.

Microsoft remains vulnerable to open source databases and other applications running on Linux, which runs on the same industry-standard hardware as Windows and SQL Server. And one other risk: Any slowdown in x86 server sales could stunt Microsoft's server software growth.

Part of Muglia's job will be to make sure the applications moving to Microsoft's server stack are large and complex enough that customers choose premium versions of its software. According to Microsoft, SQL Server holds just over a 40% share of the database market measured by units, but its share of the database market's revenue is about half that. That's starting to change, though, Muglia says. Customers are "beginning to move apps they're willing to spend lots of money for to SQL," he says. "We're able to bring our revenue per unit up." About one fifth of SQL Server sales are of Microsoft's most expensive enterprise edition, which has a list price of $25,000 per processor, Muglia says.

At the other end of the market, Microsoft is distributing more free versions of SQL Server on its Web site, trying to build a bulwark against Linux and open source databases like MySQL in hopes that hobbyists or small businesses will download the free version, then upgrade later.


Stylistically, Muglia is a sharp departure from his predecessor as head of the server group, senior VP Eric Rudder, known for his technical brilliance and combative management style. Last fall, Rudder took a new job working for Microsoft chairman Bill Gates on advanced technologies and technical strategy, his second tour of duty as a special assistant to Gates.

While Microsoft's servers and tools business grew under Rudder, he also gained a reputation for a confrontational style and disdain for talking to the press. Muglia, who's worked on most of Microsoft's major businesses, including Windows, Office, MSN, and .Net Web-services technologies, is seen as a manager who can break down barriers between technical and business staff in the 7,000-person servers and tools unit. "Bob respects and values what marketing and business does," says Steve Guggenheimer, a general manager in the group. It's a useful skill at a time when Microsoft is trying to make a clearer connection between its products and IT problems.

Months, Not years

Path To A New Deal
May 1998
Justice Department and 20 states slap Microsoft with antitrust suit in federal court
June 2000
Judge orders Microsoft broken into two operating companies and places other limits on company but stays remedies during appeals
June 2001
Appeals court reverses breakup order and sends case back to new federal court judge
November 2002
New judge approves settlement
May 2006
Microsoft and Justice agree to extend Justice oversight of company while it rewrites technical document
Muglia's conciliatory skills will be put to the test in his new role as manager of 300 Microsoft staffers working to meet Justice Department requirements that Microsoft rewrite a complex technical document that describes how other companies' software can better interface with Windows. The document was required by Microsoft's 2002 settlement of its landmark antitrust case with the federal government; earlier this month, Microsoft and Justice announced an agreement under which the department would extend its oversight of the company by two more years, until November 2009, because of Microsoft's failure to produce a workable document.

According to a filing by Microsoft and Justice to the U.S. district court in Washington, D.C., Microsoft has been unable to translate recommendations of a three-person technical committee into workable documentation of the protocols that would let other companies' software communicate with Windows. The Justice Department said Microsoft was late producing a document and that many of its proposed fixes didn't resolve known problems. To break the impasse, Microsoft named Muglia to rewrite the documentation and test its proposals, according to a court filing.

Protocols that had been in place for years didn't include documentation suitable for use outside the company, according to Muglia. "We really didn't have the right engineers on it," he says.

Muglia says he's given the court an estimate of "months, not years," to complete the document, and hopes to have an agreement with the Justice Department on a specification within the next couple of weeks. He's also working on a common document for the United States and European Union, where Microsoft has run afoul of regulators for failing to clearly publish the Windows Server interfaces required by an antitrust judgment there.