Many companies talk about getting close to the customer, but Microsoft pushed this idea to the extreme when it hired Nelle Steele to show up at 5 in the morning at the Milwaukee home of Tim Tucker. The owner of Air Engineering Inc., a supplier of industrial air compressor parts, is Microsoft's model customer. Steele's mission was to observe Tucker at close range, arriving as soon as he stepped out of the shower, then shadowing him until his workday ended at 10:30 p.m. Steele, a cultural anthropology Ph.D. student on leave from the University of Wisconsin, is one of five anthropologist-ethnographers (and the only one focused on entrepreneurs) that Microsoft hired full-time to conduct a field study. Called "Dawn to Dusk," the study documents the work habits and thought processes of a species the software behemoth had never before tried to understand: owners and employees of small businesses.

In tailing her quarry, Steele discovered, to her surprise, that small companies kept vital information in disconnected places -- what she called "data silos" -- from scribbled notes on scraps of paper to files on a PC that could be accessed by only one employee. This made it harrowing to try to answer basic questions like, "How did we do in the Northeast last quarter?" "I saw the pain that data silos caused day to day," says Steele.

Her work is part of Microsoft's $2 billion research and development effort aimed at convincing these tribes of technological primitives to join the modern world. While most of that is earmarked to improve products, a lot of it is going to spreading the word. That's in addition to two recent acquisitions -- Great Plains and Navision business management software at another $2.4 billion -- to enhance its offerings for small business. Even for Microsoft, with $50 billion in cash in the bank, that's a major investment. Microsoft has started trying to care about these customers. Why us, you might ask, and why now? Partly it's because "enterprise" customers, those that have more than 1,000 employees and 500 PCs, aren't spending on tech the way they used to. So the industry's top names, including IBM, Hewlett-Packard, and Dell, have started going after the littler fish. Even among this crowd, though, Microsoft's push into small business is remarkably fervent and richly funded -- and for a good reason: competition. There are two parts to the story that follows: the first is the challenge Microsoft faces and the criticism it has endured in the past. The second is what Microsoft is doing -- with a degree of success -- about both.

Microsoft's push into small business is remarkably fervent and richly funded -- and for a good reason: competition.

Today, 90% of small and midsize businesses run on the Microsoft platform, says Mika Krammer, an analyst at Gartner, a research firm. That's a stranglehold on this enormous market of 8 million companies in the U.S. and 40 million worldwide. Globally, these companies pay almost as much for info tech -- $400 billion a year -- as America spends on defense. But despite its long history of dominance, Microsoft faces a looming threat from Linux and the insurgent open-source "free software" movement. Linux could do what the Justice Department couldn't: end the era of Microsoft's near monopoly and strip a sizable chunk of its sales and profits in the coming decade. Many industry analysts and media critics think that Linux is more secure and reliable than Windows, a prime target for hackers. Entrepreneurs have been paying close attention to the debate. Two of their biggest role models -- Amazon and Google -- now rely on Linux to run their websites. At a Yankee Group conference in San Francisco in March, small-business owners commiserated with one another about Microsoft's disappointing customer support and their dislike of paying licensing and upgrade fees. They griped about how Microsoft's new releases often seemed more like beta software -- test versions with plenty of kinks -- than reliable finished products, and they bemoaned the software's vulnerability to viruses and the constant need for patches.

With mighty IBM putting its clout behind Linux, some small businesses are starting to convert, often with impressive results. Satellite Records, a 35-employee music retailer in New York City, made the switch after IT director Steve Shapero found Microsoft's software simply too high-maintenance. "It's like American cars and Japanese cars," says Shapero. "Do you want a Chevy Impala or a Honda Accord? It's great that Detroit and Microsoft are finally making things that don't suck, but we'd rather have the state of the art." Shapero said that Microsoft server software would require a full-time person to keep it running, which the company didn't want. "As an independent consultant I like to set up a Linux box, deploy it, and ideally never hear from my client again," he says. Other customers were motivated by cost savings from not having licensing fees. Westport Rivers Winery, a 20-person family business in Westport, Mass., cut its annual tech budget by 60% with Linux, according to an IBM case study. Rob Meyer, Internet director for Anaconda Sports, a 200-person sporting goods distributor in Lake Katrine, N.Y., says it saves around $3,000 a year on licensing fees now.

What's more, small-business owners still feel a residue of fear from Microsoft's long history of abusing power in its quest for total dominance. They remember how the company tried to hijack their websites in 2001 with SmartTags, an aborted Windows feature that would have turned many of their own words into links to Microsoft's sites and advertisers' without asking their consent. And they read about Microsoft's vendetta against guitar-string maker Ernie Ball, based in San Luis Obispo, Calif. Four years ago, the founder's son and CEO, Sterling Ball, was a victim of a "nail your boss" campaign by the Business Software Alliance, a trade group that Microsoft co-founded. BSA raided the operation and found that a few of its 80 computers had unpaid copies of Microsoft products. Ball said it was an accident, a case of unused programs left over on old PCs when they were passed from engineers to clerks. But he still had to pay $90,000 in fines and legal fees. Microsoft sent the news clips to other small companies as a threat.

Since switching to Linux, Ball has saved more money than he lost in the contretemps. "The money that I'm not spending on new versions of Office and on fighting viruses is going into marketing and R&D," he says.

Now that it fully grasps the Linux threat, Microsoft isn't being so heavy-handed with small businesses. Instead, the company is trying shrewdly to make its own claims of parity or superiority. Executives dispute Linux's claims of better security and reliability and point out that "free software" isn't actually free because you need to hire people to install, maintain, and customize it. (That's how rivals, particularly IBM, are looking to profit.) Still, Linux is "a real threat, and we take it seriously," says Darren Huston, the Microsoft vice president who leads U.S. initiatives for small and midsize businesses.

The stakes are stunningly high -- a $400 billion-a-year global market! -- and this is going to be an epic battle waged over a long time. Krammer says that Microsoft will continue to dominate that market for several years because smaller customers are often slow to switch to new software and most buyers won't really consider Linux until it becomes more mainstream. Besides, there aren't yet many business programs based on Linux, and those that are available, such as Sun's StarOffice, aren't as good as Microsoft's offerings.

Microsoft remains vulnerable, however, because small-business owners resent being captive to such a powerful force and not having viable choices. A January Yankee Group survey of companies with fewer than 500 employees found that 43% of them are concerned about becoming overly reliant on Microsoft's products and services; of those respondents, 72% were actively seeking alternative vendors. "Microsoft's challenge," says Krammer, "is to go from being a necessary evil to something that small businesses like to invest in."

Improvements are being made, but there is always room for more. In April Microsoft launched a revamped and much easier-to-use Web portal at Still, you might have to wait half an hour when calling customer service. Even more frustrating is how Microsoft keeps smaller customers at arm's length by forcing them to work through intermediaries -- local consultants who sell Microsoft's software, set it up, show buyers how to use it, or write their own software to work with it. There are some 325,000 of these folks, who go by awkward acronyms and names such as "VARs" (value-added resellers), "ISVs" (independent software vendors), and "certified partners" (individuals who have passed training courses run by Microsoft).

Small businesses hook up with these "partners" mainly through word of mouth, but if you're an entrepreneur with little tech savvy, it's hard to know whether your accountant's sister-in-law or your lawyer's fraternity brother is the best person to apply software to the challenges of your business. To help, Microsoft's newly redesigned Web page has a "partner finder" to identify local consultants and their areas of training and expertise.

The cottage industry of Microsoft's partners is getting some big new players. Both HP and Dell are starting to hawk their consulting services to businesses with fewer than 500 employees. IBM is reaching out to entrepreneurs too, but rarely dips below the 500- to 1,000-employee range. While all three companies embrace Linux, they also promote Microsoft's products as part of their overall packages for clients.

Although finding the right partner and setting up a new software system can be stressful, there's a compelling reason for sticking it out: Microsoft now offers many extremely useful products for small and midsize businesses.

Microsoft divides this huge market into two parts: The 7.5 million "small" businesses with fewer than 50 employees, with no more than 25 PCs and with a maximum of $5 million in annual revenue. The 330,000 "midmarket" companies with fewer than 1,000 employees have up to 500 PCs and up to $500 million in revenue.

The smallest businesses probably don't have a PC network or even a professional info-tech employee. These start-ups can benefit from Small Business Center (formerly bCentral), a set of Web-based services hosted by Microsoft on its own computers. The pitch is that it's like hiring Microsoft to be your info-tech department for a monthly or annual rental fee, usually after a 30-day free trial. First developed in 1999, the services -- aimed at businesses with fewer than 25 employees -- have quickly become popular, attracting more than 2 million users in the U.S., Microsoft says.

One of them is Jack Marshall, president of Pastry Chef Central in Boca Raton, Fla. His small family business sells baking and pastry tools through "It's supercheap," Marshall says of Microsoft's "shopping-cart" services, which cost only $249 a year (excluding credit card verification fees, which are billed by a third-party partner). "You can't beat it." And even though Microsoft can't give the little guy all the powerful features of an Amazon, "they're moving toward that," he says. Marshall particularly likes the new "order status link" that sends e-mail purchase confirmations to customers with Web links so they can check on delivery without having to contact the company: "That's been a fabulous timesaver for us." Besides time, there's the money: Microsoft says that the top 100 customers for Small Business Center's e-commerce service averaged $43,000 in revenue last December.

Small Business Center also offers ListBuilder, which enables companies to send mass e-mails to customers to let them know about sales or other news. Microsoft handles the mailing, then tracks who opened the messages and were inspired to visit the sender's website. The cost: $29.95 a month or $299 a year. Microsoft surveyed 100 ListBuilder clients and found that businesses sent e-mails to an average of 30,000 customers, though some had amassed lists of more than 100,000 names. (Microsoft says it does not keep e-mail addresses for its own use.)

One of Microsoft's most useful hosted Web services is SharePoint, which allows colleagues to share information and collaborate with one another and their customers. SharePoint is sadly underused by small businesses, but it's a smart idea. In a Microsoft case study, Jeff Williams, president and owner of Carolina's Choice, a furniture manufacturer in Rocky Mount, N.C., says SharePoint allowed his company to make up-to-date sales information available 24 hours a day to a network of 700 furniture dealers (the cost: $19.95 introductory price, then $39.95 monthly).

As fledgling companies grow, Microsoft wants to wean them from paying monthly rental fees to investing in licensed software installed on PCs (which is how Microsoft has always made most of its money). The staple of the desktop PC has long been Microsoft Office (Word, Excel, Outlook, and PowerPoint), which boasts 400 million users worldwide. "Everyone I hire out of college can use it," says Eric Meslow, president of Timbercon, a 30-person, $4.5 million fiber optics manufacturer in Portland, Oreg. That gives Microsoft a big advantage over Linux, which often requires training.

The latest twist: Last October, Microsoft introduced Office Small Business Edition 2003, which lists for $449, while earlier Office users can pay an upgrade price of $279. The prices are up to $50 higher than the standard version, but Microsoft throws in two compelling programs. First, Business Contact Manager consolidates all the information you have about a customer, a dramatic improvement over the haphazard data silos discovered by Nelle Steele that could spell lost leads or missed sales opportunities. The program can identify long-neglected sales accounts or alert you to what's coming up in the pipeline in the next seven days. Timbercon's Meslow says that before his salespeople had this "sales funnel" feature, it took them an hour a day to monitor their accounts. Now it takes "about two minutes," he says. Meslow figures that saves a total of 20 hours a month for his typical salesperson, who generates an average of $150 to $200 an hour.

Office's other addition, Publisher, is a tool for creating websites, e-mail newsletters, and other marketing materials so you don't have to hire professional design firms or printers. Timbercon saved $72,000 in the first year by designing portions of its website and product data sheets. "Publisher was one of the larger surprises of the new line for us," Meslow says. "Five years ago you could tell if something was created in Publisher. Now it looks professionally done, and it's relatively easy to use." It's also fast, he says. A project that once took three weeks for outside firms to design and print can be created in-house within a week.

"Five years ago you could tell if something was created in Publisher. Now it looks professionally done."

Terry Szpak, VP of marketing and sales at Telesystems West, an 18-person, $2.5 million company in Bellevue, Wash., that sells and installs phone systems, estimates sales rose $5,000 to $10,000 a month thanks to Publisher. Over its first dozen years, Telesystems had put together a database of 5,000 customers, but employees were too busy to create or manage promotions to sell additional products. With Publisher they were able to turn out flyers and e-mails. "It's hitting people who already trust us," Szpak says. "Marketing to our existing customer base has been a boon."

Office and Business Center provide benefits to companies with multiple PCs hooked up only through the Internet or what's known as the "sneaker net" -- people simply walking around, a likely scenario for a start-up. But as the business grows, even greater opportunities can come from setting up a PC network with a separate machine dedicated as a server.

About 7 million of America's 8 million small businesses still don't have a server, according to Microsoft. It charges $599 to license its Small Business Server software for five users, and Dell and HP both sell the hardware with this software already installed for under $1,000. (Customers can later expand by licensing up to 75 users before they have to switch to a more capable product.) The investment usually pays for itself quickly. A server makes it easier to back up data that might otherwise reside on isolated PCs. It lets employees look at each other's calendars and contacts, hook up to the network remotely, and share software for business functions such as accounting and inventory.

Having a server enables a company to host a SharePoint intranet, which is how the Fischer Group changed the way it did business. The 23-person, $10 million Orange, Calif., food manufacturer representative firm had relied on old-fashioned paper files for purchase orders, contracts, contact information, and memos. They were often misplaced. Worse, employees could only get to the files during business hours. "Our biggest problem was wasting time and money physically handling job documents," says Gene Austin, the company's general manager. "It was like putting $100 bills in a pile and setting them on fire." Once Fischer digitized this material, finding information and responding to customers became easier and faster. Small Business Server also provides security for a company's network, an area where many small businesses are turning to Linux, including Timbercon, which runs its firewall on an open-source software server.

Even though Microsoft still relies on its partners, it's trying much harder to make direct contact with its customers. The company now offers free seminars for small businesses in 160 cities, many of them far-flung rural outposts like Casper, Wyo. Cynthia Bates, Microsoft's general manager for U.S. small business, says that everyone on her team has to spend one day a month working for a customer's company to see what daily life is like. "We want to humanize Microsoft rather than be the company in the backroom," says her boss, Darren Huston.

Meanwhile, our intrepid cultural anthropologist Nelle Steele has begun a new two and a half year study called Small Business Better Together, which is applying technology to three small companies in the Seattle area. The owner of one of the three didn't want customers to wind up with voice mail; he insisted that an employee take a message. But these employees relied on sticky notes applied to computers or chairs. When these fell off, the customer's needs would go ignored. Microsoft responded by buying new hardware and donating software. Now, Steele reports, "people are taking messages for each other in Outlook." The notes haven't gone away entirely. Some things stick for a long time, and no amount of technology will change that.

Sidebar: Microsoft a la carte

Info-tech options for your small business

Small Business Center (formerly bCentral)

  • What It Is: Online services for hosting e-commerce websites, processing customers' orders, developing sales leads, and launching e-mail marketing campaigns
  • Pros And Cons: Microsoft rents many useful Web-based services on a monthly or annual basis, though the other options -- especially eBay -- are popular with small merchants and with customers.
  • Alternatives: Amazon, eBay, Yahoo

Office Small Business Edition 2003

  • What It Is: Tools for creating and editing documents, spreadsheets, presentations, and marketing materials; managing e-mail and calendars; and tracking contacts and leads
  • Pros And Cons: Everyone's already trained on Microsoft's excellent suite, the global standard with 400 million users, but OpenOffice is a viable option -- and it's free.
  • Alternatives: OpenOffice, Sun's StarOffice

Small Business Server

  • What It Does: Runs and provides security for PC networks
  • Pros And Cons: It's a good product. But Microsoft charges $599 for five users, while open-source rivals like Apache are free -- and critics say they offer lower maintenance costs and better security.
  • Alternatives: Apache, EmergeCore IT-100, Novell's Small Business Suite, Red Hat Linux

Alan Deutschman is a writer living in San Francisco and Roanoke, Va.