Bill Gates understood networks and platforms in a way his competitors did not. Now, Microsoft faces an uncertain future.

Microsoft is lagging in the current round of Internet competition. In 1978, the 11 original members of the company, with Bill Gates at bottom left.

By STEVE LOHR

Bill Gates and Microsoft have fundamentally shaped how people think about competition in many industries where technology plays a central role. Today, there are more than one billion copies of the Windows operating system on PCs around the world.
But the old rules of competition that were so lucratively mastered by Microsoft have been altered. For millions of users, mobile devices like cellphones are beginning to edge out PCs as the tool of choice for many computing tasks. And Google, the front-runner in the current wave of Internet computing, has wrested the mantle of high-tech leadership from Microsoft.
Despite his success, Mr. Gates is moving on as the company he cofounded in 1975 is struggling to find its way. He is retiring, sort of. He is still only 52, and he is going off to spend more time guiding the world’s richest philanthropy, the Bill and Melinda Gates Foundation. He will still be Microsoft’s chairman and largest shareholder, but June 27 marked his last day as a full-time worker at the software giant, marking the unofficial end of his career as a business leader.
Although Mr. Gates will spend one day a week at the company, it will be up to his successors, led by Steven A. Ballmer, the chief executive, to master the challenges of the Internet or watch Microsoft’s wealth and stature in the industry steadily erode.
“Bill’s legacy is Windows and Office, and that will be a rich franchise for years to come, but it’s not the future, said David B. Yoffie, a professor at the Harvard Business School.
Mr. Gates has been an animating force behind the personal computer revolution, helping to build a huge global industry and engineer blockbuster products like Windows and Office, used every day in offices and homes around the world. More than 90 percent of personal computers run Microsoft software.
The Harvard University dropout was the wealthiest person on the planet for years - worth more than $100 billion in 1999 - though his fortune is now about half that because of the decline of Microsoft’s shares and his continued donations to his foundation, which is focused on global health and education.
Industry experts and economists say that Windows is not necessarily the best or most admired software for running the basic operations of a personal computer - Apple’s Macintosh can claim the most devout fan club. But Mr. Gates grasped and deployed two related concepts on a scale no one ever had in the past: the power of network effects and the value of establishing a technology platform.
Put simply, the network effect describes a phenomenon in which the value of a product goes up as more people use it. Email messaging and telephones are classic examples.
A technology platform is a set of tools or services that others can use to build their own products or services. The more people who use the tools, the more popular the platform can become.
Mr. Gates combined the notions to build Microsoft’s dominance in PCs, spreading its influence with computer makers and software developers.
Today, there are many thousands of software applications that run on the Windows platform .
“Gates saw software as a separate market from hardware before anyone else, but his great insight was recognizing the power of the network effects surrounding the software, said Michael A. Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management.
That, Professor Cusumano added, was the essential difference in the paths of Microsoft and Apple, the early leader in personal computing. Apple, he said, focused on making outstanding products alone, while Microsoft nurtured a growing ecosystem of outside software developers who use, and are dependent on, Microsoft’s technology.
In the past, Microsoft has beaten back challenges and vanquished rivals, even when it came late to markets, as it did in the first wave of Internet technology. Mr. Gates’s shrewd 1995 decision to embrace Internet browsing technology and attack the early leader, Netscape Communications, started a pitched antitrust battle with the government.
“But he extended Microsoft’s hegemony for a decade, said Mitchell Kapor, a longtime rival.
However, Microsoft is lagging badly in the current round of Internet competition and, analysts say, is facing more formidable challengers this time - notably Google.
Microsoft’s share of Internet search in the United States is less than 10 percent, while Google holds more than 60 percent and Yahoo has about 20 percent. And search is only part of the new platform on the Web, which includes social networks like Facebook and MySpace and Internetbased alternatives to traditional desktop software, including e-mail messaging, word processors and spreadsheets.
Traditional desktop software - and the technology standards Microsoft controls there - matter far less when more software is accessed with a Web browser and delivered over the Internet from vast data centers run by Google and others. The new approach is known as “cloud computing, and the business model behind it is typically to sell online advertising and software services.
At Microsoft, there is scant sign of panic, despite its trailing position and its failed bid to buy Yahoo for $47.5 billion as a catch-up strategy. Microsoft sees an evolution in computing, not a disruptive revolution that will imperil the company, said Craig Mundie, Microsoft’s chief research and strategy officer.
Mr. Mundie said Microsoft is preparing for a widening world of both cloud computing and “client machines, not only personal computers but also cellphones, cars, game consoles and televisions, all running Microsoft software.
“The next big platform is the union of the clients and the cloud, he said.