After the Vista debacle, Microsoft changed the way it makes software. The result – Windows 7 – is winning raves. Can a new operating system (and a new attitude) help the company take on Google?

With Microsoft's founder and chairman, Bill Gates, trotting the globe in a quest to abolish diseases, his handpicked successor, CEO Steve Ballmer, has had most of a decade to move the company beyond its two biggest cash cows, the Windows operating system and the Office productivity suite. So far, not so good.

The company's web forays, such as MSN, have only highlighted the dominance of Google and Yahoo. In software for smartphones, there is Apple, RIM (RIMM), and everybody else. MP3 players? Microsoft's Zune hardly merits a mention. And even the core franchise has suffered. In the face of slowing PC sales and the economic pall, Microsoft's fiscal 2009 revenue actually contracted, to $58.4 billion from more than $60 billion in fiscal 2008 — and the company missed its earnings estimate by more than $1 billion.

Fresh Coat of Paint: Artist Ricardo Richey, commissioned by Fortune, spray-paints a street-smartversion of Microsoft'sname and Window's logo on a San Francisco wall.

But the biggest failure under Ballmer's tenure was self-inflicted. Vista was meant to be a wholesale reimagining of Windows, the brand name for Microsoft's operating systems dating back to the early 1980s. Every so often the company unveils a new OS, blandly named for the year of the release (Windows 95, Windows 98) or a geeky abbreviation (Windows XP is short for Windows Experience). Vista had a marketing-friendly moniker, a fancy user interface, new security architecture, a better file-storage system, and much more. More

Photo: Bill and Melinda Gates Foundation

The collective net worth of the super rich on Forbes's annual list of the 400 wealthiest Americans fell by $300 billion over the past 12 months, and the tech sector spilled its share of the red ink.

Microsoft's Bill Gates lost the most — at least on paper. His net worth dropped from $57 to $50 billion, not enough, however, to keep him from topping the list for the 16th year in a row. Two current and former Microsofties were close behind: Paul Allen (No. 17) lost $4.5 billion and Steve Ballmer (No. 14) gave up $1.7 billion.

Other notable losers were Michael Dell (No. 13), down $2.8 billion, and SAS's James Goodnight (No. 33), off $1.9 billion.

In this company, the $600 million that Apple CEO Steve Jobs lost on paper doesn't seem so bad. In fact, on the strength of the $5.1 billion he still has, he moved 18 spots up the Forbes 400 list, from No. 61 to No. 43.

Below: The 12 richest tech moguls and their change in net worth. One actually got richer. Can you guess who?

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Image: Microsoft Corp.

Image: Apple Inc.

"I would give a lot to have Steve’s taste."

Bill Gates said that of Steve Jobs at the D5 conference two years ago, and we knew exactly what he meant.

Take, for example, the two images above. They are samples of the new desktop images offered by this fall's big operating system updates: Microsoft's (MSFT) Windows 7, scheduled for release in October, and Apple's (AAPL) Snow Leopard, due in September.

Can you guess which is which?

Gates may have retired as CEO and Jobs may have spent much of 2009 on medical leave, but the taste gap persists.

To see the full sets of wallpapers, obtained by Creative Bits, click here for Windows 7 and here for Snow Leopard.

This one is for Bill Gates.

He was 27 when I first met him. It was 1983 and he was in New York hustling a new laptop (the Radio Shack TRS-80 Model 100) that came with Microsoft software in ROM. I remember him rocking back and forth, as if to contain his impatience, when asked if there was an UNDO key.

In those days, before Microsoft became a software colossus, he or Steve Ballmer would stop by my office every once in a while to talk about their plans for the company. Later I would see another side of him through the Bill and Melinda Gates Foundation.

But the Bill Gates I remember best is the one I spent two uncomfortable hours with in 1995, in the early days of his antitrust problems. We were in his Redmond office with Dave Jackson, then Time Magazine's San Francisco bureau chief, conducting what was supposed to be the final interview for a Time cover story (Master of the Universe).

It was not going well. And it reached a low point when, in my memory, the chairman of Microsoft called me a communist. Later, reading the transcript, I realized he didn't really say that — although he was pretty feisty. To my editors' credit, they printed the juiciest parts of the interview — including a brief mention of Apple (AAPL) — as a sidebar to the cover.

In honor of Gates' last days at Microsoft (MSFT), it's pasted below:

INTERVIEW

By Philip Elmer-DeWitt, David S. Jackson

[Redmond, Wash., June 5, 1995]

Bill Gates displayed his well-known combativeness last month when TIME questioned him about Microsoft's controversial business practices. These are excerpts from a two-hour interview with TIME technology editor Philip Elmer-DeWitt and San Francisco bureau chief David S. Jackson

TIME: Are you betting the company on Windows 95?

Gates: I don't know what "bet the company" means. We're a company with $4 billion in the bank. I don't think we'll disappear. We're not like Time Warner, with $15 billion in debt. But if you had to take one thing in the next year and say what will our biggest impact on the PC industry be, it would clearly be Windows 95. Windows 95 is a very, very big deal.

TIME: Have you won over all the easy computer customers? Is it going to be harder now to convert the nonusers?

Gates: Well, 20 years ago, when we started, we talked about a computer on every desk and in every home. Now, if you take that to its extreme and say 100% of the people, clearly we'll never get there. There'll always be some people who choose not to participate, just like some people don't use the phone or watch TV.

I see it as a continuum. That is, as more multimedia titles come out, as more information is online, as we make these things easier to use, we start to draw in more and more people. Now, once you get in for one application, the hurdle to learn a second one is fairly low. My dad wanted to do his taxes automatically. Then I got him doing word processing and now electronic mail because everybody in our family is connected.

TIME: Do you spend much time on the Internet?

Gates: Well, I spend a few hours a week just seeing the new stuff that's out there. If you count E-mail, I'm on the Internet all day, every day.

TIME: We'd like to ask you about some of the charges that have come out in court.

Gates: This is old, old stuff.

TIME: We'd like to have it on the record, if you wouldn't mind.

Gates: Are you, like, a historical publication or a newsmagazine?

TIME: Just last January, according to Apple, you threatened to stop developing for the Macintosh. Is this true?

Gates: We at no time, in any way, have ever threatened to stop developing for the Macintosh. I don't even understand what it would mean. It's the most bizarre thing in the world. What would we get out of that? It's a big revenue source. It's a profitable business.

TIME: Borland [another Microsoft competitor] charges that you used vaporware [the preannouncement of a nonexistent product] to screw up the development of Turbo BASIC. Which you did, right?

Gates: No! If you're accusing me of competition, then yes. You have to decide. Are we optimized to help competitors, or are we optimized to help customers? Should we be open about our plans?

Do you understand what is being said here? The question is, are you allowed to tell people what your products are in advance?

TIME: Isn't the point that if you're a small player and you pre-announce a product, it has no effect, but that when a large player preannounces, it can freeze out the competition?

Gates: I'd say that's pretty nonsensical. Let's say you take a market, like the cigarette market, and you ban advertising. Who benefits?

TIME: The manufacturer with the largest installed base.

Gates: Installed market share, totally. So let's have an absolute ban. You may never talk about new products in advance. But people do talk about their plans. You know, it's this damn free-speech thing. It's well established that communications is valuable for the efficiency of marketplaces. That's all procompetitive stuff. This assumes that you like capitalism.

TIME: We don't live under free, unfettered capitalism. Isn't that why we have antitrust laws?

Gates: When did antitrust come up in the discussion? Antitrust is the way that the government promotes markets when there are market failures. It has nothing to do with the idea of free information.

TIME: I guess in Judge [Stanley] Sporkin's mind it does. He's saying vaporware is an issue.

Gates: You have to laugh. I mean, this is a judge who goes off and intentionally reads a book [a biography critical of Gates called Hard Drive] in advance and asks about some of it. It's minor. I mean, you're either here to talk to me about Microsoft or talk to me about that stuff. This lawsuit has nothing to do with Microsoft. Nothing.

TIME: Are we supposed to ignore the fact that there is a complaint that has Microsoft's name on it?

Gates: There are probably 60 cases with Microsoft's name on them. There will be at all times. Period.

TIME: Have you given much thought to succession?

Gates: I have a will written that, you know, talks about how the company should be run and who should vote my shares. There's nobody designated as my successor.

TIME: How long do you plan to run Microsoft?

Gates: Well, I'm 39, and my response to that question has always been that for the next decade I plan on playing pretty much the role I am today.

TIME: You always answer one decade?

Gates: Yeah, that's as far ahead as I can see.

It's hard to tell what is more surprising about Radar's latest Fame-O-Meter results: that Steve Jobs has only now passed Bill Gates in the magazine's "buzz index," or that Radar thinks Rupert Murdoch is a "Web 2.0 figure."

The Fame-O-Meter, according to the magazine's website, is an "absurdly scientific real-time" measure of the "notoriety and cultural relevance" of public figures based on the number of times they appear in news publications, newswires, blogs and other sources combined with data from such aggregators as Google, Technorati and Yahoo.

"With last week's announcement of the new iPhone, more gadget geeks than ever have been clicking for Steve Jobs," writes Hailey Eber, who runs the meter. "Adding to Jobs' online intrigue is concern over his health." (link)

Apple's (AAPL) CEO is still running behind Gates in the magazine's monthly and weekly buzz indices, but he passed Microsoft's (MSFT) outgoing chairman in the daily reports over the weekend and by Monday was pulling away, with 83 million hits to Gates' 70 million. Jobs is comfortably ahead of News Corp.'s (NWS) Murdoch and Google's (GOOG) Sergey Brin and Larry Page.

Radar, originally founded in 2003 and relaunched twice since then, was nominated in May for general excellence by the American Society of Magazine Editors.

Apple has no numbers to compare with the 140 million copies of Vista that Bill Gates says Microsoft (MSFT) has sold since the latest version of Windows started shipping in late 2006. (link)

Literally, no numbers. The last time Apple (AAPL) released a Leopard sales figure was Oct. 30, 2007, when the company said that it had sold more than 2 million copies of Leopard in one long weekend (see here). Apple reported $170 million revenue from Leopard sales in the December '07 quarter, but that represents fewer than 1.3 million copies. Apple also sold 2.32 million Macs that quarter, more than 2/3 of which probably had Leopard pre-installed.

Even so, the two operating systems aren't even playing in the same ballpark when it comes to raw sales.

Of course, Vista was greeted with brickbats and Leopard with raves, but Gates didn't dwell on that in Tokyo Wednesday, where he gave his Japanese partners an update on how Vista is doing. "That's a very rapid sales rate," he said.

Not necessarily.

"The most significant number," says Piper Jaffray analyst Gene Munster, "is Apple's upgrade penetration vs. Microsoft's. Apple estimated that about 19% of the OS X user base was on Leopard by the end of its launch quarter. By my math, Vista is used by about 12%-14% of the Windows user base more than a year after its retail launch."

Has Bill Gates learned the lesson of Zune?

Having gone up against the iPod with Microsoft's (MSFT) MP3 player and failed to make much of a dent in Apple's (AAPL) dominant share of the portable digital music market, Gates seems to be conceding the field for all-in-one devices to the iPhone.

Thompson Financial reports today that in an interview with a German newspaper, Frankfurter Allgemeine Zeitung, Microsoft's chairman said he did not intend to make a combination cell phone/music player.

"No, we won't do that. In the sector of such smartphones, we are purely concentrating on the software with our programme Windows Mobile." (link)

That's a strategy that will put Microsoft in competition more with Google's Open Handset Alliance than with Apple's iPhone.Of course, licensing high-margin operating systems and application software, and letting others duke it out in the cut-throat hardware markets, is how Microsoft made its first billions.