By Mike Elgan, Editor

MICROSOFT CHARACTERIZES its Internet strategy with a simple phrase: "Embrace and extend."

The company's stated plan is to accept and adhere to Internet standards, technologies and paradigms while working with the industry to improve them. For the most part, Microsoft has done an admirable job of doing just that with existing protocols such as TCP/IP and languages like HTML.

But Microsoft's Web browser strategy is really "Embrace and replace." It's the same game plan that has made Microsoft what it is today. Let me explain with an oversimplified example.

When Microsoft agreed to work with IBM on a DOS replacement called OS/2, it embraced the plan to supplant DOS with what was essentially an IBM product. In actuality, Microsoft replaced IBM's operating system by simultaneously developing Windows, a wholly Microsoft creation that extended the life of DOS, its cash cow. By rewriting the rules in its favor, Microsoft got rich and transformed the industry.

Well, guess what? Microsoft's about to do it again.

What the company is calling Internet Explorer 4.0 is really two things: a regular browser plus a shell enhancement to the Windows 95 and NT user interface that gives it browser functionality. The Win95 and NT Shell Update Release, Nashville and IE 4.0 are all one and the same. (Check out Fred Langa's Start column in this issue for more details on IE 4.0.)

The browser and shell enhancement could be separate products, but Microsoft apparently intends to combine them as a tactical maneuver in its war against Netscape over control of Internet standards. In this single product, Microsoft is embracing the current paradigm of a standalone browser running on an operating system while replacing that paradigm with the shell enhancement-an "invisible" browser built into the operating system's user interface.

People like single-clicking through the hypertext-driven Web and are getting used to navigating that way.

IE 4.0's shell enhancement brings that single-click hypertext approach to the desktop and blurs differences in the accessibility of resources on the Internet, intranet and hard disk.

The shell enhancement allows a continuous display of information that can be updated from the Internet or an intranet. As Bill Gates says, "The desktop is a page"-one that can be customized by the company or end user to meet whatever needs exist.

This is good stuff. Most Win95 and NT users who surf the Web will want the upgrade. And all new Windows PCs will come with the shell enhancement preinstalled. Within a year of its release, I think the Web-aware interface will be standard. And because Microsoft has linked the two, its Internet Explorer browser will become the standard as well. Because of Windows' dominant market position, the creators of Navigator add-ons will probably fail, while those that write add-ons to Internet Explorer and the Windows shell will likely succeed.

Sound familiar? Think of a software developer's choice in 1982 between DOS and any other existing platform, and in 1990 between Windows and OS/2. IE 4.0 will end the browser war not by beating Netscape with a better browser, but by making standalone browsers unimportant.

Netscape built the best browser first. And its browser has propelled the company to dizzying heights-more through mind-share and market share than revenue. But in the future, Netscape will have to survive on the merits of its many other products.

Over the past year, the Netscape/Sun/Oracle camp has waged a propaganda war against the Microsoft camp over the future end-user computing paradigm. The Netscape people say cheap "network computers" (NCs) with built-in browsers and no local storage will deliver applications over an intranet or the Internet. In other words, applications will live inside the browser, and the browser will serve as a kind of operating system (handling all OS services except device drivers). The Microsoft camp counters that people will still use increasingly powerful PCs, and browsers will live inside applications and the OS.

What most pundits miss is that Microsoft isn't against the NC idea at all. The company's whole Internet strategy is aimed at transforming the PC into an NC-albeit one with real power, local storage and a higher price tag.

The Windows user interface becomes a browser. The desktop is your default home page, customizable with up-to-the-minute information from the Web or your company intranet. Internet and intranet pages are viewable in the right pane of Explorer, and folders are shown as links on a Web page.

Windows forms and documents become Web pages. And vice versa. Microsoft's Office 97 will feature radical HTML authoring functionality, essentially turning the entire suite into a set of tools for creating, browsing and managing Web pages.

Your hard disk becomes a local cache. The Achilles' heel of the Netscape/Sun/Oracle $500 NC is performance. Users accustomed to ever-faster performance will continue to crave higher speeds, and diskless systems that must constantly download applications as well as files won't be fast enough to satisfy them. Microsoft envisions an NC that will sport multiple gigabytes of hard disk space. What changes is the idea of file management. As you browse information, it's stored on your hard disk. To store and keep a file, all you have to do is view it. To find a file, you perform a Yahoo-like search or navigate with single clicks back to it. This paradigm implies major ease of use that will require more, not less, storage.

OLE becomes ActiveX. ActiveX is basically OLE with some added functionality. For years, Microsoft had been shaping OLE into something to allow what it used to call "in-place editing"-the ability to open and edit, using native tools, a document that was created with a wholly different type of application. It turns out that this capability is perfect for delivering apps via a browser. IE 3.0, which is currently available, already supports this capability. That means you can put, say, Microsoft Word documents on your Web site or intranet. When visitors click on the link, the browser loads a fully formatted document-if the visitor has either Word or the free Word document reader.

Your LANs and WANs become an intranet. An intranet is simply a LAN/WAN network that uses Internet tools such as browsers and HTML documents.

Much of this PC-to-NC transformation will happen with or without Microsoft. But although Microsoft is often accused of stealing and benefiting from ideas pioneered by others, the IE 4.0 shell enhancement idea is totally Microsoft's.

Even though IE 4.0 changes everything, everything pretty much remains the same. I think Microsoft's embrace-and-replace browser strategy, along with the rest of its Internet initiatives and products, will enrich the company and transform the industry yet again.