Technology

Wins and Losses

As Microsoft's Bill Gates flghts antitrust findings, rivals gear up in the battle for Web markets

Kimberley Noble November 22 1999
Technology

Wins and Losses

As Microsoft's Bill Gates flghts antitrust findings, rivals gear up in the battle for Web markets

Kimberley Noble November 22 1999

Wins and Losses

As Microsoft's Bill Gates flghts antitrust findings, rivals gear up in the battle for Web markets

Technology

Kimberley Noble

For a short while after Bill Gates was branded an innovation-stifling monopolist, the worlds richest and arguably most powerful man looked like he might be willing to give up some ground. Minutes after getting word on Nov. 5 that a U.S. judge had ruled that Microsoft Corp. is a monopoly— and an abusive and destructive one at that—Gates distributed a videotape on which he sounded almost sorry. “We hope we can find a way to resolve this,” Gates said, prompting pundits to suggest the software genius was ready to make a deal with trust-busting federal bureaucrats.

Three hours later, however, Gates had already bounced back. During a news conference at Microsoft headquarters in Redmond, Wash., he stressed that Judge Thomas Penfield Jacksons landmark decision is “just one step in an ongoing legal process.” Gates reminded his audience of Microsoft’s success in appealing such rulings in the past. And a few days later, in front of cheering shareholders at the company’s annual meeting, Gates identified the territory for which he is prepared to fight. “We are willing to go a long way to address

the government’s concerns,” he said, but the company refuses to give up the right to add new features, especially Internetrelated products and services, to its existing operating systems and software. “One of the most defensible things we’ve ever done is the support of the Internet in our operating system,” he said. “We cannot back off on that.”

Thus are the bugles of corporate warfare sounded and the battle lines drawn. Microsoft’s stranglehold on the world’s PC operating system business—90 per cent—is what makes it a monopoly. But it was Gates’s prolonged efforts to bundle its Internet Explorer Web browser with its Windows operating system, in an effort to annihilate rival Netscape Communications Corp. and, Microsoft hoped, control access to the Internet, that gave the U.S. department of justice the ammunition to go after the company in the first place. In the wake of the groundbreaking judgment, the question now is not only what happens to Microsoft, but also how the unsinkable Gates plans to continue his aggressive Internet campaign without damaging his company’s chances of

beating (or advantageously settling) the antitrust rap.

Gates is certainly right about one thing. Judge Jackson’s ruling is just the first in a long list of legal decisions that could stretch on well into the next century. The antitrust case to which it is being compared— AT&T Corp.—lasted 10 years: the telephone monopoly was finally carved up into the now-legendary “Baby Bells.” Does Microsoft face the same fate? Possibly—but it will be years away. Having declared the company a monopoly, Jackson must decide whether Microsoft has violated antitrust law. This ruling is expected to be handed down later this year or early in 2000, after which the department of justice will decide what needs to be done to punish the perpetrator and fix the problem. The company could be divided up into smaller companies that are already being dubbed “Baby Bills.” Observers are betting that before he lets that happen, Gates will appeal all the way to the U.S. Supreme Court. On the other hand, he could decide that it is in his interest to setde.

Whether Gates is cut down to size, or merely forced to play by other peoples’ rules for a while, everyone, it ■ =§ seems, may be better off. “This will be positive for busimm § ness and for consumers,” says Andrew McCreath, a Lmm I Toronto-based fund manager for Synergy Asset Management Inc. “This entity is so large—any effort to shrink or curtail it is going to make the market much more competitive.” McCreath and others point to the stock market for signs of who specifically is expected to benefit. Remarkably, Microsoft survived relatively unscathed: like Gates, the share price was slightly depressed for a few days after the Jackson ruling, but closed the week up $3.47 at $ 133.95 on the Nasdaq exchange. At the same time, Microsoft’s longtime competitors and future challengers saw their market capital grow by millions. Shares in established software makers like database manager Oracle Corp. of Redwood Shores, Calif, and Ottawa-based Corel Corp. rose substantially (Corel jumped a resounding 30 per cent). Stock of Red Hat Software Inc. of Raleigh, N.C., distributor of the most popular version of the Linux PC operating system, last traded for $148.95 on the Nasdaq exchange, up from $125.73 before the Microsoft ruling.

Most observers, though, say Microsoft is likely to remain dominant in the PC operating system market. What matters now is who wins control of emerging Web-based markets. Microsoft and America Online Inc. are already engaged in what technology writers have dubbed a “holy digital war” over socalled instant messaging systems that allow PC users to run programs letting them exchange real-time e-mail and use the Internet at the same time. AOLs service now bypasses conventional browsers—and has the potential to replace PC operating systems entirely—making it a major new threat for Microsoft. In a move that seems reminiscent of Gates’s decision to squash Netscape by giving away the Explorer browser, the company has responded by announcing that it might fight back with free or low-cost Internet access.

Where Gates is really expected to concentrate his attack is in the looming batde for the consumer electronics market. In the post-PC world, access to the Internet will depend more on a range of personal electronic devices—such as cable television set-top boxes—than computers. Says one Torontobased technology analyst: “This is the high-growth space”— and one where any effort to carve up Microsoft is most likely to hurt it. Because of its clout, the company can command the services of thousands of product developers to come up with consumer electronics software. A Baby Bill devoted to this particular application and facing more competition would have access to much less. This is why, observers say, Microsoft has spent so much money expanding its ownership of wireless, cable and other consumer electronics companies.

But rather than gobbling up the clever start-ups or threatening customers and competitors, large minority investments in established players may be the means by which Gates expands his customer base and influence in the future. After all, Microsoft made $11.4 billion last year; the money has to go somewhere. Last spring, the company paid $7.3 billion for three per cent of AT&T, in exchange for which the telecom behemoth promised to use Microsoft’s new consumer electronics operating system in some of its TV set-top boxes. In May, Microsoft followed up with a $600-million investment in Rogers Communications Inc., of Toronto, which comes with a guarantee covering at least one million set-top boxes. Those investments come on top of at least $3.8 billion in similar deals made by Microsoft between 1997 and 1999. Within days of the monopoly ruling, moreover, Microsoft had unveiled two more: a $293-million (U.S.) investment in communications provider Teligent, followed by a Nov. 11 announcement that Microsoft will pump $146 million (U.S.) into an e-commerce alliance with Tandy Corp.’s RadioShack that will jointly promote both companies’ online products and related services.

There is a growing sense that the Internet has already grown beyond Gates’s grasp. This is pardy because of the antitrust trial, which has prevented Microsoft from crunching competitors as it did in the past, but it is predominantly because, unlike the desktop software business, the Web is too large for any one corporation to control. And the growing consumer electronics business seems certain to be the same. Microsoft’s new business partners, including Rogers, are enthusiastic about the prospects of working with Gates. “The prize in the relationship with Microsoft is not the money,” says John Tory, chief executive and president of Rogers Cablesystems Ltd. “The prize is the alliance to exploit the software they are developing, so we can roll out interactive television faster than anybody in North America.” True enough. But the big change from a few years ago is that Rogers, like AT&T before it, has acquired Microsoft’s consumer electronics system and a big wad of cash, without agreeing to give Gates exclusivity. This, observers say, may be the biggest sign that the Microsoft juggernaut may indeed be reined in—if not by antitrust rulings then by a changing marketplace. CÜ3