Swinging the axe

JENNIFER HUNTER February 16 1998

Swinging the axe

JENNIFER HUNTER February 16 1998

The war against Microsoft



It was no way to treat the world’s richest man. But Bill Gates, the embattled chairman of Microsoft Corp., has developed a knack lately for finding trouble in the most surprising places. Last week, it was Brussels. As Gates made his way to a meeting with Belgian dignitaries, he was hit squarely in the face with a cream pie. With sweet custard dripping down his dark suit, Gates retreated to a washroom and reappeared a few minutes later looking embarrassed but otherwise unruffled.

Police suspected the prank was the work of Noel Godin, Europe’s serial pie-thrower to the stars.

‘We’re dealing with a jokester here, and he has achieved another joke,” said Bob Herbold, Microsoft’s chief operating officer. “Bill just cleaned up a little bit and away he went.”

Gates will have a harder time shaking off the growing army of opponents now encircling his software empire. For years, Microsoft’s rivals have charged that it uses its dominant Windows operating system—the software used to run as much as 90 per cent of the world’s personal computers— to muscle into new markets. But in the past few months, Gates’s fight for supremacy in the market for Internet software has provoked an unprecedented backlash from U.S. antitrust regulators, plunging Microsoft into its worst crisis since the company’s founding in 1975. Spearheaded by the U.S. justice department, the battle has fuelled a debate among economists and policy-makers about how to ensure fair competition and continued innovation in the high-technology sector. “There’s more at stake than Microsoft’s fate,” says W. Brian Arthur, an economist with the Santa Fe Institute, a respected think-tank in New Mexico.

“What is at stake in this case will rewrite the rules of competition in high technology, probably for the next generation.”

Microsoft’s troubles deepened last week when 11 U.S. states launched a joint antitrust investigation aimed at Windows 98, the soon-to-be-released successor to the Windows 95 operating system. ‘We’re looking at anything and everything that may involve improper use by Microsoft of its dominant market position in Windows in relation to the [Internet software] product,” said Connecticut attorney general Richard Blumenthal. Despite the setback, Microsoft insisted that its widening antitrust battle will not delay the release of Windows 98, now slated for the second quarter of this year. Meanwhile, the company’s list of adversaries keeps growing. The Senate Judiciary Committee jumped on board last week with an announcement that it, too, is studying competition in the software industry, with a special emphasis on Microsoft. And the software industry’s largest trade group, the Washington-based Software Publishers

The software giants under siege by regulators Association, issued a list of principles that critit cized the competitive practices of Microsoft, the B group’s biggest member.

I Washington fired the first round in the antitrust 5 fight last October, when the justice department I took the Redmond, Wash.-based company to court. Regulators accused Microsoft of breaking a 1995 agreement in which it promised not to force computer makers to buy any of its other products as a condition of licensing the Windows operating system. According to the justice department, Microsoft has done just that by linking sales of its Internet Explorer software to Windows 95. Microsoft is fighting the charges, pointing out that the so-called consent decree expressly allows the company to combine the features of various products. The company maintains that Explorer, which allows users to browse the World Wide Web, is now an integral part of Windows, rather than a separate piece of software.

The battle turned ugly in December, when Judge Thomas Penfield Jackson of the U.S. district court ordered Microsoft to give PC manufacturers the option of installing Windows 95 without Explorer. Lawyers decried the injunction as “senseless” and insisted that any attempt to remove the software from Windows would render the operating system useless. In response, the justice department labelled the company “arrogant” and filed a contempt of court motion.

Microsoft finally gave ground last month by agreeing to offer manufacturers a version of Windows that does not give users access to the Explorer program. But the company is still trying to overturn Jackson’s order. A court hearing in the case is scheduled for April 21.

Meanwhile, the dispute has bruised Microsoft’s public image in the United States. ‘We are an aggressive company, and I remain unapolo-

getic for that,” Steve Ballmer, the firm’s brash executive vice-president, said last month. “On the other hand, I don’t like it that people think of us as a harsh company.” In Canada, the image problem is less severe, according to Mississauga, Ont.-based Microsoft Canada Co. Company officials say they commissioned a survey of 600 Canadian consumers last December and found that 79 per cent still have a positive view of the company. Only 15 per cent were aware of the U.S. legal battle.

Behind the arcane arguments in the case lies a key issue: should the U.S. government intervene to prevent Microsoft from trying to seize control of computing’s new frontier? Critics say the company is well on its way to achieving that goal. Its archrival in Internet applications, Netscape Communications Corp., which produces a Web-surfing program called Netscape Navigator, has stumbled badly in recent months. In the past two years, Navigator has steadily lost market share to Explorer, and Netscape recently reported a loss of $118 million in the fourth quarter of 1997. The troubled company is now reportedly considering selling all or part of its business.

Some analysts say the odds are stacked against Netscape and any other rival that dares to challenge Microsoft. In the technology sector, consumers inevitably demand a uniform standard that allows them to communicate easily with one another, says Geoffrey Moore, a San Mateo, Calif.-based consultant and author of two widely quoted books on computer marketing. “They say, ‘Look, I don’t care if it’s 110 volts or 220 volts or 240 volts, but I don’t want it to be all three,”’ says Moore. “So those markets go very far towards a monopolistic structure.”

That is what makes high technology so different from traditional industries such as oil or railways, says Arthur, a pioneer in the study of high-tech economics whose work has influenced the views of Joel Klein, Washington’s top antitrust official. Unlike the great U.S. antitrust battles of the past, which saw the breakup of such companies as John D. Rockefeller’s Standard Oil and telephone titan AT&T, the solutions are not as easy today for regulators because high-tech markets tend to operate on the basis of winner-take-all. Moreover, companies that conquer one market often have a huge advantage in winning the next one, as Microsoft showed by leveraging its success in operating systems to gain a similar lead in the lucrative market for office software. “If Microsoft starts to dominate or looks like it’s going to dominate a market,” Arthur says, “then nobody enters that market.”

Gates and his allies, however, say that governments should think twice before trying to regulate high technology. Despite Microsoft’s power, the industry is extremely competitive and consumers are winning through steadily falling prices, says Brad Smith, the company’s associate general counsel and one of the lawyers involved in negotiating the 1995 consent decree. Ultimately, manufacturers must be free to decide how to develop and package their products, he says. “Do people really want the government to step in and shape the direction of technological development?” Smith asks. “When people start thinking about that, what they’re really suggesting is a series of steps that could slow economic growth.”

The justice department’s Klein publicly advocates “surgically applied intervention” to keep the way clear for new Microsofts and Netscapes. If the courts agree, the world of high technology could be changed forever. Traditionally, the market has been a real freefor-all, says Arthur: “Fortunes are made, fortunes are lost. It’s like Tombstone or Dodge City in 1881.” Gates may not like it, but it’s high noon in the world of high tech, and the sheriff is riding into town. □