Microsoft under Suit

At the 1996 press event introducing Microsoft Internet Explorer 3.0, Bill Gates quipped, "We expect IE 3.0 to do well, because we've priced it to sell." What he meant, of course, was "FREE." At the time, Microsoft had a miniscule market share among browsers -- perhaps 10 to 15 percent. Netscape had 70 percent. The difference between the two companies, apart from size, was that Microsoft didn't need the revenue and Netscape did. Because of its immense wealth and industry clout, Microsoft has been able to achieve rough parity with Netscape in just three years. Those who oppose Microsoft claim the free browser ploy is just one example of the exploitation of monopoly power enjoyed by Microsoft.

What's at stake?

Florida is just one of 20 states along with the federal government that is taking aggressive anti-trust action against software powerhouse, Microsoft. The theoretical impact of these lawsuits could be dramatic for Microsoft, its partners, its competition and its millions of users. Those of us who run our businesses on PCs live in a Microsoft-centric world. Therefore, we should pay careful attention to this particular anti-trust action.

Perhaps only a Microsoft zealot would defend all of the company's business practices. But, to a certain extent, Microsoft is now being made the scapegoat for its own success and for its competitors' long string of missteps. The overwhelming dominance of Microsoft happened in large part because of a consistent vision and dogged strategic and tactical execution of that vision. But, they were aided and abetted along the way by the failure of a host of competitors to operate with comparable vision, zeal and focus.

However, the crux of the problem for Microsoft is that they supplemented their product and strategic strengths with hardball marketing practices that made it more and more difficult for other companies to compete. The stronger Microsoft became, the more brutal its tactics. As Windows became the overwhelming market leader with 85 percent market share, Microsoft leveraged that operating systems clout into dominance in every area in which it took an interest. This included the major productivity applications such as word processing and spreadsheets, database software, email and now from all appearances -- Internet browsers as well.

The anti-trust action deals primarily with Windows 98 and the tight integration of the MS browser, Internet Explorer into the operating system. But the impact extends to how Microsoft uses its leverage in every product area. In fact, the effect may not be to hinder Microsoft's push toward the internet but to improve the chances of success in the future for new software products.

How did we get here?

The computer industry is replete with examples of companies whose smugness or one-way vision got them into trouble. Among them:

** The minicomputer vendors who scoffed at PCs in the 1980s only reduced to rubble by the PC revolution; in the ultimate irony, Compaq acquired the once mighty DEC this year.

** In the word processing arena, dedicated word processing machines from Wang and others fell by the wayside when PCs arrived. The first big PC hit, Wordstar, was toppled by an innovative product from Word Perfect, which in turn fell victim to Microsoft Word as the graphical Windows interface became dominant.

**The Apple Macintosh and its graphical user interface in 1984 were years ahead of the competition. But, arrogance, failure to license its operating system and lack of focus opened the doors for Windows.

Microsoft has taken advantage of every marketing misstep by its competitors. And there were plenty. It now dominates in operating systems, in all office productivity applications, in PC database software and probably soon in Internet browsers. Clearly, smart marketing and good products had a lot to do with it.

But Microsoft also did everything possible to avoid a level playing field. In particular, it used restrictive licensing agreements that made it highly undesirable to select other than Microsoft products. In one of the most notable examples, Microsoft licensed its operating system across entire lines of PCs. To get a great price, vendors made a deal to put Windows on every PC that they shipped. Since they were paying for Windows on every PC, they had little incentive to add other operating systems like OS/2 or UNIX. Similar deals were made in every product area. In the end, because PC makers had to have the Microsoft operating system, they bowed to pressure to add more Microsoft products and to exclude competitive products from their systems.

Most recently, Microsoft foresaw a real challenge to its overall dominance because of its tardy realization of the importance of the Internet and of software browsers as portal to the Internet. But when Microsoft woke up in 1996, it moved heaven and earth to displace Netscape's unique dominance in this essential arena.

The Anti-trust Suits

The United States Department of Justice has laid out a very compelling case for reining Microsoft in. In a lengthy press release, Joel Klein, Assistant Attorney General in the Antitrust Division of the DOJ, emphasized, "Inventors and investors cannot and will not develop and market innovative software programs if they know that Microsoft can use its Windows monopoly to block the distribution of their programs and to force consumers to buy Microsoft's competing products." The entire press release can be found at www.usdoj.gov/atr/press_releases/1998press/1764.htm

Microsoft may well have hung itself with a paper and email trail of statements about its intent. The DOJ quoted a Jan. 2, 1997, memo from Microsoft Senior VP, Jim Allchin: "Memphis (then the code name for Windows 98) must be a simple upgrade, but most importantly it must be a killer on OEM shipments so that Netscape never gets a chance on these systems."

Somewhat surprisingly, conservative jurist William Bork sides with the government. He stated in an op-ed piece in the May 22 edition of the Wall Street Journal, " Microsoft's aim is .... to preserve its world-wide monopoly in operating systems by stifling companies whose technology would compete.

True, the company makes no additional monopoly profit; in fact, the tactic costs money because Microsoft prices its browser at zero. But that is a rational investment given Microsoft's enormously disproportionate resources and the fact that costs do not rise commensurately with output .... In truth, the government does not propose to design software but only to enjoin monopolizing practices." Bork concludes, "The government's suit would in no way hamper innovation, though that is Mr. Gates's favorite mantra. It would allow innovation from many sources rather than just one."

Although the DOJ has made forceful statements about Microsoft's practices and t