The argument for leaving Microsoft
ALONE is both simple and powerful.
- “If it isn’t broke, don’t
fix it.”
Look
around:
·
Is
it limiting consumers?
·
Does
the economy appear to be suffering?
·
Is
the computer industry
experiencing a lack of competition or innovation?
The
answer is a resounding “NO” on
every count.
Count the statistics. The number of software companies founded
in the US in 1997 was 191
- twice as many as in 1990. Industry-wide software
revenues have grown from $39 Billion in 1990 to $140 Billion in 1998, and
$175 Billion in 2000, according to International Data Corporation.
Much of this good news is attributed to
Microsoft. The company’s Windows
division runs on 90% of all personal computers and it’s more powerful sibling,
Windows NT accounted for 40% of all Network Servers sold in 1997. These systems, along with Intel
Corporation’s microprocessors, helped establish economies of scale for
PC makers and have helped lower the price of the average desktop computer
down 50% in just four years from $2192 in 1996, to $1200 today, and have
fostered a thriving computer software applications industry.
The key to Windows amazing influence is
that it has become the software standard for the PC industry. As such, thousands of PC hardware makers,
tens of thousands of independent software companies, and millions of individual
programmers depend on it. Windows
assures these companies and programmers of a large market for their goods and
for consumers and corporate customers, Windows serves as a warranty that
software programs can work on any of 250 Million that have been shipped
world-wide since 1990.
Microsoft is the chief bureaucracy of
its monopoly, but Microsoft got where it is today in large part by competing
harder and smarter than its rivals.
Take the Apple Corporation, the only semblance of competition in PC
operating systems. Early on, Apple made
a crucial decision NOT to license its operating software to other PC
manufacturers, which could have established them as the standard, and they
could have pursued a high pie strategy.
Then over the past 10 years, it squandered its technological lead, and
today, the computer maker only has 3% of the worldwide market.
There are those who say it would not be
all bad if Microsoft were the only one.
WHY? Because Microsoft has
always improved steadfastly.
Microsoft as the competition has dropped
off, Microsoft doesn’t behave like a monopoly.
It has always worried about another competitor coming up and beating it.
Even if the justice department decides
that Microsoft has behaved illegally or is becoming just too powerful of the
good of the software industry, it must establish that consumers have been
harmed and that will be a tall order, given the PC industry track record for
keeping prices low, even while adding new features.
One of the things competition about is Microsoft’s practice of adopting
other innovations and integrating them into their own operating system.
In the past three years, Microsoft has
snapped up or taken equity stakes in more than two dozen start-up industries
with leading technologies.
Such acquisitions bring great benefits
to the consumers, and by packing into technology, such as graphical user
interface data compression and faxing capabilities.
Microsoft has spared consumers from
having to buy these features and stitch them together.
To be sure, Windows has gone down in
cost. In 1990, the retail upgrade cost
was $50. Now it goes for $80.
Microsoft says that because Windows is
the most powerful.
Nonetheless, higher prices are remakable
in an industry where prices are falling.
Meanwhile, there is no shortage of
innovation in Windows applications being made by other companies, including
corporate software for tracking inventory an dorder taking as well as programs
designed for travelling workers and games and educational software.
What
are the Charges the US Government has against Microsoft?
· Microsoft is a large company headquartered in America, in the high-tech industry, which is the economic success story of the 1990s.
· The American high-tech industry accounts for 30% of the increase in the Domestic Product since 1994.
This explosive increase in growth has enabled the US to regain its supremacy in the global marketplace. Not since the heyday of railroads in the 1800s has prosperity been tied to one sector of the economy.
· The engine inside this economic steamroller is Microsoft, which provides operating systems for all PCs along with the leading applications and many of the top programming tools.
· With a single company setting key software standards, businesses and consumers are able to buy software and hardware without worrying about compatibility, and the computer industry has mushroomed into a $700 Billion business (total computer business).
· But few companies have grown as much as Microsoft. In 1997, Microsoft’s $1.4 Billion in Net Income accounted for 41% of the 10 largest publicly traded software companies
· Now, Microsoft with its $10 Million cash pile and 25,000 employees is reaching beyond the PC into new markets, everything from selling TV-top computer boxes, to selling cars and airline tickets over the Internet.
The
sheer pervasiveness of Microsoft in an increasingly digital world raises
profound questions:
Should a single company exercise such economic power?
What should the government do, if anything?
This
could be the most critical economic policy decision facing the US today.
Microsoft has just launched a blitz for
the Windows ‘98 product release, which was a lightning rod from an anti-trust
viewpoint, since it integrates an Internet browser with the operating system
As part of the suit, the Justice
Department could also aim at curbing a wide range of allegedly anti-competitive
practices, including exclusionary contracts and Microsoft control of the
opening screen. Trust busters are
marshalling forces for a possible second suit.
Focusing on some of Microsoft’s stakeholders in video technology, Apple
Computers Inc. and other businesses.
Microsoft executives “deny” wrong-doing
and say the government interferences will not only hurt Microsoft, but the
entire industry. Bill Gates says the
software industry success has not been driven by government regulation, but by
freedom and the basic desire to learn to innovate and excel.
The stakes are enormous, any government
action runs the risk of hobbling the most dynamic sector of the economy.
Speaking of Apple Computers, executives
from Apple say there were two other occasions when Microsoft was attempting to
keep Apple out of the Windows market before the February 13 meeting with Mr.
Tevanian at Hobbes restaurant.
Prosecutors resist to allege that Microsoft inserted a technical obstacle in Windows to thwart rival technologies, including Apple Computers, Inc. Gates was aware of the problem with Quick Time, and is trying to block them out of Windows, and Gates wanted to get as much mileage as possible out of the Java and browser relationship. Do we have a clear plan on what we want Apple to do when undermining Sun? A Microsoft spokesman said the government is misrepresenting them by disclosing snippets of e-mail messages taken out of context to damage Microsoft’s public image.
Let me start our discussion on Microsoft and
finally, you will write up this assignment in case style, choosing which
solution you choose in regard to the Microsoft trial, which began last October
after more than 5 months of litigation and testimony for and against
Microsoft. Microsoft Corp. rested its
case Friday in the Government’s landmark anti-trust suit but not the presiding
judge had shouted angrily at the company’s final witness and ordered him to
stop talking.
Friday’s incident was yet another blow in
several months of mis-steps and embarrassments, as Microsoft has tried to
defend itself against the Government charges that the company bullied the
computer industry and used its monopoly in computer operating systems to the
disadvantage of competitors.
The trial is not over. Court will resume in mid-April for several
weeks of testimony from rebuttal witnesses, three to a side. But as Microsoft completed their central
case today, six weeks after the government began its case, both sides said they
were confident of victory.
John Warden, Microsoft Head Trial Lawyer
who has tripped up, acknowledges that the Government had underestimated our
willingness, but he called this a desperation tactic. “When you don’t have the law of the facts you try credibility and
that’s what I think has driven to this strategy.”
David Boies (BOYZ), the Government’s lead
trial lawyer, who has tripped up and embarrassed most of Microsoft’s witnesses,
said he believed casting doubts on witnesses credibility was not all that has
been achieved. “They’ve acknowledged
monopoly power,” he said. “They’ve
admitted the absence of competitive constraints. They’ve admitted raising prices to hurt consumers. They’ve admitted to depriving consumers of
choice.”
In the witness box Friday, Robert Muglia,
a Microsoft Senior Vice President, tried to put the best face on his company’s
relationship with Sun Microsystems, the creator and owner of the Java
programming language. The Government
charges that Microsoft tried to sabotage Sun because it saw Java as a
competitive threat.
Mr. Muglia said Microsoft was interested
in cooperating with Sun. But Mr. Boles
presented numerous e-mail messages and memos from senior Microsoft executives
saying in one manner or another that they wanted to defeat Sun.
The combined effect of the memo was to
leave the impression that if Mr. Muglia was not to be believed, he was either
out of touch or naïve, and his continued defense of his position even in the
face of a contradictory e-mail from William Gates, the company’s chairman, set
off the judge.
In May 1997, Gates wrote, “I am hardcore
about ‘not’supporting the latest version of Java. Messages in the same string of e-mail from
other executives made the same statement, but with exclamation points and
explicatives.
Yet Mr. Muglia tried to make the case
that Gates had not really meant what he wrote adding, I don’t exactly know what
Bill Gates meant by support.
At that Judge Thomas Jackson, who is hearing the case without a jury shook his head and interrupted with an irritated tone, saying, “There’s no question. He says he does not like the idea of supporting it. Let’s not argue about it.”
Mr. Muglia persisted, pleading with the
judge. “Can I say one more thing
please.”
But a few seconds after he began what
promised to be a long discourse defending his position. Judge Jackson exploded, one hand covering
his face, the other one held up at the witness, he bellowed, “No! STOP! There is no question pending.” He then called a recess.
A Microsoft spokesman said they believed
that Mr. Muglia needed to keep his answers shorter.
Earlier, Mr. Boies had showed him a
Microsoft memo setting out the company’s strategy on Java. The first line was “Kill cross platforms by
growing the Java polluted market.”
Sun and the Government accuse Microsoft
of creating its own “polluted” version.
Microsoft argues that its version is better.
Muglia said the document was written by a
junior employee and was later revised by her supervisor.
Judge Jackson’s outburst followed
questions he had asked earlier in the day suggesting that he was skeptical of
Microsoft’s case.
While lawyers warn that it is dangerous
to read too much into a Judge’s remarks – it is also true that judges often
pose questions at the end of a trial that are intended to test conclusions they
are considering for use in their formal ruling.
Microsoft’s lawyer was questioning the
preceding witness, Joachim Kempin, a Microsoft vice president, prompting him to
list the modifications Microsoft was not allowing computer manufacturers to
make in its Windows operating systems.
A year ago, the company forbade most all such changes, which contributed
to Federal antitrust charges.
Judge Jackson interrupted the questions
to ask in an even tone, “Are all these rights manufacturers now possess a
matter of sufferance and grace on the part of Microsoft, or are they expressly
written into the contracts?”
Mr. Kempin said some were granted in
personal letters to the companies, others in phone conversations, not in
contracts.
“So, you have chosen to waive or give up
certain rights you have in contracts,” the judge said.
“That’s right,” Mr. Kempin said. The judge’s questions appeared to mirror the
government assertion that Microsoft’s new generosity to manufacturers could be
temporary, lasting only as long as Microsoft’s previous behavior. This is the subject of antitrust charges.
As Mr. Kempin completed his testimony, he
turned to the next topic of testimony – Java.
He offered an eloquent explanation for the tenuous nature of Microsoft’s
dominant position in the industry.
Among other threats to the industry, he said, “Java was such a powerful
idea that it could cause a paradigm shift that would unseal Microsoft.”
But that exposed a contradiction in
Microsoft’s defense. Mr. Muglia, in his
written direct testimony said, “Sun’s version of Java was so dreadful that
Microsoft had every right to create its own version.”
Sun’s Java he wrote “is truly the
great equalizing software: it has reduced all computers to mediocrity and
buggyness.”
At the end of the day, Mr. Muglia
described a conversation in which Bill Gates had told him that if Microsoft had
licensed Java from Sun, it could meet its contractual obligations by simply
posting Sun’s version of Java on Microsoft’s web site, rather than including it
on Windows.
Then Mr. Boies introduced a memo in
whicht the company executives charged with doing that described what they had
done.
The Java file was posted one Microsoft
executive wrote “but there will be no entry index,” and as a result, a consumer
would have to “stumble across it.”
“I put it in a directory with 37 other
old files,” the executive wrote. “In
this directory, it is pretty buried.”
“Awesome” the other executive wrote back,
“Thanks.”
Mr. Muglia insisted that he had said
specifically “that I didn’t want it hidden” and he suggested that the hidden
copy was just a draft.
But Mr. Boies said simply, “I have no
more questions. The trial adjourned.
Put simply, the Government’s case is that
Microsoft illegally used its monopoly power to thwart the challenge to its
dominance posed by Internet software, stifling competition and innovation.
The 57-year old Mr. Boies – known for his
rumpled blue suits, for his uncanny memory and for having defended IBM in a
marathon anti-trust case – has clearly put Microsoft through a humbling
courtroom experience.
He rattled a senior Microsoft executive
by pointing out misleading aspects in a videotaped demonstration he introduced
as evidence. He confronted Microsoft’s
economic expert with his earlier writing, which seems to contradict his
testimony, and the befuddled witness said, “What could I have been thinking?”
Last week, after Mr. Boies seemed to
dismantle another Microsoft executive, forcing him to retract some of his
testimony, Judge Thomas Penfield Jackson joked as a Microsoft lawyer took over
that the task before him was a “heroic endeavor.”
In the courtroom, Mr. Boies is trying to undermine
the credibility of Microsoft’s witnesses, which is a central element in the
Government’s legal strategy. Attacking
Microsoft’s credibility, antitrust experts say, helps reinforce the strongest
part of the Government’s current case – a case that suffered a setback a month
after it was filed last spring.
The Government sued Microsoft last May in
a complaint that focused mainly on the Internet browser market. It contended that Microsoft bundled its Internet
browser to the company’s industry-standard Windows operating system in an
illegal attempt to hobble a promising challenger, Netscape Communications, the
pioneer in software used to browse the World Wide Web. Microsoft replied that its Explorer browser
and Windows were not two products, but a single product, and that Microsoft
could put anything it wanted to into Windows.
A Federal appeals court essentially
agreed with Microsoft last June in a separate but related case. The court said that Microsoft had a right to
fold a browser into its operating system as long as it could make a “plausible
claim” of consumer benefit.
After the appeals court ruling, the
Government added evidence to flesh out the allegation in its original complaint
that Microsoft was engaged in a “pattern of anticompetitive behavior.” By the time the trial began in October, the
Government’s roster of witnesses included not only Netscape’s President, but
also executives from Apple, IBM, Intel, Intuit and Sun Microsystems. In one episode after another, they
testified, Microsoft was a monopolistic bully, using its power as a club
against other companies to try to curb competition and divide markets.
Microsoft denies each allegation, saying
that its accusers are a collection of its rivals trying to portray routine
business meeting in the software industry as something sinister.
These allegations all center on private
meetings – some more than three years ago – involving Microsoft and other
companies. The court must sort through
the written evidence and the witness testimony to decide whom to believe.
“What happened at these meetings are
we-said, they-said disputes,” said Robert Litan, a former senior official in
the Justice Department’s antitrust division.
“That’s why the Government has tried so hard to go after the credibility
of Microsoft’s witnesses in general.”
The credibility strategy is also an
effort by the Government to bulletproof any lower-court ruling from
appeals. No one can predict with
certainty how Judge Jackson will rule in this non-jury trial.
His questions, comments, and even rebukes
to Microsoft witnesses may indicate that Judge Jackson leans toward the
Government. But regardless of the
verdict at Federal District Court, the case will almost surely go to the Federal
Court of Appeals and perhaps to the Supreme Court.
Judge Jackson could certainly be
overruled on matters of evidence and law.
But legal experts say it would be very difficult to reverse him on
findings of fact based on credibility.
“The judge can say I looked all these witnesses in the eye and I don’t
believe them,” noted Mr. Litan.
The Government has amassed a lengthy list of allegations. They range from trying to get rivals to divide markets to pressuring service providers to agree to exclusionary contracts that unfairly curb competition. Still, to rule in favor of the Government, the courts must decide that some of Microsoft’s actions were clear-cut violations of the antitrust laws and not merely what one antitrust scholar called ingredients in a “stew of unsavory behavior.”
Microsoft, legal experts say, has certainly been able to raise doubts about some of the incidents. The Government, for example, contends that Microsoft made an illegal offer to Netscape to divide the browser market at a pivotal meeting on June 21, 1995, an offer Netscape declined. Based on the courtroom testimony and reams of E-mail evidence, the executives of the two companies left that meeting with sharply differing views of what occurred.
The legal hurdle in attempted collusion cases, antitrust experts say, is fairly high. The key case, they say, is a 1984 ruling involving American Airlines, Inc. In a tape-recorded phone conversation, Robert Crandall, American’s president, tried to persuade the president of Braniff Airlines to jointly raise their fares 20 % on flights from Dallas. A Federal Appeals Court ruled against American, finding the evidence “uniquely unequivocal.”
The Microsoft-Netscape meeting, antitrust experts say, does not seem to rise to that unambiguous standard of evidence. “I doubt that charge will hold up,” said Mr. Kovacic of George Washington University.
Microsoft insists that most of the credibility attacks on its witnesses are on issues not central to the case. For example, Mr. Boies got Richard L. Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology, to say he could not imagine what he was thinking when he wrote in a 1982 Harvard Law Review article that “persistent excess profits” suggest that a company has considerable market power – contrary to his testimony that Microsoft’s enormous profits are not an indication of monopoly power.
The next day, Microsoft’s lawyer pointed out a footnote in a 1982 article in which Mr. Schmalensee noted that extremely high profits could be explained by owning a “unique and long-lived asset.” A particularly valuable intellectual property, like Microsoft’s Windows, could qualify as such an asset, Mr. Schmalensee said.
“Are we sorry he did not go to the footnote on the first day?” said William Neukom, a senior vice president and general counsel of Microsoft. “Sure we are. It gave David Boies a moment of drama, and it dominated the news stories of the trial that day. But it does not affect the factual record of the case, not one whip.”
Most legal experts believe that the strongest part of the Government’s case is the allegation that Microsoft’s restrictive agreements with computer makers and Internet service providers, combines with financial incentives to favor Microsoft’s products, unfairly put Netscape at a disadvantage to thwart competition. “The evidence that Microsoft constantly placed hurdles to make it more difficult for consumers to choose Netscape looks quite strong,” said Stephen Axinn, a leading antitrust litigator.
Microsoft’s legal strategy is to try to focus the court’s attention on the outcome in the marketplace, not on Microsoft’s inflammatory E-mail or contract details. And Microsoft argues that many of its contract restrictions have since been eased. “Whatever those arrangements were, whatever measure of exclusivity they created for a period of time, Netscape was able to gain a substantial number of new users,” said Richard Urowski, a partner at Sullivan & Cromwell, the law firm representing Microsoft. “There was no foreclosure of consumer choice.”
The courtroom battle will be silenced for a while. Judge Jackson declared a six-week recess because of scheduling conflicts with other cases. In mid-April, the case resumes as each side can call three rebuttal witnesses, followed by final arguments. A verdict is expected in the summer.