From Microsoft Word
to Microsoft World:
How Microsoft is Building a Global Monopoly

A NetAction White Paper

Nathan Newman
Project Director, NetAction


Table of Contents

Introduction: Where Do You Want To Go Today? Microsoft Has Other Plans

Why Microsoft Dominates: The Economics of Networks

The Core: Leveraging the Operating System for Desktop Dominance

Moving On Up: From the Desktop to Control of Corporate Computing

Microsoft Bids For The Internet

From Software to Hard Cash: Controlling Financial Transactions on the Internet

Taking On Internet Commerce Across Industries: Travel, Cars, Real Estate and Local Information

Content and Media Dominance

Controlling Access to the Home: Web TV, Cable and Satellites in the Sky

Conclusion and Recommendations

Endnotes

An ASCII copy of this paper is available for you to download.


Copyright 1997 by NetAction. All rights reserved. Material may be reposted or reproduced for non-commercial use provided NetAction is cited as the source.

NetAction
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Web: http://www.netaction.org

About the author: Nathan Newman has been writing for years on the economics of computer and Internet technology. His writing on Internet commerce has appeared in MIT's Technology Review and State Tax Notes, and his research reports have been covered in Reuters and a range of other news sources. He has been a featured speaker at the Association of Bay Area Governments and the annual conference of the California State Association of Counties and has been interviewed on C-SPAN and The Web. As co-director of UC-Berkeley's Center for Community Economic Research from 1991-1996, he helped pioneer use of the Internet in support of education and outreach, receiving notice for his work in the New York Times, Business Week, the Washington Post, CNN, USA Today, the Nation and C-SPAN. He is also an editor and columnist for E-NODE, an electronic newsletter on the social and economic implications of the Internet, and is finishing doctoral work at UC-Berkeley where his research has focused on the emerging role of information technology in shaping the economic geography of regions.


Introduction:
Where do you want to go today? Microsoft has other plans

Is Microsoft building a monopoly?

To ask the question, one has to ask in what markets, since through a combination of business acumen, hardball tactics that many consider monopolistic, and a buying spree of acquisitions, Microsoft is now involved in almost every aspect of the computer and computer-related telecommunications markets and is emerging as a major player in Internet commerce and on-line media ventures.

It controls the operating system of 94.1% of the personal computers sold on the market today (Dataquest numbers) and just finished off a $150 million investment in Apple Computer to tie the other 5.9% of new desktop sales into an alliance. In major software applications, Microsoft has steadily expanded its market share- in the case of word processors from barely a third of the market in 1995 to over 80% in 1997. It has used its Windows NT server software to rapidly enter the business workstation, client-server and large-scale "enterprise" computing segments. Over sixty-five percent of new intranet sites are deployed on Windows NT servers, while Windows NT workstation clients are growing 177 percent annually. (Source: IDC) It owns not only operating systems and software applications but sells the development tools used by a majority of programmers involved in the industry and has strong dominance of the training programs of information technology professionals. As of March 1997, 87 percent of the 2.4 million software developers were developing for the Windows 32-bit platform, up from 61 percent a year earlier. Fifty-three percent of 2.4-million U.S. professional developers use Microsoft's Visual Basic program as their primary development language.[1] Along with controlling software used by developers, Microsoft is playing an increasing role in their technical education, forging commercial partnerships with both commercial and academic training institutions, while spending millions of dollars subsidizing the training costs of computer vendors and professionals in order to tie them into the Microsoft framework.

Microsoft is using both its control of the desktop and its inroads into the server market to leverage control of emerging Internet standards and commerce. Its Internet Explorer desktop browser is rapidly overtaking Netscape's software for navigating the Internet, while its combination of Internet servers, Web editors, Internet development software, and network-based applications are establishing dominance in control of the evolution of the Internet. Its purchase of and alliance with a range of audio and video "streaming" technology companies is already assuring Microsoft control of the standards for delivery of multimedia over the Net. In the fight over the software standards that will run the Internet, particularly in the maneuverings over the Java language standards that many see as crucial, Microsoft has leveraged every advantage possible to design those standards to suit its own commercial interests.

Through alliances with banks and its financial software, Money and Personal Investor, along with its financial server software, Microsoft is emerging as a key player in shaping the on-line financial transaction system of the future. Microsoft is establishing on-line commercial ventures in airline ticket sales, auto sales, news, games, local events and entertainment (along with local advertising revenue), and a range of other on-line commercial ventures. Its ownership of the Microsoft Network (MSN) and its partnership with NBC in the creation of the MSNBC venture are giving Microsoft strong distribution outlets for its emerging range of media content. Its investments in Dreamworks gives it a position in Hollywood movie and music production that can be integrated into its on-line ventures involving interactive multimedia as computers and television converge in coming years.

Beyond software and content, Microsoft is working to control the way people connect to the Internet from work and home. Its $425 million purchase of WebTV gives it control of a major avenue for non-PC Internet access. Its $1 billion investment in the cable company Comcast and proposed investments in US West cable now make it a major player in designing the standards for accessing the Internet over cable. And in a breathtaking venture, Microsoft's Bill Gates is in partnership (with a one-third stake) in a $9 billion venture to create a low-orbit satellite system called Teledesic that could give high-speed Internet access to anyone anywhere in the world, an investment supported by the US government through a massive free giveaway of radio spectrum to the company.

Buying Its Way Into Dominance

The raw fact is that Microsoft is now a financial behemoth which, when it fails to create viable competitive software, readily uses its financial resources to buy-out startups and key technology to maintain its stranglehold on the industry. The company had annual revenues of $11.4 billion for fiscal 1997, a 31% increase from the year before, and has a cash and short-term investment war chest totaling $9 billion.[2] With a soaring stock price and a market capitalization of roughly $160 billion, the only company in the country that consistently has a higher market capitalization is General Electric ($228 billion in July). Microsoft rivals Coke in value and has a market value three times that of General Motors.

Microsoft has used that financial clout consistently over the last few years to acquire companies and their software and human assets, while sealing financial alliances with a range of partners. While many of the financial details have not been made public, Microsoft spent an estimated $1.5 billion between 1994 and 1996 on acquisitions.[3] Through these investments, Microsoft has bought out dozens of companies, buying or investing in over twenty companies in 1996 alone. Its investments have only accelerated in 1997 with the $1.5 billion spent in the WebTV and Comcast investments, the $150 million invested in Apple, and the hundreds of millions invested in additional Internet-related companies, including its key investments in audio and video streaming. . It has been acquiring key strategic technologies at a rate of over one per month. These are all in addition to its large strategic alliance investments in MSNBC and Dreamworks over the last few years. All told, Microsoft has spent an estimated $4-$5 billion on acquisitions and equity alliances in the last few years to expand its reach.

Microsoft has acquired or invested in companies involved in 3D animation, web site design, Internet development tools, speech recognition, handwriting recognition, joystick controls, Internet payment security, on-line gaming, technical training, e-mail connectivity, mainframe connectivity, multilingual translation software, business news services and a range of other Internet-oriented companies. In doing so, it has helped assure that companies that might have supported a broad range of different systems, including Microsoft competitors, have instead developed breakthrough technology in-line with Microsoft's goals and strategies for dominance. Microsoft has also traded cash and expanded training subsidies to establish equity stakes in a few key vendors who integrate and manage large-scale computer networks for many corporations in order to leverage their strategic position into a bias towards Microsoft systems.

And as Microsoft acquires both technology and key individuals, it can add them to a research and development department that has grown to a size that threatens to overwhelm any potential competitor. During fiscal year 1997, Microsoft spent $1.93 billion on product research and development activities. That amounts to 16.9% of revenue, an admirable percentage commitment to innovation but a raw amount that tilts the whole competitive nature of the industry towards Microsoft's control.[4]

Most disturbingly, especially when comparing its economic heft to comparable financial powerhouses in other manufacturing industries, Microsoft is not at the peak of an industry's size but at an early stage in markets that are expected to explode geometrically in the next decade. If unchecked, there is a very real possibility of Microsoft becoming an unprecedented financial and technological colossus bestriding more markets and industries than any monopolist has ever aspired to dominate.

Why Microsoft Dominates: The Economics of Networks

If Microsoft was merely using its economic and research strengths to win out in each individual market it enters, it would be a cause for concern in monitoring each market but we would not be highlighting the overall threat of Microsoft to the industry as a whole and to the consumers who will increasingly participate in an Internet-based economy. But the fact is that the nature of high technology makes each individual market inextricably linked to other markets through a combination of software standards, training skills, development tools and physical architecture that must all be able to work in combination.

The key to the economics of networked technology is that products and markets do not stand alone in these high technology markets but instead reinforce one path of innovation versus any alternative path. An operating system attracts software developed around that operating system, thereby discouraging new competition since any alternative faces not only the challenge of creating a better operating system but competing against a whole array of already existing software applications. Businesses train employees in one technology and are reluctant to abandon that investment in training, while the existence of a pool of people trained in that technology encourages other businesses to adopt that technology. And as desktop software has to be able to work with client-server networks and an array of other technologies, it becomes nearly impossible to abandon an established set of technology standards that tie those different parts together. These so-called "network effects" give an incredible anti-competitive edge to companies like Microsoft that control so many different parts of the network and use that control to leverage position in connected markets.[5]

Compounding the economic hurdles to new competitors are the high up-front costs to entering any new market. Research and development costs are extremely high for the first software diskette produced, yet since the unit costs are so low, any established market leader with sufficient financial resources can easily drop its prices to prevent any upstart from recouping its initial investment.

In an industry of relatively equal competitors, one could imagine these economics producing dominance by different companies in different market segments without any one company dominating that many segments all to itself. Such a system would require strong open standards to assure compatibility between each market segment and rigorous policing against abuses by market competitors since even small amounts of abusive market behavior, if it gives advantage in market share, is magnified in its returns to the abuser due to network effects.

However, that is not the world we live in today. Instead, we have one company, Microsoft, that towers over its competitors in most market segments and who is doing everything possible to undermine open standards in favor of proprietary ones that it controls. Because it is making large profits in the areas it dominates like the Windows operating system and its applications "Suites," it can afford to spend lavishly in new market segments not in order to make money in those market segments but in order to reinforce its overall dominance and control the standards on the assumption that it will reinforce profits in other parts of the network chain.

As well, Microsoft has not been adverse to engaging in outright anti-competitive practices as needed to assure its dominance of markets, as a string of lawsuits and complaints trailing in its wake can attest to. From his first days in the computer industry back in the 1970s, Bill Gates said repeatedly, "We want to monopolize the software business."[6] And while he has moderated his words, his actions have shown no change in attitude other than the range of industries he wants to monopolize has expanded. When competitors have released new software, Microsoft has announced upcoming better features on its own software - improvements which often would not materialize for months, even years after their "scheduled" release. The result of such "vaporware" announcements was to freeze software purchases in the market until Microsoft had time to marshal its financial and technical resources to overwhelm its opponents. Hidden features of its operating system have been used to give its own application developers a leg-up on the competition. And the bundling of software has allowed Microsoft to use dominance in one market to jump-start a presence in another market by linking software purchases in both markets together. It has used every advantage of its monopoly control of the desktop to leverage dominance of Internet standards and in turn use that control to achieve a dominant position in Internet commerce.

The combination of these natural network effects and Microsoft's acquisition strategies leads consumers to assume that Microsoft will be successful in any market it enters. As individual markets blur and merge over time, Microsoft is seen as the only company that people feel assured will offer compatible applications (and that the company will work to prevent others from succeeding in the same task). This all just reinforces consumer dependence on Microsoft products and furthers its dominance. Any strategic technology which Microsoft cannot produce in-house, it has the financial resources to acquire.

The Internet, while a potential threat to Microsoft's dominance, is also an opportunity for the company to seize control of those Internet standards and thereby gain new network footholds on every computer connected to the Internet. Through the combination of controlling standards in the Web browser market, Web servers, development tools for Internet software developers and development of standards for financial transactions on the Net, Microsoft is not only quickly dominating markets for software sales related to the Internet, it is using its dominance of software technology to leverage a commanding position in consumer-oriented Internet commerce, from auto sales to classified advertising over the Internet. Through its investments in WebTV and cable companies, it is seeking to further reinforce its dominance by controlling standards and connections to the Internet right from the home.

It is worth stressing that Microsoft's monopolistic practices serve a purpose for customers--a fact often cited by Microsoft defenders. In a world of rapidly changing technology, Microsoft's monopolistic grip on standards and different market segments give consumers some assurance of stability and interconnection between products. However, the fact that a monopoly has a social purpose is hardly unprecedented. Most of the monopolies of the past were lauded by many segments of the business community for ending reckless speculation and destructive competition in favor of stability--just look back at the initial respect for John D. Rockefeller in creating Standard Oil. It is only later, as the monopoly matures and upstart competition finally fades, that the abuses of monopoly clearly overwhelm its advantages. At that point it is extremely hard to reverse.

As an alternative to Microsoft's proprietary approaches to integration, a range of companies have worked to promote a language called Java as a system of software exchange over the Net that would be independent of proprietary operating systems like Windows and would promote the assurance of stability and interconnection between different software that Microsoft is able to deliver. However, Microsoft is quickly using its position to undermine Java's open standards in order to prevent a level playing field for software competition. It has used everything from its position in the browser market to its sale of Web servers and applications to its dominance of software development tools to assure that software developed on the Windows platform is not compatible with other systems.

While the "network effects" of technology have played a large role in Microsoft's monopolistic success (as has the company's focused business strategy), much of the blame belongs to the federal government for its failure to curb abuses by Microsoft, block its acquisition of key technology, or step in to support open standards not controlled by Microsoft. Most critically, the government must examine not only individual markets but how Microsoft's expansion from desktop software to investments in enterprise computing, media content, on-line commerce and Internet access to the home all work in combination in anti-competitive ways.

The rest of this report will explore in more detail the specific areas of Microsoft dominance, its emerging interests, and the interconnections that threaten even more pervasive monopolistic abuse in the future if left unchecked. It will illustrate both the breadth of Microsoft's dominance and the tactics and overall strategic domination that has made the company the economic and financial juggernaut it has become. The report concludes with five recommendations for actions that NetAction believes are necessary to ensure consumers of a strong and vigorously competitive market in the information technology industry.

Table: Recent Microsoft Acquisitions
(partial list)

Name of company/software Key Software Technology Date Amount Invested

Operating System

Stac Electronics Stacker Disk compression software 1994 $39.9 million
Aha software Smart Ink, InkWriter Handwriting recognition 1996 not disclosed
Lernout & Hauspie   Speech recognition software 1997 $45 million

Desktop Applications

Fox Software FoxPro Database software 1992 $175 million
Altamira Composer Graphics software 1993? not disclosed

Server Operating Systems & Enterprise Computing

Santa Cruz Operation UNIX Server operating system 1989 20% stake (still 11.5%)
Netwise Transaccess Linking databases to mainframes 1995 not disclosed
Panorama Software Systems   Multidimensional database 1996 not disclosed
Trados Translators Workbench Multilingual document production facilities for software developers. 1997 20% stake
Wildfire Communications Wildfire Voice recognition integrated into Microsoft's Outlook e-mail 1997 Equity investment (undisclosed amount)

Vendor Training & Professional Services

VANstar   Professional services and skills aimed at enterprise computing 1995 Equity stake and funded training for its engineers
ENTEX Information Services   Professional services and technical 1996 5% stake with training
XLConnect Solutions Inc.   Professional services and skills 1997 Equity stake with training

Multimedia Internet Standards

VDONet Corp. VDO Wave technology Video steaming 1996 5% stake
Progressive Networks Inc RealAudio Audio/Video streaming 1997 10% stake
Vxtreme   Video streaming 1997 $75 million

Internet and Enterprise Development Tools

One Tree SourceSafe Source code management; used in Visual Basic and Visual Studio 1994 not disclosed
Vermeer Vermeer (renamed Frontpage) Web site editor & management 1996 $80 to $130 million
NetCarta Web Mapper (now Site Analyst) Web site management 1996 $20 million
Aspect Engineering dbWeb Internet Tools for the Web 1996 not disclosed
ResNova Software WebforOne and Boulevard Mac Web server Software company 1996 not disclosed
Proginet Corp TransAccess, Proginet Oasis Linking Web applications to mainframes Dec 1996 not disclosed (10% stake)
Interse Corp. Market Focus (now Usage Analyst) Web site analysis (incorporated in MS Site Server) 1997 not disclosed
Coopers & Peters EyeOpener Java and Smalltalk tools, add to MS AFC 1997 not disclosed
`LinkAge Software Inc. NotesConnector and email software Support Microsoft Exchange on e-mail in enterprise computing 1997 not disclosed

Java-related investments

Colusa OmniVM Java-like object-oriented software 1996 not disclosed
Dimension X Liquid Motion Interactive software, key java tools 1997 not disclosed
Apple Computer MacOS Computer company 1997 $150 million (stake)

Internet Financial Transactions

eShop   Secure Internet retailing & payment system for Merchant Server. 1996 not disclosed

On-line News Media

MSNBC MSNBC On-line news 1995 $500 million
Individual Inc. iNews Customized business news services 1995 7.4% stake
Black Entertainment Television MSBET On-line news & entertainment 1996 not disclosed (joint ownership with BET)

Interactive Entertainment/Games

Softimage Softimage High-level 3D animation 1994 $177 million
DreamWorks Interactive   Multimedia titles 1994 $30 million (50% stake)
Dreamworks SKG   Movies, music and entertainment 1994 not disclosed
RenderMorphics Ltd. Reality Lab 3D graphics for games 1995 not disclosed
Bruce Artwick Organization Flight Simulator Games software 1995 not disclosed
SingleTrac Entertainmnet Twisted Metal Game software. 1996 not disclosed
Atomic Games World at War, etc. Games software 1996 publishing titles
Rainbow America Fury 3 Games software 1996 publishing titles
Exos Force Feedback Joystick and input devices 1996 not disclosed
Electric Gravity Internet Gaming Zone On-line gaming environment 1996 not disclosed

Internet Access & Cable

UUNet   Internet network infrastructure 1994 13% stake (bought by MFS in 1996)
Web TV Networks   Internet access device 1997 $425 million
Navitel   Internet telephone software to integrate into Windows CE & WebTV 1997 not disclosed (minority stake)
Comcast Corp   Cable company, QVC 1997 $1 billion (10% stake)

Note: Bill Gates has also made personal investments through his digital image archive company Corbis and in his proposed $9 billion joint venture in the Teledesic company seeking to create high-speed satellite access to the Internet.

The Core: Leveraging the Operating System for Desktop Dominance

The operating system, MS-DOS and Windows, are the software core of almost all computers-linking keyboards, the central processing unit, memory chips and all other software together in a functioning whole. While Microsoft has expanded its operations in the last few years, it was through control and sale of desktop operating systems in the consumer market that Microsoft made the fortune from which all other ventures have sprung and it is the operating system that has been the key strategic point of control that has given Microsoft a monopolistic advantage in other ventures. Microsoft is now using many of the same tactics that it used to monopolize the consumer market for the desktop computers to win domination of the business-level and Internet markets.

MS-DOS

Microsoft's MS-DOS operating system, begun in controversy and accusations of deceptive business practices, has been the subject of a Justice Department defense decree, and to this day is still the object of residual lawsuits from erstwhile competitors. When IBM licensed the operating system from Microsoft in 1980, the fortune of the company was made as it went on to resell the operating system to almost every company seeking to build computers that were compatible with the new IBM standard. And as IBM was to ruefully discover, in the new age of the desktop, control of the operating system was the true position of economic power in the computer economy.

Like many of its products, Microsoft did not create MS-DOS but bought it from a company, in this case one called Seattle Computer. In the nascent desktop computer market, Seattle's product had no market share compared to the dominant CP/M operating system produced by a company called Digital Research. In fact, Digital Research would continue to contend that Seattle Computer had illegally stolen source code to create their stripped down version of CP/M. But with IBM backing not only MS-DOS but making sure all programs initially shipped for the new IBM PC were compatible only with DOS and not Digital Research's CP/M, MS-DOS quickly came to dominate the market, despite the fact that almost everyone in the industry considered CP/M a far superior piece of software. Microsoft had already mastered the art of leveraging hardware deals, the bundling of applications software and operating systems in a mutually reinforcing strategy to knock off rivals, even when those rivals had superior products.[7]

But Digital Research would continue to try to compete with Microsoft's MS-DOS in the form of advanced versions of CP/M called DR DOS. In fact, many people accused Microsoft of doing little to improve MS-DOS for years after creating its version 3.3 in 1986 until a far superior DR-DOS version was created. In 1990, with no version of DOS to ship in competition with DR-DOS, Microsoft began issuing press releases about the imminent "new DOS" that would include all the features buyers liked in DR DOS and more. Yet Microsoft would fail to ship MS-DOS 5.0 for over a year (slowing DR DOS sales in the meantime) and when it did, it used a new system of deals with hardware resellers to essentially destroy the market for DR-DOS.[8] Microsoft began requiring all manufacturers installing MS-DOS on any machine to pay a license fee to Microsoft for every machine they sold - whether they installed MS-DOS or not. Essentially, the hardware sellers had to pay for MS-DOS in any case so they refused to pay extra for a competing operating system; DR DOS peaked at $31 million in sales in the year DOS 5.0 was introduced and would rapidly be driven from the market.[9] The fact that early versions of Windows issued false error messages that made DR DOS appear incompatible with Windows just added to the destruction of competition for DOS.[10]

The Justice Department belatedly began investigating Microsoft for anti-trust violations and forced the company in late 1994 to sign a consent decree promising not to commit the same offenses in the future, but by this point the damage had already been done and Microsoft owned essentially 100% of the operating system market for all non-Apple desktop computers. District Judge Stanley Sporkin rejected the consent decree for concentrating only on issues that were essentially moot because of Microsoft's absolute victory in the DOS marketplace, while failing to deal with all the emerging controversies over Microsoft's use of its operating systems to support its applications business and other ventures. "It is clear to this court," Sporkin wrote in an impassioned, 45-page decision, "that if it signs the decree presented to it, the message will be that Microsoft is so powerful that neither the market nor the government is capable of dealing with all of its monopolistic practices."[11] However, Sporkin was overturned on appeal and Microsoft was allowed to continue a range of anticompetitive practices based on its control of DOS and Windows operating systems.

Windows

Throughout the 1980s, Microsoft had tried to sell versions of Windows to give DOS machines a more Mac-like graphical feel, but it was in 1989 that Microsoft would see Windows as not only the key to leveraging itself into dominance of software applications but as a way to take complete control of the desktop away from IBM itself. Microsoft had been developing IBM's new graphical operating system, OS/2 (which would have replaced Microsoft's cash-cow DOS as well), but in 1990 Microsoft withdrew from that work in favor of concentrating on its release of Windows 3.0 the same year- a relatively amicable separation from IBM that would lead, through IBM missteps, to Microsoft domination.

Part of the problem was that OS/2 was aimed at higher-power machines not generally available, while Microsoft still understood better than IBM how to leverage developer support and third-party software into acceptance of an operating system. And Microsoft was not loathe for a little hardball even against former ally IBM, threatening at one point to pull Microsoft's sponsorship of an industry exposition if IBM's top OS/2 executive was allowed to speak.[12]

As for competition with those like Quarterdeck's Desqview which were, like Microsoft, adding a graphical interface on top of DOS, Microsoft was accused across the industry of using unpublicized knowledge of the workings of both DOS and Windows to undermine competitors. Quarterdeck claimed that DOS 5.0 managed network drivers in ways that competitors found impossible to do given published documentation of DOS. As for building an alternative interface on top of Windows, Desqview developers complained that Microsoft products were making "calls" on the operating system that were nowhere documented for competitors to utilize as well. A 1992 book called "Undocumented Windows" by Andrew Schulman analyzed an array of undocumented Windows features that the author discovered by taking the software code apart himself.[13]

Other software companies complained that successive versions of Windows were swallowing up whole categories of software utilities that had once supplemented DOS. By bundling such utilities with the operating system or with Windows, Microsoft could essentially destroy software utility rivals as Microsoft's versions came bundled "for free" with Windows; Microsoft was able to lock-in loyalty to Windows through its array of software utilities and, through the breadth of its operating system licensing, recoup the costs of bundling those utilities with the operating system.

As we will return to when we discuss the conflict over control of the Internet, many analysts worry that the bundling of Internet browsers and other Internet-related software with proposed new versions of Windows will just continue this anti-competitive tool bundling practice. Combined with new acquired technologies like speech recognition software (through the 1997 purchase of Lernout & Hauspie) and handwriting recognition (through the 1996 purchase of Aha), whole classes of software competition will be liquidated as Windows bundled-utilities destroy those software markets with customers unwilling to pay additional money for an alternative when the Microsoft version had to be purchased already as part of the operating system.

Using Windows to Leverage Applications Dominance

The transition to Windows also became an opportunity to steal a jump on rival software companies in key application software, from word processors to spreadsheets to databases. Microsoft application developers were ready to release Windows versions of both its Word word-processing software and its Excel spreadsheets far ahead of rivals, and by the time Wordperfect for Windows or Lotus 1-2-3 for Windows got to market, in the words of Time magazine, "Microsoft already owned the markets."[14]

While this was not instantaneous, the leveraging of the Windows operating system gave it a massive anti-competitive leg-up over rivals, and Microsoft's willingness to spend profits derived from its operating system monopoly to fund entry into new software markets only compounded its advantages. When Microsoft had problems developing its own database software in the early 90s, it readily dropped $175 million to acquire top-rated Fox Software and its team of developers who had created the FoxPro database. In combination with the move to Windows, this new talent gave Microsoft the chance to aggressively enter the database market when its own software team seemed unable to do it on its own.[15]

However, the coup de grace by Microsoft was its promotion of "suites" of software bundled together. By linking spreadsheets, word processors, and databases in one package that could easily exchange data, Microsoft's Office suite was able to overwhelm the makers of individual programs. A key to making such software suites are systems that allow data exchange. Microsoft promoted a proprietary approach called OLE against alternatives like Open Doc which were built around open software standards. While Open Doc was considered an easier to use and more robust approach, fears that future Windows upgrades might undermine any approach other than OLE forced almost all software makers to deal with Microsoft's own proprietary system. And since Microsoft provided little documentation for assuring compatible links between different software packages, customers naturally chose Microsoft suites as the best way to assure their software would work together.[16]

Most competing software had to sell out to larger companies desperately trying to compete with the Microsoft juggernaut. Previously dominant wordprocessor Wordperfect along with Borland's Quattro Pro spreadsheet were first bought by Novell in 1994, then sold two years later to Corel, once only a graphics software company. Borland's Paradox database had once dominated the desktop market but Microsoft's suite strategy had decimated its market share, so Corel in 1996 took over development and marketing of Paradox as well within its suite competitor. Once dominant spreadsheet maker Lotus was so battered by the competition from Microsoft that it was forced to sell out to IBM.

While the massive consolidation of software into competing suites led to a small comeback in sales for Corel and Lotus, by 1997 Microsoft was making an estimated 85% of unit sales of suite software and 90% of all revenues in this key area of home and office software.[17] Between its operating system franchise and its Office revenues, Microsoft had both the dominance of the desktop and the financial war chest to move on to its assault on the corporate computing market and then onto taking control of the Internet.

Moving On Up: From the Desktop to Control of Corporate Computing

In the world of business computing, Microsoft is leveraging its strength on the desktop to take on business networking and larger-scale client-server computing - a key step in controlling the networks integrated into the Internet. The main vehicle for this has been the Windows NT operating system which has steadily gained on all competitors in the marketplace. Many worry that Microsoft is using the same kind of tactics used to monopolize the desktop to take over domination of the business community.

In entering the business market, Microsoft is quickly displacing the open standards of the UNIX operating system (sold in a variety of forms by different vendors) with its own proprietary Windows approach. At the lower end of the marketplace, involving the networking of desktops and central "servers," Microsoft is already surpassing UNIX in most markets and is rapidly displacing it in other markets. Windows NT is expected to have a 255% growth from 1996 to 1997 while all forms of UNIX are expected to barely hold even with 8.6% growth.[18] Many analysts are already predicting that it is only a matter of time before Windows NT displaces UNIX in all but the highest levels of computers (and even there Microsoft is making inroads as will be detailed later in this report). In the area of what is called intranet servers (based on the Internet model but connecting internal networks), Microsoft has passed UNIX in sales and is expected to have over 65% of market share by the year 2000.[19]

Part of the reason for Microsoft's success has been the fracturing of the UNIX standard in the early 90s. UNIX had been created at Bell Labs in the late 60s and the federal government had funded improvements in it throughout the 1970s and 80s, including the inclusion of Internet standards. Aggressive purchasing rules by the federal government in the 1980s prohibited purchase of any business-level computer that did not include a unifed set of open UNIX standards as an option. The open standards in the UNIX market, along with high levels of competition in hardware and software, was in marked contrast to the rise of the Intel-Microsoft duopoly in the desktop market. Unfortunately, the government weakened its role in enforcing standards in the 1990s and UNIX standards were allowed to fracture. That opened the way for Microsoft to impose its unified proprietary approach over the open, but sometimes incompatible versions of UNIX. (As a hedge, however, Microsoft had bought a 20% stake in 1989 in the Santa Cruz Operation, one of the main promoters of commercial UNIX software.)[20]

Another reason for Microsoft's success, of course, was its very dominance of the desktop. As businesses increasingly wanted to network personal computers to workstations, servers, and even mainframes, Microsoft's position on the desktop gave it great leverage in designing operating systems to move up the computing scale. With its software and operating system on most desktops across the country, it had a ready base of software to scale into networks with people trained in their use.

Mind Share: Development tools and business computing

But beyond the traditional advantages used by Microsoft, its growing financial and technological strength has given it new advantages to help it leverage control of the business market. Like its control of the desktop operating system, its expanding control of the software tools used by computer programmers has further assisted its expansion in the business sector. Microsoft has had a long, skillful tradition of cultivating developers on the desktop, but the need for customized software in a range of industries has only raised the importance of the actions of software professionals ten-fold.

In a sense, leveraging developer tools for broader forms of control of computing standards dates from the origin of Microsoft. Before its original deal with IBM, Microsoft had been primarily a seller of software languages like BASIC; it was the desire of IBM to include Microsoft BASIC on its machine that allowed Microsoft to negotiate its broader control of the DOS operating system. As customization of software and networking becomes integral to business computing, control of developers tools becomes an extension and reinforcement of its control of the operating system platform. Paul Gross, vice president for developer tools at Microsoft, states bluntly, "Microsoft is very focused on these 2.4 million professional developers because of their impact on multiplying the platform."[21]

No software developer starts from scratch in creating today's ever more complex software; instead, programmers use a base of computer languages, development tools and pre-written software code in order to build the next level of software complexity. With Microsoft supplying an increasing percentage of those software tools, it is able to control the software and computer standards embedded in those development tools. Good development tools make it easier and faster for programmers but they also make such developers more dependent on the operating system and standards embedded in such tools, so whoever controls developers tools end up controlling the standards of the computer marketplace.

As the 1990s progressed, Microsoft systematically expanded control over and investments in the tools developers used within the Windows environment, thereby strengthening its hold within the platform and pushing business software developers towards Windows NT at the expense of networking alternatives. By 1997, over 65% of all software developers worldwide were using Microsoft products. Over half of all developers used one program, Microsoft's Visual Basic, as their primary development tool, with another 25% using C++ as their tool of choice. Moreover, 73% of developers using C++ were using Microsoft's Visual C++.[22]

Microsoft had achieved this level of dominance through its usual bag of tricks from software bundling to strategic acquisitions to raids on competitors' top talent. When its main desktop and server tool competitor, Borland, seemed ready to stage a resurgence, Microsoft began distributing stripped-down free versions of Visual Basic with every copy of its word processing and spreadsheets, including in its Professional Office suites.[23] It acquired a number of smaller software development companies (and this only accelerated with its wide-ranging spending spree on Internet development companies as will be described later). And where it did not buy companies outright, it could launch a full-scale raid on rivals' programming talent as it did in the case of Borland, eventually recruiting scores of programmers including its head of research and development (the Paul Gross quoted above). The stream of talent to Microsoft continued to the point where Borland has filed a lawsuit accusing Microsoft of using such recruits to find out about Borland's development plans and strategically undermine it.[24]

In 1997, Microsoft has taken a leaf from its own success with Microsoft Office in launching a suite of applications tools called Visual Studio, which allows developers to easily switch between Visual Basic, C++ or Microsoft's version of the Java language. This is an especially effective strategy for developers doing corporate computing tasks which often have to deal with networks of programs needing different tools. The key is that the ease of tool integration and sophistication of developer standards will just reinforce the whole range of Microsoft tools and the developers' dependence on Microsoft platforms. One analyst in Informationweek described this "lock 'em in and tie 'em down" strategy this way: "One example is the Microsoft Foundation Classes (MFC). Microsoft locked in millions of C++ developers with its operating-system-specific framework, which made it easier to build Windows programs. The lock: While C++ source code is technically portable across platforms, MFC works only on systems that support Microsoft Windows.[25]" Microsoft's buying spree on supporting development tools just helps to make its development framework irresistible.

Squeezing out Application Rivals in Enterprise Computing

As Microsoft supplies the operating system increasingly used in large corporate networks and supplies the tools used by programming professionals for customizing software, Microsoft is able to increasingly "enhance" each in ways that obliterate software rivals, from makers of corporate databases like Oracle to IBM's "middleware" network management software. Microsoft has introduced its own network database product, called SQL server, which is increasingly making inroads into database markets currently held by Oracle, IBM, Informix and Sybase. Even in the largest-scale computing areas where its product cannot yet compete with their core database, Microsoft's development tools are increasingly replacing the supplementary database utilities previously sold by those companies. As one executive at Informix stated recently, "The reality is, competing with [Microsoft's] Visual Basic is next to impossible if you are a database vendor."[26] Microsoft is increasing the capacity of Visual Basic to substitute for as many of its rival database tools as possible- absorbing more and more of the functions of their software into its own development tools.

And Microsoft's SQL server itself is coming on fast with a 40% share of the ever expanding NT database market.[27] In order to scale its database applications to large-scale enterprises, one acquisition in its recent buying spree was Panorama Software Systems, which is supplying what is called OnLine Analytical Processing (OLAP) to its SQL Server and Windows NT platform. This new OLAP technology will be integrated with a new NT data exchange standard called Tensor - itself an offshoot of Microsoft's old desktop OLE data linking standard.[28] Between its Visual Basic development tools, its SQL Server software and their integration into new database exchange standards in NT, many analysts are predicting increasing dominance by Microsoft in the database market.

More broadly, Microsoft is creating a whole suite of what it calls BackOffice software in order to dominate management of corporate computing and networks. As with its desktop Office, the strategy with BackOffice is to create such a seamless integrated set of tools that individual products get drowned in the integration of development tools, software and operating system. The greatest limits to Windows NT has been how many different users could be coordinated compared to large-scale UNIX systems, but Microsoft has introduced new software technology called Wolf Pack to radically expand the reach of NT within corporate networks and even mainframes.

As Microsoft expands across networks, it is embroiled in another standards showdown on how to manage exchange of data and software objects between all different kinds of machines - a fight where Microsoft is of course promoting its own standard tied to its proprietary Windows tradition (called DCOM) as opposed to the open standard (called CORBA) promoted by most of its rivals like IBM and Oracle. While DCOM does allow network management between computers with different operating systems, it is designed to work best with only Windows-based machines, meaning that the more Microsoft is able to push DCOM's adoption (through providing development tools and software tied to it), the more incentive companies will have to move towards maximum Windows use on their computer networks. Of course, Microsoft's own widely used developer tools like Visual Studio produce only DCOM software code.

Training and Education: Controlling the Professional Workforce

While Microsoft has traditionally pushed forward its dominance through control of software, it is increasingly investing financial resources in professional training, and tilting the workforce towards Microsoft expertise. As Microsoft makes sure there are professionals available trained in its technology where its rivals often cannot, business will feel pressured to adopt Microsoft technology just to be assured of a trained workforce.

Microsoft's existing worldwide training and certification programs trained more than 1.2 million technology professionals in fiscal year 1997 as part of a program Microsoft calls Skills 2000. It reaches these professionals through an intensive combination of partnerships with computer vendors, work with commercial training centers, a free television-based training program, training sessions linked to conferences around the country and a growing network of academic alliances.[29]

Microsoft is the only software vendor (outside fading Novell) which has its own professional certification credential. The company has worked with a variety of vendor partners and commercial training centers to establish its certification program; with 120,000 Microsoft Certified Professionals by 1997, the number had grown 250% in one year. Concentrated in the consultant services and system integrators hired by other firms to set-up their computer systems, such strategic training is magnified as those Microsoft-trained professionals tilt the buying decisions of a whole range of companies[30]. Microsoft is spending hundreds of millions of dollars on training--thousands of dollars per person trained--on other peoples' employees in order to tilt the supply of software professionals towards Microsoft technology.

By subsidizing the training of computer vendors, it also has encouraged those companies to promote Microsoft technology in companies they work with to push support beyond market demand due to the evangelism of trained Microsoft professionals.[31] Microsoft has spent lavishly to tie "system integrators," those companies that sell to and manage computer networks for large-scale corporate enterprises, into its technology. Beyond its traditional subsidies of training, it has begun trading cash and expanded training for equity positions in a number of the largest national integrators, including Vanstar ($2.2 billion in annual revenues), ENTEX ($2.5 billion in revenues) and XLConnect ($150 million) while creating long-term alliances with many others like Ameridata Technologies (owned by GE Capital). Microsoft's goals in these deals has been for each of these vendor partners to create expanded consulting divisions to promote Microsoft products, bluntly calling it the creation of a "Microsoft-biased" division in the Ameridata deal[32]. Such financial equity positions give Microsoft quiet but strong leverage influencing the technology decisions of companies across the country on a day-to-day basis. ENTEX professionals alone manages 2,400 servers and 600,000 desktops for a range of corporations.[33]

Microsoft has spent lavishly to encourage both individuals and such vendors to go through Microsoft's training program, offering tens of thousands of free vouchers and training incentives to radically expand the pool of Microsoft Certified Professionals. It has created a system of what it calls Authorized Technical Education Centers (ATEC) with its own certified curriculum and pool of instructors. Microsoft has tapped into the burgeoning commercial system of technical education centers around the country, from Sylvan to the Michael Milken-owned Knowledge Universe, to push these ATEC partners to hype its products. Many worry that cash incentives by Microsoft are turning what is billed as unbiased technical education into Microsoft marketing. "What they're doing is distracting us from being a high-quality training company that's doing marketing to promote Microsoft training, to one just promoting Microsoft in general and their products," said one ATEC operator. "And that's not what we're here to do."[34]

Microsoft is also tying over 300 academic institutions and 40,000 students a year into its training program through its Authorized Academic Training Program It provides free technical training to teachers and educators and has shaped those academic programs to create Microsoft Certified Professionals, adding the academic stamp of approval to its own programs. Essentially, Microsoft is taking advantage of the weakness of standards in both the private and public technical education fields to mold them into subsidized Microsoft recruitment tools.

Looked at comprehensively, Microsoft is using its training programs to further reinforce the network effects already tilting control of corporate computing under its dominance. Its competitors like Novell, Sun and Oracle are scrambling to create a multi-company training network to contend with this Microsoft-controlled training system, but it is an unfortunate fact that our country's whole system of technical education is being distorted as it becomes one more tool for Microsoft's monopolistic goals.

Microsoft Bids for the Internet

The rise of the Internet has been both a threat to Microsoft's empire and an opportunity to expand it to a degree impossible before. With various forecasters expecting between $80 and $160 billion in electronic commerce by the year 2000, the Internet had become the decisive realm of computer competition for the future[35]. And Microsoft is working hard to ensure that consumers will become captive customers of its monopoly.

The threat of the Internet was obvious: with a twenty-year tradition of open computing standards connecting computers of all kinds, the Internet looked ready to make proprietary operating systems for individual machines an anachronism. As the Internet broke into national consciousness in 1994 and 1995, it appeared that millions of computers were connecting to one another with Microsoft having nothing to say in the matter. The rise of Netscape and a host of other new Internet companies seemed to promise a new era of competition including a whole new cast of companies. The final nail in Microsoft's coffin seemed to be when it introduced a new proprietary Microsoft Network on-line service as an alternative to the Internet; within months, Microsoft shut down the proprietary version in late 1995 and converted it fully into an Internet service provider.

But in many ways, Microsoft's quick success since that point in seeking control of the Internet marketplace just shows the inherent monopolistic power of the company's place in the computing world. Having dismissed the Internet until relatively late, Microsoft has in under two years been able to assume not only a competitive position but is now threatening to control the standards of the Internet. Microsoft's slogan has been to "embrace and extend" (and thereby control) the Internet from its position of control over the desktop.

The opportunity for Microsoft from the growth of the Internet is that if it can seize control of those standards, they will reinforce its control not only of the desktop but of the range of corporate computing and on into whole other economic fields. Having used the desktop to push into corporate computing from one direction, it could use the Internet to push its dominance from that direction as well. To accomplish this goal (which has already been partially achieved), Microsoft has marshaled all its traditional tools from bundling software to hardball negotiations with third-party vendors to control of development tools. Additionally, Microsoft has stepped up its acquisitions at an avalanche pace - at least one major technology per month on average - in order to incorporate as many promising technologies into its own proprietary strategies as possible.

The Browser War: Giving It Away and Taking Control

The most visible part of the battle for control of the Internet is the so-called "Browser war," the fight largely between Microsoft and Netscape Communications over which piece of software is used by computer owners to surf the Internet. Netscape has dominated sales of browsers since 1994, but it is rapidly losing market share to Microsoft and, with new versions of Windows soon to come bundled with Microsoft's Explorer browser as an integral part of the operating system, most analysts expect Microsoft to take over this software market.

But browsers are more than a piece of software- they have a decisive impact on all standards for web design. Browsers are the means for any computer user to "read" information from a World Wide Web computer server at some distant place. If the dominant browser is designed not to "read" a certain kind of information - a kind of graphics, software effect, etc. - then web page designers will be loathe to use that kind of information or technology, while they will tend to support software standards that are compatible with the dominant browser. And if you are a software company like Microsoft selling web servers, web design and an array of Internet commerce software, you have an overriding interest in controlling those Web standards.

Netscape had been the first company to spot this fact and had back in 1994 "dumped" its version on the Internet - in the economic sense of giving it away for free to destroy a rival. In that case, the rival destroyed was the original government-created browser called Mosaic. Essentially, when the government refused to defend the Web standards contained in the Mosaic browser against Netscape, it left Internet standards to the mercy of whichever company could marshal the strongest economic force to dominate them.

While Netscape got a head-start, Microsoft has used its monopoly control of the desktop to quickly catch up. Also, while Netscape needed to start charging for its browser, Microsoft continues to give its browser away for free since Bill Gates has stated flatly, "We don't need to make any revenue from Internet software." Instead, Microsoft is using it to reinforce its overall operating system and technological dominance.[36]

This sort of predatory pricing should trigger antitrust investigations, (and similar calls for Justice Department intervention were made when Netscape did it originally) but Microsoft has not stopped at free distribution. When it introduced Windows 95, most competing browsers were initially made unusable, helping push the initial consumer migration to Microsoft's Explorer.[37] Microsoft has been paying Internet service providers like AT&T, Netcom, Compuserve, America Online, MCI and Prodigy to bundle Explorer with their services. Computer resellers have been given discounts on licensing for Windows if they include Explorer in the package sold to customers.[38] It is hard to see paying other companies to accept free software as anything other than a monopolistic practice when the only expectation of profit derives from increased technological domination of the Internet. In other cases, Microsoft is accused of going further in threatening to withhold Windows licenses altogether from computer resellers who bundle anything other than Explorer on computers sold to consumers.

It is the combination of these practices that recently led the Department of Justice to launch a new round of antitrust investigations against Microsoft and to ask the courts for a $1 million per day fine against Microsoft until it stops pressuring computer resellers to bundle Explorer on their computers.

Additionally, Microsoft has been signing exclusive deals with companies like Time Warner and Disney where Microsoft's Explorer will be required for access to parts of the web sites those companies are establishing on the Web.[39] In this way, Microsoft's media alliances and ventures (to be detailed more later in this report) give it an anticompetitive edge in the browser market.

The final kicker is Microsoft's integration of Web access directly into its next version of Windows with Web sites being accessed directly from the operating system or by any application. Current test versions of "Windows 98" pull up Explorer in many cases even if you specify an alternative browser.[40] Consumers will of course have the option to pay for a different browser but, as Microsoft has proven in the past with other software bundled into the operating system, few will.

The Next Step: Audio/Video standards

If controlling the basic web browser is Microsoft's first goal, the next step in controlling desktop access to the Internet is control of how computer users download audio and video from Internet sites - a crucial technology standard as the Internet converges with television in the next few years.

Competition in audio and video streaming technologies and standards started out as a free-for-all between a number of start-up companies, but in recent months Microsoft has purchased equity stakes in or bought out-right most of the major competitors. It paid a reported $75 million to purchase Xtreme Inc., the video and audio technology licensed to a range of companies including CNN, and bought equity shares in Progressive Communications (the leading audio streaming company) and in VDOnet, another leading video streaming company. All will modify their technologies in future versions of their software to conform with Microsoft's Netshow software for multimedia Internet access and its Active Streaming Format (ASF) multimedia standards.[41]

With these key purchases, Microsoft has essentially seized control of the standards that will control video and audio distribution over the net. The Justice Department is investigating these deals but it will be hard to undo Microsoft's setting of these standards once adopted by the array of companies already moving to do so.

The Payoff: Selling its Web and NT servers

So if Microsoft is not making money on its browsers, how is it profiting? Just as control of the desktop is helping Microsoft take control of Internet standards, control of Internet standards is helping Microsoft increase its control of business computer networks as many companies seek to connect their computer systems to the Internet. Through control of desktop operating systems and Internet browsers, Microsoft is working to control the business computers managing web sites at the other end.

In typical Microsoft fashion, Microsoft began bundling its basic Internet Information Server for free with every copy of Windows NT. This had the double bonus (another word for network effects) of encouraging companies to adopt NT over rivals since they would get a Web server for free, while discouraging anyone buying Windows NT from paying for a Web server from any Microsoft rival - especially Netscape. Competitors have also complained that Microsoft is able to use in-house information about new upcoming versions of NT in order to get a jump on competing Web server products.[42]

Where Microsoft expects to make its money (beyond expanding its NT sales) is in selling higher-powered Web server software. Microsoft licensed a version of NT for workstations whose license specifically barred companies from using any Web server other than Microsoft's - including a much cheaper version produced by Netscape. Microsoft's lawyers have told Netscape to "cease and desist" promoting its products on NT Workstations; although Netscape has refused to stop and has sued Microsoft, many customers will think twice before violating their license agreement with Microsoft[43].

The result has been a massive expansion of Windows NT servers for both Internet sites and internal corporate sites--intranets--using Internet-based software. With Microsoft increasingly controlling Internet standards, it was hardly surprising that corporations began flocking to its expanding server options, from Internet versions of its SQL database server to its Merchant Servers for on-line financial transactions.

Using Developer Tools to Dominate the Internet

Reinforcing this trend and Microsoft's control of the Internet were its new Internet support and developer tools which it would use to reinforce its Internet strategy much as it has used developer tools to reinforce its Windows operating system and applications. Given its late entry into the Internet, Microsoft turned to a massive spending spree to buy up the technologies it needed.

The first major purchase was in January 1996 when Microsoft paid an estimated $130 million for Vermeer Technologies, a company which pioneered tools to make it easier for non-programmers to easily create Web sites. With its new talent moved up to Redmond, Microsoft renamed the software Frontpage and it quickly became the best-selling web design software on the market. Described by Business Week as "key to Microsoft's Internet effort," the software further reinforced its control of Internet standards since sites created with Frontpage would follow Microsoft's standards rather than its rivals.[44] As one competitor to Vermeer said when Microsoft purchased it, "Vermeer [engineers] never had a vested interest in supporting one language or database, but now they certainly do."[45] The result was that while FrontPage quickly became one of the most sophisticated web design products, supporting not only basic web designs but database access through the Web as well, the only database servers it supports are Microsoft's. If anyone wants the full value of FrontPage, they then have an incentive to be using a Microsoft Web server and Windows NT as well. Combined with Microsoft's earlier purchase of Altamira's Composer, a software program for graphics design, Microsoft had purchased a one-two punch for drawing developers into its web design standards.

To further reinforce demand for its Web servers, Microsoft beefed up its BackOffice network support applications with a range of new proprietary Internet tools gained from scooping up technology through its buying spree. It acquired its Site Analyst software through its purchase of NetCarta, its Usage Analyst software from its purchase of Interse, a sophisticated "object-oriented" user-interface framework from Coopers & Peter, web tools from Aspect Engineering, and Macintosh web server software from ResNova to keep its hand strong in that machine.[46] With these tools bundled in a new software suite called Site Server, pressure just grew on companies to buy Microsoft's servers in order to have these tools available. And while the tools are a boon to companies wanting to create and maintain Web sites without needing professional programmers, the tools create Web sites tied to Microsoft's Web servers and thereby block easy future portability to rivals' server software.[47]

Other investments are being used by Microsoft to strengthen its entry into large-scale enterprise-wide networks. To strengthen its electronic mail connections across networks, it absorbed Toronto-based Linkage Software with its technology for connecting the Web to older "legacy" computer systems and bought a ten percent equity stake in Proginet Corp to tie their mainframe Web access software to Microsoft's own line of web tools and servers.[48]

Java: The Showdown Fight

Nothing highlights Microsoft's monopolistic strategies more than its attempts to destroy the open computing standards of the Internet-oriented Java language--an open standard for running software over the Internet created by Sun Microsystems and supported by hundreds of other companies. The most basic use of Java is for enhancements of Web pages--animated pictures, interactive queries from browsers - to go beyond viewing static information. But Java is ultimately a way for the Internet to act as one giant computer where programs can be located anywhere and be accessed instantly over the Internet from any desktop. The key innovation of Java is to be platform-independent, meaning that a Windows user can run software from a UNIX server or even run sophisticated software from simple "network computers" that need only a stripped-down operating system for Internet access; most software functions will be run somewhere else on the network and only small "applets" need be sent back-and-forth between desktop and central computer. Obviously, Java is a direct threat to Microsoft's Windows franchise and the power Microsoft derives from it, so Microsoft has done everything possible to undermine Java's "write once, run everywhere" programming standards.

Microsoft's first strategy was to create a competing software system called ActiveX for allowing Web designers to create mini programs on their Web sites to lessen the immediate demand for Java "applets." Microsoft quickly used its control of major development tools like Visual Studio and its web server support software to make writing ActiveX commands as easy as possible to lure developers and companies to adopt ActiveX. And this strategy partly worked with an estimated $400 million market in ActiveX components created by 1997.[49]

But Microsoft also recognized the lure of Java and it initially licensed Java from Sun for its own Web software and development tools for fear that developers might abandon them if Microsoft did not provide Java capability. Microsoft's Visual J++ Web development software (incorporated in Visual Studio) quickly became the most popular Java development tool and is used by 50 percent of Java developers.[50] Microsoft accomplished this dominance through large-scale distribution of free and reduced copies of J++ to key developers around the country. It also bought out Colusa, an early developer of Java tools, and in 1997 purchased Dimension X, whose Liquid Motion graphics and multimedia authoring tools for Java were already considered top in the industry.[51] All of this gave Microsoft an emerging dominance in the Java field that was surpassing Sun itself. However, Microsoft's J++ tools are optimized for Windows machines and many developers expressed skepticism of Microsoft's commitment to open Java strategies.

By mid-1997, it became clear that Microsoft's goal was not just to "embrace and extend" Java but to destroy its multi-platform function, using Microsoft's combination of browsers, operating systems and developers tools to divert Java into a new Microsoft-controlled proprietary system running best only on Windows-based machines. Microsoft introduced a new version of Java called J/Direct which went beyond being optimized on Windows machines to actually making direct "calls" on Windows operating system commands - violating the basic principles that all Java programs should be independent of a specific operating system. In July of 1997, Microsoft announced it would not include any of what Sun called Java Foundation Classes--bits of standardized Java code to assist cross-platform compatibility--in future Microsoft products. As one Microsoft executive stated flatly, "It [Java] is a competing operating system" and Microsoft's goal was to undermine, not support its use as a cross-platform standard, no matter how many companies supported it.[52] Microsoft is promoting a competing Windows-oriented Java Application Foundation Classes (AFCs) and has been working with its hardware ally Intel to optimize its new software standards with Intel's hardware--thereby reinforcing both their positions in control of computing standards.[53]

Having largely engineered its unfriendly takeover of Java standards, Microsoft put the final nail in the coffin with its $150 million investment in Apple Computer. In exchange for that investment, Apple not only agreed to bundle Explorer with every Apple computer, but agreed to support Microsoft's Java standards - essentially extending Microsoft's control of Internet standards across nearly 100% of desktop computers.[54]

On Oct. 7, Sun filed a breach-of-contract suit in federal court in San Jose, Calif., arguing that Microsoft was misusing its license to use Java in creating platform-dependent versions. Business Week commented on the importance of the lawsuit, stating, "[Java] is perhaps the only remaining technology that can challenge Microsoft's dominance," but they also noted that the delays involved in any lawsuit may well kill open Java standards since the legal uncertainty plays right into Microsoft's hands since it can in the meantime confidently promise to, through its economic strength, deliver one standard or another on its Windows machines.[55] If there is no quick, decisive action by the courts or the Justice Department to support open standards, Microsoft will end up expanding its monopoly to control of software throughout the Internet and corporate networks, and consumers as well as business customers will be captives of its monopoly.

From Software to Hard Cash: Controlling Financial Transactions on the Internet

Having come to dominate software sales in the computing world, Microsoft is looking to use that control to move into other markets. With large areas of commercial activity moving onto the Internet, a prime Microsoft goal is to take substantial control of the standards governing financial transactions on the Internet and to use that position to leverage itself into an array of on-line commercial activities. While working to set the software standards for financial transactions on the Internet, Microsoft is rapidly moving from being a software supplier to being a major direct player in Internet commerce unto itself by using its dominance of software and its monopoly position in operating systems to reinforce its other businesses on-line.

Intuit Failure and Server Success

Microsoft had originally hoped to take a very direct route to dominating on-line commerce by cornering the market on all financial software sold to consumers. In 1995, it was ready to pay $1.5 billion to acquire Intuit, maker of the dominant financial software program Quicken. Microsoft had tried to make inroads with its own Money software, but Quicken had proven a harder challenger than any other software competitor (even with Money bundled with other software for free), so buying the company had become the next best option. However, under pressure from competitors and banks, the Justice Department intervened to pressure Microsoft to abandon the deal.

The result shows some of the benefits of blocking Microsoft from dominating a market, but subsequent events demonstrate that when one avenue of control is blocked, Microsoft will simply take another route. Consumers who purchase Intuit's Quicken 98 will have to install Microsoft's Explorer browser in order to use the software for online banking. In some respects, however, having been blocked from merger, Microsoft has been forced to compete hard with Intuit in improving its software. Most importantly, Microsoft has been forced to work with Intuit on open transaction standards, called Open Financial Exchange (OFX), acceptable to both companies along with an array of banks, including Bank of America, Chase Manhattan, Citibank, Wells Fargo along with many others.[56]

However, having been blocked in directly controlling the software and standards for financial transactions, Microsoft has rushed to dominate the tools and server software necessary for banks and other financial institutions to implement the standards. It has established alliances with Hewlett-Packard and Verifone (maker of most credit card "swipe" machines in retail stores) to promote Microsoft financial server software.[57] It also has established an alliance with Tandem and Compaq computers, dominant suppliers of hardware to banks, to promote an upgraded version of its SQL Server to act as a database for financial transactions through ATMs and home computers. Microsoft has supplemented its developer tools with a specific set of tools aimed at financial institutions working to build transaction-oriented Web sites.[58]

But the key to Microsoft's strategy is making its Merchant Server the dominant Internet server for on-line commerce. Lacking the technology inside Microsoft, the company in mid-1996 acquired eShop Inc., which had created key technology in running their own virtual shopping mall. Shutting down the mall, Microsoft made it clear that it was eShop technology they needed for incorporation into Merchant Server. Analysts described Microsoft's purchase as a major blow to competitors, especially Netscape. Measuring the importance of eShop, Microsoft itself stated it saved 12 to 24 months of development time and outside analysts argued that cornering the eShop technology was going to give Microsoft a three-year jump on the competition - a lifetime in the fast-moving computer world.[59]

Sealing its advantage, Microsoft quickly nailed down contracts with major financial institutions to use Merchant Server, including BankAmerica Corp, Wells Fargo, NOVUS Services and hundreds of others (including many of those who had worked with Microsoft and Intuit in establishing the OFX on-line transaction standards.) As part of the deal, Microsoft and its on-line partner VeriFone added secure Internet retailing and payment systems, further strengthening the package that Microsoft has been able to offer in selling not only its Merchant Server but its underlying NT computers as well.[60]

While Microsoft had not been able to dominate on-line financial transactions from the consumer software side, it rapidly proved that its already expanding dominance of server software could be leveraged for many of the same goals. It has opened its own financial Web site, Microsoft Investor, which already has 120,000 people a day--a number that Microsoft has generated by providing, in the words of Forbes magazine "tour de force software and financial analysis at no cost." Along with this has come lavish spending on free services to generate Web traffic, while generating commissions and fees for higher-level services.[61] Microsoft has already forged alliances with Charles Schwab and Fidelity Investments for their customers to trade stocks through the service, generating a share of the commissions for Microsoft. Since Schwab alone already has 908,000 active online customer accounts with holdings of more than $66 billion, even a piece of that and other financial allies' business promises large growth areas for Microsoft.[62]

Taking On Internet Commerce Across Industries: Travel, Cars, Real Estate and Local Information

Having secured a strong presence in the world of direct financial transactions, Microsoft is already moving aggressively to leverage its money, expertise and software position into a dominant role in a wide range of Internet commerce, from on-line car sales to travel to real estate listings to local entertainment and classified listings. Analysts predict more than $35 billion in goods and services will be sold over the Internet by the year 2000, and Microsoft is already gunning to have a large role in that new business, using its command of technology to leverage its position.[63]

Travel: Microsoft's first major success has been its Expedia on-line travel service which is expected to book $100 million in travel transactions in 1997 - with Microsoft receiving a commission on each transaction. Established in October 1996, it is already carving out a large slice of what is expected to be a $4.5 billion online travel market by the year 2000. Expedia not only books travel plans but provides a full range of travel information and online guide books, generating additional traffic. Microsoft adds revenue from advertising fees by hotels paying to display additional information besides the basic listings included at Microsoft's site, while selling banner advertising in the main areas.[64] To top it off, Microsoft is licensing the core transaction technology to American Express and airlines like Continental and Northwest.

Rivals are already worried that Microsoft's combination of technological expertise and alliances will soon choke off fair competition. Sabre, a traditional supplier of travel reservation services to airlines, is especially concerned. In February 1997, the Texas Attorney general issued a subpoena to investigate Microsoft's practices on behalf of Texas-based Sabre - charging that Microsoft is giving Expedia an unfair advantage through default links built into Microsoft's Internet Explorer browser.[65]

Car Sales: Microsoft launched its CarPoint site to try to match its success in online travel in the virtual car dealership business. Started initially as an editorial guide to car shopping, the site was relaunched in July of this year as an e-commerce site logging 30,000 visitors a day. Viewers can browse reviews of cars, calculate what they can afford, and solicit bids from up to three dealers near their homes. Microsoft has teamed up with Reynolds & Reynolds Co., a long-time technology service provider in the auto industry, to tap its network of 10,000 auto dealers around the country. Microsoft gets paid $1,000 per month by each participating dealer and a commission on each successful car sale. CarPoint in mid-year launched a used-car listing service, marking the company's first foray into the classified ad market. While no sales numbers have been reported yet, a Reynolds spokesman noted that 47% of online queries have resulted in a sale through the service.[66]

Real Estate: Microsoft has announced plans for a Web site for real estate listings code-named Boardwalk (with the reference to Monopoly almost making you think Microsoft has a sense of humor). To be launched in early 1998, the Boardwalk service will allow users to search for residential properties and connect with local Realtors. Marrying its new Internet commerce experience to its financial transaction alliances, Microsoft is working with Countrywide Home Loans to offer on-line lending on the real estate site.[67]

Local Entertainment Guides & Classifieds: Microsoft has spent over $100 million in the last year launching city-by-city on-line entertainment and information sites called Sidewalk, a crucial tool for going after the estimated $15 billion in local classified ads and the overall $66 billion local advertising business each year. Without the space limitations of a newspaper, Sidewalk can provide a wide range of information, from show times to ticket prices to comprehensive reviews, plus restaurant guides and even personalized services to alert customers by email when events of interest are coming to town.[68]

Newspapers see these kinds of guides by Microsoft as a real threat to their existence, especially striking fear into the weekly "alternative press" whose bread and butter are the entertainment listings that Microsoft is targeting. "Bill Gates," argues Edward Canale, marketing director for the Sacramento Bee, "wants to skim the cream off the newspapers' business without paying for real journalism."[69] What worries newspapers most is that many online analysts expect classified ads - what newspapers depend on for a third of their revenue - to be used online as free "content" to draw consumers to other advertising and direct Internet commerce sales. So even if newspapers launch themselves onto the Internet, they will still lose revenue unless they become commerce sites themselves and match Microsoft's technological expertise in online transactions.

Robert Ingle, Knight-Ridder's president of new media, gave a keynote address in the summer of 1997 to a gathering of 500 newspaper executives, denouncing the threat from Microsoft and noting that Microsoft is spending more on new media ventures than the entire newspaper industry combined. A number of newspapers had initially cooperated with Microsoft based on promises from the company not to move into classified ads, yet within the year Microsoft broke those promises, launched its used car ads on Carpoint and announced its planned real estate listings on its Boardwalk site. Added to the indignity, Ingle noted that many newspapers were purchasing software from Microsoft, which in turn was using profits from the software to fund its new ventures to undermine those very newspapers and even hire key reporters away to staff its Sidewalk sites.[70]

Tying it all Together: How Microsoft will dominate Internet Commerce

While Microsoft currently faces competition in each of these individual online markets, it is the only company in all of them, from personal finance to travel to real estate to car sales to local information services. Its technological expertise and deep pockets give it a built-in advantage to begin with, but Microsoft's ability to bundle these on-line services together allows it to repeat its "suite" strategy of linking and cross-promoting its different ventures into one dominant "super-site." Combining customized local versions of Expedia, Carpoint and Boardwalk will give each city's Sidewalk a powerful competitive edge over any rivals. And analysts see Microsoft's breadth itself as a selling point to advertisers. Jupiter Communications analyst Peter Storck argues, "They can package a network with a whole bunch of demographics in one media buy. That's what advertisers are begging for."[71]

The real kicker, however, goes right back to Microsoft's dominance of the desktop. Microsoft's new version of its Internet Explorer 4.0 contains a feature called "active channels" technology to send Web site information directly to the desktop. The software comes with twelve preset "channels" which Microsoft is busy licensing to media outfits and planning to use to promote its own Internet commerce sites. Not only is Microsoft pressuring media outfits for exclusive deals to help reinforce its browser, it is in turn requiring computer resellers to stick with its preset channels as part of its operating system and browser licensing deals[72]. Combined with its massive spending and technological know-how, Microsoft is adding in its usual pattern of monopolistic tie-ins to dominate online commerce.

One other wrinkle is Microsoft's recent investment stake in Comcast Cable, which in turns owns the QVC home-shopping cable channel. QVC's new on-line site, iQVC, is only selling $1 million of goods per month, but it is backed by the QVC experience of over $2 billion in cable sales each year and, as importantly, has experience in fulfilling orders fast and accurately. With its investment in Comcast, Bill Gates announced, "We'll be sitting down and talking out how we can help QVC move and drive forward their interactive activities."[73]

Content and Media Dominance

Even as Microsoft is negotiating to act as an online middle man for as much of Internet commerce as possible, it is also looking to become a supplier of original content itself in the new world of interactive information and entertainment. While on-line media ventures have been notoriously unprofitable in these early years of Internet development, this has in many ways worked to Microsoft's advantage since it is one of the only companies with deep enough pockets to keep experimenting for the formula that works.

Networking the Networks (TV, that is)

Microsoft's most notable failure has been leveraging its original content on the Microsoft Network (MSN) into a stronger position as a service provider, although its 2.3 million subscribers still makes it the second largest Internet service provider behind America Online. But it has continued to invest in original content, from "channels" to Slate magazine, and is launching new content this fall with a range of media partners, including the Disney corporation.[74]

On the other hand, the hundreds of millions invested by Microsoft in its MSNBC venture with NBC has resulted in programming, if not profits, that have won it respect. With an online editorial staff of over 100, its interactive coverage of the news has been hailed by critics as better and more original than CNN's or ABC's news web sites.[75] Microsoft has launched another joint service with Black Entertainment Television, MSBET, to target African Americans on-line.

Microsoft is already inking similar deals with news outlets around the world. In July, Microsoft agreed to develop an online news site with Australia's Publishing and Broadcasting Ltd. (PBL), including Nine Network TV and a magazine publishing empire - all owned by Australia's richest man, Kerry Packer (worth $3 billion). The online service will include news, sports, weather, entertainment and lifestyle shows along with access to financial and retail services, including Microsoft's Sidewalk and Expedia services. One example cited in the advantages of the combination is leveraging Channel Nine's travel shows with an instant link to Expedia's Web sites to book tickets.[76]

Licensing Literature, Hocking History

While creating original content is one priority for Microsoft's Bill Gates, cornering the market on "old media" for resale in new interactive forms is seen as a key role for dominance as well. The prototype for this kind of success comes from Microsoft's sales of Encarta, a CD-ROM encyclopedia which Microsoft created through mixing a second-tier encyclopedia with pictures and multimedia pizzazz. It soon became the best-selling encyclopedia in the world and expanded versions have tied its basic content to web links around the globe.[77]

While none of its follow-up CD-ROMs have quite matched Encarta, it has scored hits with its Cinemania CD-ROM, which bundled together movie reviews, books from top critics Leonard Maltin, Robert Ebert and Pauline Kael, and its Music Central CD-ROM with a similar mix of reprinted reviews and articles about music. Both Cinemania and Music Central have been supplemented with well-respected Web sites to expand their offerings and pull in new CD-ROM purchasers. While it has not occurred yet, there has been suggestions that both might be incorporated into Sidewalk listings.

But the most ambitious (and culturally scary) recycled content endeavor is happening not at Microsoft itself but through a company Bill Gates created himself back in 1989 called Corbis. With early anticipation, Gates began cutting bargain-basement deals with museums like the Hermitage, Philadelphia Museum of Art, and the National Gallery of London for the right to redistribute their works. Corbis has also made outright exclusive purchases of the digital rights to Ansel Adams' photographs, Leonardo da Vinci's notebooks, and, most importantly, purchase of the 16 million photo Bettmann Archive - one of the largest and most important collections of commercial photographs.

With over 18 million images and 120 employees, Corbis is already the No. 1 company in the $500 million-a-year photo licensing business that supplies pictures to books, magazines and Web sites. While the slowness of Internet download times have limited its expansion so far, the company expects explosive growth as everything from business reports to Web pages look to add quickly accessible pictures to snazz up their content, with Bill Gates collecting a toll on each download.[78]

Games and Interactive Entertainment

While it has been working to pioneer multimedia in traditional non-tech areas, Microsoft has also been refocusing on a computer market it had neglected, namely the computer game industry. Partly this new focus is due to the gaming industry's rapidly expanding revenues of $5.8 billion per year[79] (more than Hollywood) which the company is loathe to ignore and partly the focus is due to Microsoft's ideas on combining gaming entertainment, especially on-line versions, with its other online media ventures.

The first step for Microsoft, as always, has been to seize control of the technology standards in order to make sure that whether or not Microsoft's own games win out, it will still be making money from the growth of the industry on its own computing platform. To this end, Microsoft has been investing a lot of resources in beefing up Windows graphics and 3D capabilities with technology it calls Direct X and encorporating software purchased from RenderMorphics. Using a grab-bag of technologies- from Java to video streaming--Direct X is targeting a broad range of professional game design and broadcast video markets.[80]

A key part of its 3D graphics strategy was its $130 million purchase in 1994 of Softimage, the graphics company whose software became famous for its dinosaur animation in the movie Jurassic Park. While the software had been designed for high-powered UNIX machines, Microsoft quickly redesigned the software to run tightly within Direct X specifications on Windows NT. Working with hardware and graphics cards markers to optimize the software, by 1996 Microsoft had SoftImage 3D software delivering as good results on NT machines as on UNIX machines that cost twice as much.[81] In order to reinforce its NT advantage as a 3D development environment, it set out to hire some of the biggest names in the industry, including Pixar (of Toy Story fame) co-founder Alvy Ray Smith who has pioneered some of the most significant advances in computer graphics.[82] Smith and others in Softimage division are working to create an integrated multimedia applications environment called Digital Studio that aims to lock game developers into the Windows NT environment as thoroughly as Visual Studio has locked commercial applications developers into the platform. Already, over 1000 companies are using Softimage tools for game development and interactive-title creation for gaming environments including the Sega, Sony and Nintendo video game systems (environments with sales twice the personal computer market).[83]

Microsoft's own game sales have only been moderate, with continued strength in its long-time top seller Flight Simulator (including acquisition of the company that developed it) and new titles from software partnerships, including Twisted Metal and Warhawk from its purchase of SingleTrac, a game startup by former designers of military flight simulators.[84] It has also established publishing relationships with companies like Atomic Games and Rainbow America. Microsoft has played to its strengths with its purchase, as well, of Exos, which pioneered "force feedback" controls for joysticks. Microsoft is introducing a joystick utilizing the technology in fall of 1997.[85] It is also investing in on-line gaming through its Internet Gaming Zone (purchased from Electric Gravity in 1996) which with 400,000 registered users is one of the stronger contenders in this emerging area.

But Microsoft's real bet on the multimedia market seems to be through its partnership (amounting to an initial $30 million from Microsoft) with Dreamworks, the studio headed by David Geffen, Steven Spielberg and Jeffery Katzenberg. The partnership, called Dreamworks Interactive, concentrated on games tied to high-profile media products, such as the "Goosebumps" game based on the titles by best-selling author R.L. Stine and a number of games based on Jurassic Park: The Lost World (many of which have been praised more than the movie). Dreamworks Interactive is also marketing "Dilbert's Desktop Games," a collection of games tied to the popular Dilbert character.[86]

However, Microsoft has made it clear that many of these investments are just keeping time until the convergence of personal computers and television bring interactive computing into its own. Microsoft has made a direct investment in the main Dreamworks studio as well, with Microsoft's co-founder Paul Allen investing a hefty $500 million of his personal fortune in the studio. The Microsoft leaders have made it clear that the company is in prime position as movie entertainment converges with interactive multimedia. Microsoft is pushing the control of the high-speed access to the home that will make that possible.

Controlling Access to the Home: WebTV, Cable and Satellites in the Sky

WebTV and the dominance of Consumer Electronics

When Microsoft announced in April of this year that it was paying $425 million for Web TV Networks, a company with 56,000 customers that had made a few small inroads selling a cheap machine to surf the Internet without owning a computer, many commentators saw it as one more shot in the personal computer war with Microsoft placing a side bet on WebTV. With rivals like Netscape, Sun and Oracle lining up behind "network computers," Web TV looked to be a nice piece of hardware to outflank them on accessing the Net cheaply. At one level that was true, but the advantages for Microsoft go much deeper than that.

Microsoft's main goal is to merge WebTV's access standards and technology with its own stripped down version of Windows called Windows CE. Microsoft had previously targeted Windows CE for handheld computers but was now making a large push to make CE the operating system of the whole consumer electronics world, from cable set-top boxes to DVD music players to Internet telephones. With WebTV adopting Windows CE, the consumer electronics companies that build the hardware for WebTV, like Phillips and Sony, would be encouraged to adopt Windows CE as a general multi-purpose operating system for all their consumer goods - a potential market far larger than the personal computer market.

With Microsoft supplying the development tools, new "smart" consumer goods would become cheaper and easier to make while ensuring that machines could communicate with each other - more and more important over time - only on platforms controlled by Microsoft[87]. Microsoft also recently invested in Navitel, the maker of an Internet telephone which has adopted CE as its standard and could be integrated into WebTV. Creating a beachhead in the projected Internet-governed phone system of the future thereby becomes a major possibility for Microsoft.

Comcast and Company: Investing in Cable, Defining the Standard

Of course, the primary consumer item Microsoft wants to have Windows CE set the standard for is the cable set-top box that many people expect will control high-speed access to the Internet from homes across the country. Cable connections to the home are expected to be more than twenty times as fast as the fastest modems today - a speed that will suddenly make all the investments Microsoft has made in interactive 3D graphics incredibly valuable to the whole media industry.

But to accomplish that, Microsoft wants to control the software in the cable box - thus its $1 billion investment (an 11.5% stake) in Comcast Corp., the fourth largest cable company in the country, and its negotiations with US West, Time Warner, Telecommunications Inc. (TCI) and Cox Cable for possible investments of similar magnitudes. With these major cable investments, Microsoft is seeking a commitment by them to support the WebTV/Windows CE standards for connecting cable set-top boxes to the Internet. This commitment by Comcast and other cable companies is crucial since there are moves by a consortium of cable companies called Cable Labs to adopt open standards for all cable set-top boxes--a development anathema to Microsoft. With deals that are likely to include the Microsoft Network as well, Microsoft may be about to see all its investments come together in a highly profitable alignment.[88] Even if Microsoft is not able to control the exact standards adopted initially, it is leveraging itself into a position to control even "open standards" in much the way it has been able to "embrace and extend" other standards like Java.

The next step is Microsoft's effort to have television broadcasters adopt digital TV standards promoted by Microsoft, Intel and Compaq that would allow the bundling of interactive content with any television show as long as the viewer has the proper operating software (meaning Microsoft's). Microsoft is already demonstrating a version of "enhanced television" this fall that depends on its new Windows98 operating system and special digital circuitry. UPN's "Moesha," the WB's "F/X," and USA Network's "Pacific Blue" have all agreed to broadcast with the new system that allows the specially equipped computers to view cast biographies, chat with other viewers and even buy knockoffs of stars' clothes as they watch the show. Combined with WebTV/CE standards, Microsoft is building a recipe for the complete convergence of computers, TV and Internet commerce.[89]

Teledesic: Domination from the Skies

But Microsoft's control of the standards for Internet access over cable is apparently not enough; Bill Gates has personal plans to own a worldwide system of satellites beaming Internet access to homes anywhere in the world. Rather than Microsoft encircling the world, Bill Gates is investing out of his own pocket in a project called Teledesic, a plan to launch 288 low-orbit satellites that will relay Internet traffic to any point on the earth. Gates and fellow billionaire Bill McCaw (who made his fortune early in the cellular phone industry) are the primary partners in this $9 billion venture, with AT&T and Boeing each receiving a smaller stake for their contracting role in the operation.[90]

The revolutionary part of Teledesic's approach is that traditional stationary satellites are so high up that delays in transmission make them less useful for high-bandwidth transmission like the Internet, so Teledesic will have to coordinate low-orbit satellites careening 435 miles above the earth at 16,740 miles per hour. Using government-financed technology left over from Star Wars experiments, Boeing is helping them solve the problem and get their satellites launched by 2002. That is when the partners want to start service to anyone with a satellite dish (that need be no larger than a dessert plate).[91]

The irony is that this plan to create a massive worldwide Internet access service controlled by two of the richest men in the world has been assisted by the U.S. government with a complex give-away of radio spectrum that amounts to twice the total spectrum controlled by all of the country's radio and television stations put together--without the government being paid a cent for this favor.[92] In fact, the government lobbied hard at the World Radio Conference, the world governing board for operating such a satellite system, to help Gates and McCaw get approval for their venture.

So with government-financed research and free radio spectrum courtesy of U.S. taxpayers, Bill Gates will be adding the final touch to his computer network domination with the most comprehensive broadband Internet access system in the world--an access system that will no doubt enhance Microsoft's monopoly in the computing world.

Conclusion and Recommendations

As noted at the beginning of this report, many of the monopolistic advantages enjoyed by Microsoft are due only partially to predatory abuses by the company; many of those advantages are results of the "network effects" to any dominant player in an area of technology where customers seek consistency and compatibility between converging technologies and connected markets.

Microsoft has used its dominance of the operating system standards--the "field of competition" in many ways--to gain an unfair monopolistic advantage against application competitors trying to compete on the standards controlled by Microsoft. It has used predatory pricing, including free giveaways of its software through bundling and Internet distribution, to overwhelm competitors who do not possess similarly deep pockets, and it has used exclusive licensing deals to completely cut off competitors from access to markets such as computer resellers tied to Microsoft through those exclusive deals.

For twenty years in the 1970s and 1980s, the federal government rigorously supported open technology standards and the end result was the innovative Internet. In recent years, the federal government has stepped back from that role as guardian of open standards and the result has been rapid monopolization by Microsoft. It is NetAction's position that the federal government must step back in to vigorously defend open standards and open competition, while carefully guarding against even the smallest abuses by Microsoft since even minor abuse by such a dominant player magnifies its advantages due to the network effects of the new economy.

In conclusion, NetAction offers the following recommendations as appropriate means of restraining the negative aspects of Microsoft's dominance:

  1. Divestiture: At a minimum, Microsoft's Windows operating system monopoly should be split off into a separate company from the application and Internet divisions. This would end the inherent opportunities for abuse of one company competing in application markets while controlling the "field" of competition as well. It may also prove necessary to separate Microsoft's application and Internet divisions.

  2. Restrain Predation: Stop Microsoft from giving away browser products. Since $0.00 is below any measure of cost, it meets the traditional test for predatory pricing (sustaining below cost pricing with monopoly profits in order to drive out competition and then raise price).

  3. Licensing: Microsoft should be forced to discontinue any licensing practices (NT, database server, etc.) that restrict customer dealings with competitors or require customer use of MSFT products. Exclusive dealing and tying purchase of one product to purchase of another should be unlawful for this monopolist where linked to the operating system.

  4. Open Standards: The government should more vigorously support open standards processes and endeavor to defend open standards developed through industry standards processes from anticompetitive abuse by Microsoft.

  5. Consumer Involvement: The government must establish processes to ensure participation by Internet users in public policy decisions effecting consumer use of the Internet, including appropriate mechanisms for addressing complaints about product marketing and the quality and reliability of Internet services.

With these measures, we can begin restoring the promise of open standards and the dominance by the best available technology, not merely whatever technology furthers Microsoft's profits and strategic dominance.


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