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. 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 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 loath 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.
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. 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. 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. 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. 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.
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.
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.
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.
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.
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.
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. 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." 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. 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.
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.
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.
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. 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. 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. 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.
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.
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. 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.
Next: From Software to Hard Cash: Controlling Financial Transactions on the Internet
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