Micro$oft Monitor

Published by NetAction Issue No. 36 October 30, 1998
Repost where appropriate. See copyright information at end of message.


Microsoft On Trial: A Mid Game Analysis
Some Thoughts on How a Software Company is Born and Dies
About Micro$oft Monitor

Microsoft On Trial: A Mid Game Analysis

By Nathan Newman, NetAction Project Director

"Gates delivered a characteristically blunt query: 'How much do we need to pay you to screw Netscape? This is your lucky day.'"

- note sent by American Online executive in 1996 after meeting with Bill Gates

Just when you expected the Microsoft trial to be a dry economic debate over technology, it has instead played more like a geek Mafia trial detailing threats, shakedowns and payoffs by Microsoft and its don Bill Gates. Due to the promiscuity of e-mail and the "rolling over" of former business partners like Apple and AOL, what has emerged in the last few weeks is a rather rich and sometimes darkly funny narrative of how the Redmond Costa Nostra developed the art of the "offer you can't refuse."

More seriously, the trial has made clear that no single company can control so many aspects of computer software without abusing that power in monopolistic ways. Whether we call the phenomena "bundling" or "network effects," the reality is the interdependence of software systems leaves smaller players hostage to standards setters like Microsoft. Microsoft used every division at its disposal - including operating systems, applications, Internet services, and browsers - to knock out the emergent Netscape threat.

A lot of ink in the press has been spilled analyzing the mid-1995 meeting where Microsoft sought, Munich-style, to carve up the Internet map with Netscape. The deal appeared to be a guarantee for Netscape to keep producing Internet software, as long as it ceded the core underlying standards to Microsoft. Netscape would get to keep a rump-state version of its Internet kingdom in exchange for Microsoft not obliterating them.

After Microsoft sought to deny this version of the meeting, as detailed by Netscape's James Barksdale, the government produced a slew of internal Microsoft memos talking about avoiding "cold or hot war with Netscape" and "moving Netscape out of the Win32 (Windows 95) Internet client arena." The bottom-line purpose of the meeting, as Microsoft executive Dan Rosen wrote to Bill Gates, was "to establish Microsoft's ownership of the Windows Internet client." And Bill Gates would gush, in his oddly cute and sinister way, "There is a very powerful deal we can make with Netscape. I would really like to see something like this happen!!"

Of course, meeting to chop up markets like Hitler chopped up Czechoslovakia is exactly what antitrust law is supposed to prevent. Capitalism's own Godfather, Adam Smith, once described every meeting by business competitors as an incipient conspiracy to screw the consuming public. Microsoft executives can color this meeting anyway they like, but the fact that it happened is prima facie evidence of monopolistic intent by the company.

In the end, Netscape declined the deal and Microsoft amply demonstrated its power to issue the technological death threats needed to take over the whole battlefield. Confirming what many Mac enthusiasts had suspected, evidence from Apple's Fred Anderson, the company's Chief Financial Officer, showed that Apple would have preferred to cut a deal with Netscape but was bullied into a deal with Microsoft under threat of technological death. The agreement by Apple to make Microsoft Explorer the default Internet client, announced by Steve Jobs to booing Mac users, was not merely the quid pro quo for Microsoft's $150 million investment, but the trophy of Microsoft's threat to stop producing new versions of Office software for the Mac. According to Anderson's notes at the time, "Apple needed to ensure that Microsoft would continue to provide MS Office for Mac or we are dead. They were threatening to abandon Mac. Trading card was making Internet Explorer Default browser."

Of course, the Apple market was just a sideshow to the larger fight for domination of the Windows marketplace, where Microsoft used its home field advantage - i.e. owning the field - to leverage deals to knock Netscape out. Using its licensing control of the Windows operating system, Microsoft would condition those licenses on PC manufacturers including its Explorer browser on the desktop. As importantly, as NetAction noted in reports both last year and this Spring [see http://www.netaction.org/msoft/browsers.html and http://www.netaction.org/msoft/browsers2.html], Microsoft was able to pressure Internet Service Providers to distribute Explorer. Since most consumers stick with the browser of their ISP, this was crucial to Microsoft's path to knocking out Netscape.

And no prize was more important than America Online with its millions of customers. Testimony by AOL Senior Vice President David Colburn made it clear at the trial that Explorer was chosen by AOL not because of inherent advantages over Netscape but because Microsoft's control of Windows gave the company leverage over AOL. In fact, AOL would have preferred to use Netscape but Microsoft was willing to give an AOL icon a place on the Windows desktop in exchange for AOL distributing Explorer - a leveraging of a monopoly offer unavailable to Netscape. As Colburn wrote in testimony, "AOL would not have been willing to negotiate a browser license with Microsoft had Microsoft not indicated a willingness to bundle and promote the AOL client software in some form of Windows."

In exchange, Microsoft gained an agreement by AOL to "strictly limit its distribution, promotion and advertising of Netscape Navigator." So not only did Microsoft use its desktop monopoly to win a specific contract, it used that leverage to further block its rival from even advertising the availability of an alternative. And if dumping its browser on the marketplace for free was not enough, Microsoft dipped into its financial war chest to actually pay AOL 25 cents for each American Online subscriber who converted to Microsoft from any rival - read Netscape - with a $600,000 bonus for doing so quickly. "I was told," testified Colburn, "that Microsoft had no limitation on what it could spend to gain market share for Internet Explorer."

One thing AOL's Colburn made clear was that it was the threat of Microsoft's MS Network online service, featured prominently in Windows, that forced AOL to cut the deal with Microsoft to gain a place on the Windows desktop as well. The "failure" of MSN - meaning its emergence as only one of the top ISPs rather than crushing all competition - has been pointed to by many Microsoft defenders as showing that Microsoft does not really have monopoly power. But it is clear from Colburn's testimony that Microsoft used the threat of MSN to gain in exchange strategic control of the browser market - the kind of anticompetitive piece sacrifice that only monopoly chess players get to play in the business world.

Two weeks of trial testimony have stripped away Microsoft's public relations defenses of its monopoly. It is not the testimony of business enemies like Netscape and Sun but that of customers and supposed business partners like Apple and America who have painted a picture of a monopolist using control of its range of products to threaten, bribe and sell at a loss if need be to destroy competitive rivals.

Even as the Department of Justice trial proceeds, Microsoft is facing other court proceedings about its monopoly practices by Bristol over its Win NT division, by Caldera over its core Windows-DOS monopoly, and by Sun over the role of Java in its Internet strategy. As discovery and testimony moves forward in each of these cases, the remaining shreds of Microsoft's PR defenses will no doubt fall. The curtain has been pulled and the Wizard of Redmond has been revealed not as the technology-magician of legend but as a manipulator of fear and threat at the expense of open competition.

Of course, this report is only a mid-game update. It is quite possible that the judges in all these cases may issue no more than slaps on the wrist to Microsoft, leaving the populace wiser but without specific relief from Microsoft's monopoly practices.

But debates over technology will be with us for years and any wisdom gained from this trial will make a difference as citizens and consumers gain a better understanding of how monopoly players can distort and undermine technology markets. That wisdom is the key step in citizens demanding the open standards and democratic access to technology that advocates like NetAction see as the only route to broad- based innovation that serves all citizens.

Some Thoughts on How a Software Company is Born and Dies

By Phil Shapiro

People who use computer software might want to know a little more about how software is made. A software company is born when a single person has a dream to bring a software program to life.

With the help of friends and supporters, the software program comes to life over a period of months. The excitement is palpable when the process nears completion, for software, like music, is created from thin air. Software is a product of the imagination.

On the flip side of the coin, here's how a software company dies. Late at night the founder tosses and turns in bed, and realizes that no infusion of time, work or money can keep the company alive. While the birth of a software company is often a public event, its death is quiet and private.

What isn't private, though, is the dream that died. The death of dreams has public effect. When a software company shuts down, the loss is of a dreamer. Future ideas that otherwise might have a chance of seizing that dreamer's imagination, will no longer have the power to do so.

The issue with the Microsoft antitrust case is much less about browsers than about dying dreams. Dreamers who would otherwise be creating software have met that late-night moment, and chosen another road rather than risk competing with Microsoft.

Because our economy depends so much on software, notice must be taken when fewer and fewer software companies are creating new software. As in ecology, diversity in the software marketplace strengthens the whole.

We are strengthened as a nation when the number of dreamers increases, not decreases. Sadly, because of Microsoft's business practices, there are fewer and fewer people choosing to pursue their dreams for new software. The magnitude of that loss can never be known, because we can never know about the dreams never dreamt.

Phil Shapiro's web site is at: http://www.his.com/pshapiro/

About The Micro$oft Monitor

The Micro$oft Monitor is a free electronic newsletter, published as part of the Consumer Choice Campaign http://www.netaction.org/msoft/ccc.html. NetAction is a national, non-profit organization dedicated to educating the public, policy makers, and the media about technology-based social and political issues, and to teaching activists how to use the Internet for organizing, outreach, and advocacy.

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