The Microsoft-Intuit Merger: The Intervention that Worked
and the Dangers Today from Microsoft's Monopoly Practices in
the Online Financial Marketplace

The Intuit Deal: Microsoft's "Pot of Gold"

When Bill Gates decided in 1994 that Microsoft should seek to become a central player in a transformed global financial system, he described the opportunity at a Microsoft strategy session as a "pot of gold." In the middle of the session, he exclaimed, "Get me into that and God damn, we'll make so much money."[1] From that attitude, Microsoft set out to dominate the emerging electronic banking field by every means possible.

Microsoft's own personal finance software, Microsoft Money, was a dismal second in an area dominated by Intuit's Quicken software which had over a 70 percent share of the finance software market. Intuit dominated the market not just because of its ease-of-use or early entry into the software category--a critical advantage in the software industry in any case--but also because of key alliances in the financial system.

Increasingly, Intuit was tying its dominant Quicken interface standard into the financial standards of the banking world. With an installed base of almost seven million software customers, Intuit had launched new ventures such as the Intellicharge Visa credit card, and had almost 300,000 bank customers paying bills electronically in 1995 with Quicken. In 1994, Intuit had acquired the National Payment Clearinghouse Inc., an electronic bill payments system integrator whose staff had helped create the Cirrus national automated teller machine network. Intuit also sold TurboTax, a top-rated tax preparation program. If Microsoft had proven that dominance of the operating system would give it an overwhelming advantage in selling strictly computer-based software, Intuit was demonstrating that its early entry and dominance of the nexus between the banking world and computers gave it a persistent advantage in the arena of personal finance software.

In 1992 as an also-ran in the database market, Microsoft had spent $175 million to acquire Fox Software--at the time the largest software merger in history. In 1994, Microsoft made a $1.5 billion offer to acquire Intuit (an amount that would rise to $2 billion) and buy its way into dominance of the personal finance software market and, in combination with Microsoft's own strengths, control of electronic banking. To placate critics, it offered to sell its finance software, Money, to Novell Corporation.

Soon after the deal was announced, the Department of Justice came out in opposition to the merger, citing the anticompetitive effects on the personal finance software market. The Justice Department would argue that, "If consummated, the proposed transaction...would likely add to the dominance of the number one product (Quicken), would weaken greatly the number two product (Money), and would substantially increase concentration and reduce competition in the personal finance/chequebook software market."[2]

Worse, since entry into the personal finance industry was "difficult, expensive and slow," the DoJ argued that "potential new competitors, if any, would find it even more daunting to compete against Quicken, the number one product in the market, if it were in Microsoft's hands." It pointed out that Microsoft had, with its considerable advantages, been trying to break in for four years and had yet to turn a profit on its finance software investments. Moreover, the DOJ noted that H&R Block had decided to exit the market because of the planned merger and had sold its finance software subsidiary, Meca Software, to Bank of America and NationsBank in May 1995.[3]

Many critics at the time saw the sale of Microsoft's Money software to Novell as a distracting ploy that would be a figleaf on an anticompetitive dominance by Microsoft. The fact that Novell's Chief Executive Robert Frankenberg said publicly at the time that it preferred to license Quicken than own Money just highlighted how much more preferable Quicken was over Money, with QuickenØs vast installed base and ties to the banking community. As it has done many times since (most recently in its investment in Apple Computer), Microsoft was seeking to prop up artificial competition to justify its own monopoly position in a market.

Adding to critics' condemnation of the proposed merger were Microsoft's plans to introduce its new Microsoft Network, itself to be tied into its new Windows 95 operating system. If the dominant financial software was integrated into both the operating system and the new online service, many worried this would put the final nail in the coffin in competition for financial software and, conversely, strengthen Microsoft's monopoly on the desktop. "If they are to put the Microsoft Network in Quicken into Windows 95," said MECA CEO Paul Harrison at the time, "we feel that would give them a tremendously unfair advantage in providing the consumer with a gateway to a host of financial and nonfinancial products and services."[4]

In this sense, the Justice DepartmentØs interest in the merger was much less about the specific market for the then-$29 Quicken software than in the much larger electronic marketplace to which it would connect users. In this fight was the early echo of the present investigation of Microsoft over the role of Internet browsers as a tool for dominating Internet commerce. And again, the worry was that Microsoft's practice of "integrating" whole categories of software into its operating system had stifled competition repeatedly in the personal computer industry. Back then, as now, many critics of the Department of Justice focused too much on the single piece of software at issue while ignoring the much broader underlying issue of how interfaces, from operating systems to financial software to Internet tools, are a critical element of market domination in the new information economy.

Just as there are defenders of Microsoft today, there were critics of the Department of Justice in seeking to block the Intuit merger. Some of the Microsoft defenders are the same; one example was House Speaker Newt Gingrich, who assailed the DoJ probe then, arguing, "I think we now go out and kill American jobs, creating problems, because the Standard Oil model of monopoly is almost impossible to create."[5]

And many of the arguments were the same: most pervasively that government interference would cripple Microsoft's ability to innovate and sabotage its role in promoting standards that advance the whole industry. Many argued that only a Microsoft/Intuit merger could create the critical mass of market power to advance home banking. One of the most prominent defenders of the Intuit merger was Richard K. Crone, senior manager of the Center for Electronic Banking at KPMG Peat Marwick: "We really need a company with the size and resources of a Microsoft in order to make the electronic connection."[6] Krone and others argued that without Microsoft, few people at home would get comfortable with online commerce, so Microsoft's monopoly role was indispensable to the advancement of all online commerce.

On May 20, 1995, Microsoft announced that it was abandoning its planned acquisition of Intuit in order to avoid what it saw as a protracted and expensive fight with the Department of Justice.

Next: The Results of the Blocked Microsoft-Intuit Merger

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