Gates cogently answered questions and idly picked at a bowl of nuts, while in Washington, Attorney General Janet Reno and the head of her antitrust division, Joel Klein, were charging Microsoft with playing a game of anticompetitive blackmail to force computer manufacturers to favor its Internet browsing program. Only once, when asked his impression of the recent anti-Microsoft campaign of consumerist Ralph Nader, did Gates comment on what must have been simmering somewhere in his multibillion-dollar brain. ““It’s kind of funny that it’s the computer industry, where the prices come down and products get better and nobody has a guaranteed position, that’s the one that somebody would look into,’’ he said.
Though ostensibly referring to Nader, his why us? complaint may well have been directed at the latest villain in Bill Gates’s ever-expanding collection of threats to Microsoft’s phenomenal rise to power and riches: balding, soft-spoken 51-year-old Assistant Attorney General Klein, who, like His Billness, is regarded as brilliant, if a bit geeky. After eight months as acting head of antitrust, Klein was confirmed in July, and everybody has been pondering his willingness to take on a company regarded by some as a monopolistic thug and by others as the paragon of American business. The answer came Monday, and nowhere in his statement did Klein use the word ““paragon.''
Does this portend doom, ruination or even a bad quarter for Microsoft, the 22-year-old Redmond, Wash., firm whose stock-market valuation is roughly the same as those of GM, Ford and Chrysler combined? Not necessarily. Klein’s charges deal with only one aspect of the firm’s far-ranging software empire, the way the company, um, encourages PC makers to include Microsoft’s Internet Explorer browser on the computers they sell. But Klein made it clear that his office is investigating other areas where Microsoft may be competing illegally, including last summer’s eyebrow-raising alliance with Apple, which benefited Microsoft at the expense of its browser rival Netscape.
Can a savvy jab artist really knock Microsoft off course, that course being a methodical increase of power radiating from the most valuable monopoly in computing–the operating system that controls the vast majority of personal computers on our pale blue dot? Microsoft’s success has plenty to do with world-class management, technical wizardry and just plain hard work. But it has never been shy about leveraging its Windows OS to extend its power. Consumers like the low prices, but competitors complain. ““Microsoft is a great white shark that knows no boundaries,’’ says Mitchell Kertzman, CEO of Sybase, whose software competes with Microsoft. ““All it knows is its appetite. When it gets hungry, it eats.''
Klein’s predecessor, Anne Bingaman, tried to bring Microsoft to ground, but it was she who hit the dirt. In 1995 she found herself in the embarrassing position of actually being on Microsoft’s side when federal Judge Stanley Sporkin rejected a Bingaman consent decree as being too weak. Sporkin’s ruling was later overturned, binding Microsoft to follow an agreement that many considered toothless. Despite Bingaman’s later victory, when her objections held up Gates’s planned purchase of financial-software leader Intuit (maker of Quicken), Microsoft seemed headed into the millennium with a sense of invulnerability.
For a brief period, Microsoft seemed threatened by the Internet’s rapid growth and particularly the fact that in seemingly no time, upstart Netscape had grabbed the crucial browser market. At first this failure seemed to vindicate Gates’s longtime assertions that in the white-water rapids of high tech, no vessel is swamp-proof. But Gates was able to upgrade Microsoft into an Internet company. Meanwhile, the company kept extending its domain into areas ranging from travel transactions to cable television.
Competitors insisted that the success came not solely from merit but also from unfair use of its dominance in Windows. This is an important distinction. There is nothing illegal about simply being big and powerful, but it is verboten to use a dominant power in one area to force people to accept products in a second area. With that in mind, Microsoft’s foes began to pin their hopes on the government. With lawyer Gary Reback as point man, they set out on a dual campaign–to publicly spread their view that Microsoft competed unfairly and to provide evidence of the same to the Justice Department.
Now it’s Gates v. Klein. Whom do you like? Gates is a Harvard dropout; Klein got through Columbia and Harvard Law. Gates is the world’s richest private citizen, newly moved into a $60 million lakeside palace. Klein is a civil servant residing in a modest colonial on the outskirts of the District of Columbia. Gates is a swashbuckler. Klein is known as a cautious strategist who likes to maintain a winning record –““My style is, I am careful,’’ he affirms. The two have never met. But for months now, while Gates has been going about the business of running Microsoft, Klein, a veteran of 10 Supreme Court appearances, has been gathering evidence. On Oct. 15 his team met with Microsoft and told it what Justice might do. And last Monday, while Gates was attending the cyber-glitzy Agenda conference in Phoenix, Klein did it.
Ironically, Klein’s action involves an alleged violation of the supposedly lame 1995 consent decree. Microsoft’s current policy is to force all Windows licensees to include Explorer in the computer, whether or not they also offer customers Netscape’s browser, Navigator. Klein’s petition says this is ““precisely the sort of improper use of [its] market power to protect and extend its monopoly that [the consent decree] sought to prevent.’’ He wants Microsoft to stop forcing manufacturers to include Explorer, inform current customers how to wipe Explorer off the system and modify its agreement with partners so that they are free to blab to government lawyers without informing Bill G. If Microsoft doesn’t comply, he wants the court to fine it an unprecedented million bucks a day.
Klein has released a stackful of exhibits to document his claims of Microsoft bullying. The most damning tells what happened when Compaq Computer tried to favor Netscape’s browser by placing its icon on the desktop and removing the icon for Explorer. Microsoft quickly moved to terminate Compaq’s license to distribute Windows 95. Selling Compaqs without Microsoft operating systems is like selling Hondas without motors. How did the PC maker react? ““We went back and reworked the code so that we put the [Explorer] icon back on,’’ Compaq exec Stephen Decker told the Feds.
Microsoft claims its actions were perfectly proper, and will argue as much in court. The Internet Explorer, says Microsoft lawyer Bill Neukom, is not really a separate product but an operating-system enhancement to Windows 95. And since the consent agreement specifically allows Microsoft to improve its operating system, there’s no problem in forcing Explorer on users. Windows, he explains, is not a ““Chinese menu’’ where manufacturers can pick and choose what parts to offer.
And here’s where things get sticky for Joel Klein. True, Microsoft might have a hard time proving Explorer–which is also offered as a separate product and directly competes with Navigator–is really part of Windows. Indeed, observers think Klein will probably win this round. But what about Microsoft’s next operating system, Windows 98, which promises to tightly integrate browsing into the system itself? From Netscape’s point of view this is more anticompetitive–but if Joel Klein stops this integration, he’s dictating what is and isn’t a software benefit. ““For us to have an operating system that doesn’t connect to the Web would be like telling us that our operating system can’t access the hard disk drive,’’ argues Microsoft VP Brad Chase.
While Microsoft’s arguments may be self-serving, the high-tech industry at large gets very nervous at the prospect of government–not only in the form of Joel Klein but six state attorneys general and the European Union, all of which are investigating Microsoft–deciding what is and what isn’t appropriate innovation. When Gates finally addressed the Agenda crowd on Tuesday, he hit this theme hard. ““Are we allowed to continue to innovate in products, and in Windows itself?’’ he asked.
Microsofties have yet another complaint with Klein–that he’s more interested in helping their competitors than the consumers Klein is charged with protecting. So far, says the Redmond crowd, computer customers have had a solid run of more powerful products at lower prices–and Microsoft Explorer is free. Klein’s defenders scoff at this argument. ““That is a classic definition of predatory pricing,’’ says Ralph Nader. ““Once they get rid of Netscape you will see the difference.''
If it were only that easy to see. While regulators like Klein must rely on legal and economic precedents, the possibility exists that the software field may be ruled by a different set of principles. Who knows whether a company like Microsoft–which manages to reap fantastic margins while selling low-priced products–might be able to keep prices low even as it immolates key competitors? We know that there’s an unprecedented boom of innovation in the high-tech field–would there be more if not for Microsoft’s dominance?
Joel Klein understands that these are delicate issues. And it’s clear he respects Bill Gates. Yet he has determined that by using Windows to promote its other ventures, Microsoft has crossed the line. While Klein won’t comment on his future plans, he says he is involved in ““an iterative process.’’ ““This is like playing batting practice,’’ says Gene Kimmelman, head of Consumers Union. ““If you knock the first one out of the ballpark, then you move on.''
Bill Gates, meanwhile, is unbowed, unrepentant and unwilling to change his corporate behavior until the day that a court orders him to do so. Can you blame him? Consider the effect of Justice’s suggestion of a million-dollar-a-day fine. During this week when Klein and Reno delivered their broadside against Microsoft–presumably a black, black time in Redmond–the company’s stock went up 3 1/8 points, meaning that Gates himself added $846 million to his net worth. If this was the worst Joel Klein could offer, no wonder Bill Gates wasn’t distracted. But unfortunately for Microsoft, Janet Reno’s trustbusting deputy is far from finished.
Operating systems* 1996 MARKET SHARE Microsoft (Windows and DOS) 87% Apple 5.6% Other 7.2% Web browsers 1996 MARKET SHARE Netscape 54.6% Microsoft Explorer[t] 29.5% Other 15.8% Business performance 1996, IN BILLIONS COMPANY REVENUES MARKET VALUE** General Motors $158.0 $50.7 IBM 75.9 98.6 Hewlett Packard 38.4 67.6 Microsoft 8.7 164.5
*DOES NOT INCLUDE SERVERS. [t] INCLUDES AOL BROWSER VERSION 3, BASED ON EXPLORER. **PRICE PER COMMON SHARE MULTIPLIED BY NUMBER OF COMMON SHARES OUTSTANDING. NUMBERS DON’T ADD TO 100 DUE TO ROUNDING.
SOURCES: BLOOMBERG, IDC.
