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Before he
installed Windows 95, John Dodge connected to the Internet using software
from a Microsoft competitor, CompuServe's Internet in a Box. Not
anymore—Windows 95 silently disabled a key piece of his setup and made
it too difficult for him to reinstall it.
Dodge is no novice. He is senior executive editor of the trade journal
PC Week and so had access to the highest-level support engineers. But life
is short and even software professionals learn to take the path of least
resistance—in this case, the path leading to Microsoft. He has become
a regular user of the new Microsoft Network, though he has trouble with its
Internet features.
Still, he believes Microsoft executives when they deny trying to gain
market share by sabotaging competitors' software. He just wonders whether
Microsoft "has a full appreciation of its actions in the market place."
There is reason to believe that Microsoft does.
Microsoft
vs. the World
The Government's lawyers are
engaged in the third major phase of an investigation that may prove to be
the most important, and the most difficult, in the century-old history of
antitrust law. Its target is a scrappy, young, fast-moving company with a
mere 18,000 employees—a fraction of the size of I.B.M. and A.T.&T.,
the last great subjects of antitrust action. Microsoft does not control a
manufacturing industry (as I.B.M. did), a natural resource (as Standard Oil
did) or a regulated public utility (as A.T.&T. did). Microsoft's strategic
monopolies—for it does possess and covet monopolies, despite vehement
denials from its lawyers—are in a peculiarly subtle and abstract commodity:
the standards and architectures that control the design of modern software.
In a historical eye blink, as the technologies of computing
have come to pervade the world's economic life, Microsoft has turned 20 years
old. When Ronald Reagan became President, Bill Gates's new company was an
unincorporated partnership with accounts kept in handwritten ledgers. Apple
was a big new personal-computer company, worth $3 billion; I.B.M., the mainframe
giant, was cobbling together its first personal computer out of parts from
outside suppliers. By 1990, just a decade later, Microsoft had become the
world's richest software company, though it had no leading product in any
important category but operating systems. Today nearly half of the world's
total P.C. software revenue goes directly to Microsoft.
"I personally believe that Microsoft is the most powerful economic
force in the United States in the second half of the 20th century," says
Eric Schmidt, chief technology officer of Sun Microsystems—a minicomputer
and networking company whose business used to be remote from Microsoft's
but now finds itself under direct competitive pressure. Some of Microsoft's
control over computing, at all levels, is obvious. Much, however, is invisible.
Even longtime insiders are just beginning to understand the nature of that
power: how Microsoft acquired it, preserves it and exercises it.
"The question of what to do about Microsoft is going to be a
central public policy issue for the next 20 years," says Mitchell Kapor,
the founder and former C.E.O. of Lotus Development Corporation—once
the leading P.C. software company. "Policy makers don't understand the real
character of Microsoft yet—the sheer will-to-power that Microsoft
has."
The vast majority of the world's personal computers—estimates
range from 80 percent to more than 90 percent—run on Microsoft software
from the instant they are turned on. Yet, pervasive as P.C.'s are now, Microsoft
has made clear that they are only the beginning. The company is working toward
wallet computers that carry digital signatures, money and theater or airplane
tickets; toward new generations of fax machines, telephones with screens,
and car navigation systems; toward Microsoft-run interactive television boxes,
office networks and wireless networks, and, most potently, toward an aggressive
Microsoft role in the Internet itself.
By making connections among all these levels of modern computing,
and by exerting control over the architectures that govern those connections,
Microsoft is in the process of transforming the very structure of the world's
computer businesses. "Microsoft is imposing a new verticality on the industry,"
says Gary Reback, a Silicon Valley technology lawyer who represented a group
of anonymous Microsoft rivals in the antitrust proceedings. "Bill's been
able to exploit the market far better than anybody else has, and I think
that's because he intuitively under stands what enormous power he has and
how to exploit that power."
It is a software company with the broadest possible understanding
of software: not just computer code but books, news services, music,
movies, paintings, maps and directories of people and businesses. It believes
that you will buy all these on line, and it intends to deliver them. With
its new Microsoft Network, providing both an on-line service and Internet
access, it is focusing on electronic financial-transaction processing—which
is to say, all electronic commerce; which is to say, at least in some visions
of the future, pretty much all commerce. "Basically what Microsoft
is trying to do is tax every bit transition in the whole world," says a senior
executive of a competing software company. "When a bit flips, they will charge
you."
Its profit margins are staggering by the standards of manufacturing
companies—it salts away about a quarter of every dollar that comes in,
compared with about 3 cents for Apple. It sits on an enormous reserve of
cash. Among modern corporations it has been an unparalleled generator of
personal wealth. Never mind that its founder and chairman may on any given
day be the world's richest person; the third-richest Microsoft executive,
Steve Ballmer, owns close to $3 billion in Microsoft stock, and 2,000 or
more of its employees have be come quick millionaires, creating a remarkable
new class structure in Seattle's social and political life. In a less-charged
era, Gates and Ballmer both occasionally joked about their goal of world
domination. Now they are more careful. Microsoft's people are taught to avoid
using the word dominate in public discussion of the company's role in any
part of the software business; the preferred word is lead.
There are many, many articles
that say Microsoft is about to fail," Gates tells me in a hasty interview
on the eve of a vacation in China. (Only later does it occur to me that he
must have Satan's own clipping service.) "Those two extremes are silly beyond
belief. We won't fail tomorrow, and we don't have a guaranteed future. That's
just logical." It has become an article of faith—with considerable help
from Microsoft —that no credible threat exists to its monopoly in operating
systems for personal computers or its rising dominance in all P.C. software.
This summer, during the orchestrated build-up for Windows 95, Wall Street
found that Microsoft is the company that drives the American financial markets
as only I.B.M. and General Motors could in previous eras. The closing months
of 1995 see competitors and potential competitors—I.B.M., Apple, Lotus
Development, WordPerfect, Novell—fading back from Microsoft's businesses
or bracing fatalistically for the next onslaught.
Gates is back now from his vacation: a personal trip, but he
did find time to meet formally with President Jiang Zemin, and Beijing
announced—no Antitrust Division there—that it was declaring Windows
to be the country's official software standard. Days later, Gates revealed
that he had bought the world's greatest storehouse of historical photographs,
the Bettmann Archive, adding to his already unchallenged collection of visual
images. Two more markets cornered, it seems. The Government must ask now,
as the computer business is asking, whether a dangerous threshold has been
crossed—whether a single force has taken control of the most tempestuous,
inventive, unpredictable industry of our time.
Cult of
Bill
By now it's well known that
where other companies have offices, Microsoft has a huge and verdant
campus—low-slung steel-and-glass buildings set amid stands of evergreen
trees in a Seattle suburb, with softball fields and basketball courts and
an artificial pond called Lake Bill. Most employees still have private offices,
and soft drinks are still free, but the campus has lately taken on an air
of relative maturity. It's full; a new set of buildings are on the rise across
the freeway. A soccer field was torn up this summer to make way for the
extravaganza of the Windows 95 launch.
Everywhere, though, is a sense of the forceful influence of
the company's 40-year-old leader, who at One Microsoft Way is always referred
to simply as "Bill." Bill's so smart, says a character in Douglas
Coupland's new novel, "Microserfs" (another Microsoft first: popular fiction
inspired by its wondrous corporate culture). Bill is wise. Bill is kind.
Bill is benevolent. Bill, Be My Friend . . . Please! A heightened casualness
does strain the voices of Microsoft middle executives when they drop mention
of "face time" with Bill.
Sometimes people at Microsoft say that they are a mere surfboard
and Bill is the man who rides it. The company went through a series of
short-lived presidents before finally realizing that a president in the presence
of Bill was an impossibility; now there is just an Office of the President,
occupied by a group of vice presidents. "One of the things that makes us
work today is the incredible brain capacity, memory capacity that Bill has,"
says the most senior of them, Ballmer, striding energetically around a tiny
conference room.
Microsoft wears the personality of its leader like a wet suit.
Gates's mind-set might be described as a blend of ruthless competitiveness
and planned paranoia. He chooses to be scared; he wants his company to be
scared. At the moment it is the explosive rise of Internet that scares him
most. At similar critical moments in history -- "discontinuities," as he
accurately puts it -- he has watched most of his competitors stumble and
fail, beginning with I.B.M. He goads his employees with fear of failure.
It may help that Microsoft is the company that the est of the industry loves
to hate.
Accusations that Microsoft's people lie, cheat and steal information
are as much a part of the company's lore as its cadre of millionaires with
FYIFV (". . . I'm fully vested") buttons. Microsoft knows it has clout, and
it uses what it has: to pressure small competitors, trade-show operators,
journalists, retailers (shelf space for non-Microsoft software will be at
a premium this Christmas) and everyone else.
"Can you name anybody that's happy about being in the same industry
with Microsoft?" Mitchell Kapor asks.
Microsoft lives according to a "thin ethics," as he sees it: "Anything
not a direct lie or clearly illegal is O.K. to do and should be done if it
advances Microsoft's tribal cause. This licenses the worst sorts of
manipulations, lies, tortured self-justification and so on." Microsoft is
hardly alone, of course; plenty of its competitors would play as rough, if
they only could. Others in the industry suggest that Microsoft's small-company
scrappiness has kept it from facing the issue of corporate ethics: behavior
that people will forgive, or at least understand, in a start-up looks
considerably less attractive when David grows into Goliath.
Microsoft stumbles, but less often than its competitors; and
when its competitors make mistakes, Microsoft has historically managed to
take advantage. It has cultivated an aura of inevitability. It has failed
so far to overcome some rivals, but it has never lost an important franchise
once gained. And if Microsoft people are now openly contemptuous of the
Government's multiphase investigation of its trade practices, it is Gates
who sets the tone. This spring, when the second phase ended with Microsoft's
dropping a proposed acquisition of the financial-software maker Intuit, Gates
said sarcastically, "In the future we may wait a week or two before we decide
to do something like this again."
None of the above appears
in the entry on Gates, William Henry, III (1955- ), in the world's
best-selling multimedia encyclopedia: "Much of Gates' success rests on his
ability to translate technical visions into market strategy, and to blend
creativity with technical acumen. . . ." There is a picture, too, with a
sound clip: "Microsoft was founded based on my vision of a personal computer
on every desk and in every home. We've never wavered from that vision."
Needless to say, that's not the Encyclopaedia Britannica, now
struggling for its life. The leading encyclopedia in the multimedia world
is Microsoft's own Encarta—a glossy retread of the old Funk & Wagnalls,
updated with pictures and audio bits. Microsoft is rapidly accumulating
best-selling entries in every reference category: general desk reference;
movie guides; music guides; cooking and wine guides. Most of these were licensed
or bought outright, but Microsoft's consumer division is gearing up to produce
more and more of its own material for CD-ROM's and on-line information products.
Its new Digital Cartography Lab alone employs 15 highly trained cartographers
and geographers, working on a new generation of digital maps. (Hammond, Rand
McNally—are you ready?) Over at the Microsoft Network, a fledgling news
staff produces a sort of electronic front page every day.
And by the way, the unabridged version of that famous Gates motto
is: "a computer on every desk and in every home, all running Microsoft
software."
Microsoft
vs. the Internet
Not only is the new Microsoft
Network software automatically set up for every Windows 95 user; its
icons—"MSN" and "The Internet"—are an astonishingly persistent
feature of the "desktop" that stares at you from your screen.
"Does anyone know how to get rid of the Internet Explorer icon
so that I can put my Netscape Navigator icon in its place??" asks a Windows
95 user on the Microsoft Network. Over on CompuServe, a user says, "I want
the MSN icon to go away, but I don't seem to be able to delete it. How do
I get rid of the thing?"
That's what Steve Case wants to know, as president of America
Online, the most popular commercial on-line service and one of the companies
with the most to lose. "The tens of millions of existing computer owners
who are expected to upgrade to Windows 95 won't be offered choices built
into their operating system other than MSN," he says. "The operating system
for 85 percent of all personal computers is about to become an exclusionary
marketing and distribution tool."
He has sent the same message to the Department of Justice. He
argues that the operating system is to a computer what the dial tone is to
a telephone: the thing you have to use to go anywhere at all. Just as the
Antitrust Division eventually prevented A.T.&T. from using its
local-telephone monopolies to perpetuate a monopoly in long-distance service,
so it should prevent Microsoft from leveraging its operating-system monopoly
into the new territory of Internet and on-line services.
The Internet has forced Microsoft to make a late change in its
on-line strategy. As little as three years ago, when MSN was a vigorously
leaked secret code—named Marvel, the on-line landscape comprised thousands
of hobbyist bulletin boards and just three giant commercial services: America
Online, CompuServe and Prodigy. The Internet, meanwhile, was obscure, academic
and seemingly irrelevant to any vision of electronic commerce. Marvel was
designed as an America Online-CompuServe-Prodigy killer: a private service
that would host proprietary content from newspapers, television networks,
Microsoft's own consumer-product sources and a wide range of businesses with
information and products to sell.
Microsoft was not the only
company caught by surprise when the Internet burst into public view, and
it was one of the quickest to begin a recovery. It took the unusual step
of buying a minority stake in an Internet access company and building a
nationwide network that customers will be able to use for dialing into the
Internet—paying, of course, by the month or by the hour. Gates insists
that Microsoft will remain strictly a software company—"We're not in
the connectivity business; we're not in the business of owning wires"—but
by last year it was clear to Microsoft, as well as the big on-line services,
that Internet access was essential. And Microsoft determined to provide it
by means of a single button on the Windows 95 desktop.
But that button is only the beginning of Microsoft's strategy.
In a confidential memo to 14 senior executives last year, Gates described
the rise of electronic communication as a "sea change" and warned that in
one category, the sharing of documents among groups of co-workers,
"embarrassingly we find ourselves some what behind one of our old
rivals"—Lotus.
It is a revealing document, with a mixture of goading and
exhortation, of futuristic vision and rock-hard attention to Microsoft's
singular economics. Nothing matters more than persuading users to pay for
upgrades to their software. In mature product categories like word processing,
he notes accurately, users will not upgrade or switch products merely for
the sake of a few extra features, but they will if the new software takes
advantage of a sea change. "It takes even more guts," he wrote, "to bet on
the Sea Change when you are the market leader but it is the only way to position
yourself for massive upgrades."
Every software division at Microsoft is now redesigning its
products to take advantage of a world in which every computer can talk to
every other. The next version of Microsoft's CD-ROM encyclopedia can be updated
live through the connection to MSN or the Internet. For word processors,
integration with the Internet means thinking not in terms of personal documents
at home or even work-group documents on your private office network, but
in terms of browsing, searching and publishing on line. For spreadsheets,
it means viewing and manipulating data that comes across private and public
networks, interchangeably. "Excel must blow away the competition," Gates
urged in the memo. "The basic point, however, is that users' expectation
of what Office applications will do is changing and three to four years from
now anyone forced to use the software we have today would find it completely
inadequate for dealing with the electronic world."
Nathan Myhrvold, one of Microsoft's chief strategists, sums
up the attitude now driving every company division: "The Internet is an example
of a revolutionary shift that, if we forgot about it, would eventually kill
us. The notion that you would do a task on the desktop with desktop software
in a few years that didn't involve the Internet is just ludicrous."
Microsoft has already tightly integrated its Internet access
into the new Windows 95 environment. Addresses for all kinds of Internet
resources can be dragged onto the desktop, where they appear as colorful
icons of their own; dragged again into E-mail messages to be shared with
friends; and clicked on to begin an automatic dialing process. The Microsoft
Network as an on-line service has its problems -- performance is sluggish
and the content thin—but as new computers stream into the marketplace
with Windows 95 already installed, millions of newcomers will find their
way to the Internet by clicking that Microsoft icon.
Hence the extra annoyance of its competitors over the little matter
of Windows 95's disabling their users' existing Internet access. Many users
who had installed the widely popular Netscape browser and then tried Microsoft's
Internet Explorer discovered that Netscape would no longer work. The same
problem affected users CompuServe's Internet in a Box software.
"Windows 95 includes a process that disables your Internet account,"
says David Pool, a top CompuServe executive. "And that's just the tip of
the iceberg of the inappropriate things Microsoft does from a networking
standpoint. It's a clear extrapolation of their operating system monopoly
into the network application market."
Microsoft is characteristically unrepentant. "This guy makes
me laugh," says Brad Silverberg, head of the personal operating systems division.
In the Microsoft version of events, Windows 95 does not "disable" anything.
It just happens that some companies' applications cease functioning -- they
"use nonstandard components" and "need special configuration." Those companies
violated Microsoft's published guidelines, he says; they have realized their
error and are preparing new versions of the software to repair the problem.
The truth is not quite so innocent. Most Internet dial-up software
written for Windows relies on a piece of software called winsock. Everyone's
winsock is supposed to be more or less interchangeable with everyone else's,
but differences do exist. Many vendors put their winsock into the Windows
directory of the user's computer—a friendly practice, since it is then
available to other software that might need it, but a risky one, too. If
Windows 95 sees a non-Microsoft winsock, it carefully and explicitly replaces
it.
"It's not like we blow it away and it's gone forever," Silverberg
says, beaming with sincerity. "I think we do a very honest and responsible
thing. It's admirable, really."
He acknowledges that the specifications for using the operating
system's new dialer were slow in coming but says they are now available to
all who want them. And for that matter, he asserts, if Microsoft chose to
keep such specifications private, to give a competitive advantage to its
many software departments, that would be the company's privilege. It does
own the operating system, after all.
More Windows,
Bigger Windows
It is conventional at Microsoft
to say that success comes from making good products. Microsoft does devote
extraordinary resources to improving its technologies. It has effectively
stressed "usability" and crisp design. It has recently created a 100-person
research laboratory that resembles a leaner and harder-driving version of
A.T.&T.'s Bell Laboratories and I.B.M.'s Thomas J. Watson Laboratory.
But at least to date, the quality of its products has been incidental to
Microsoft's triumphs over its competitors.
Even Windows 95 shows more awkwardness and instability than
the personal operating systems that have long been available from Apple,
I.B.M. and Next. It adopts virtues of all those systems, but many users will
still struggle with obscure techniques for allocating memory to their old
DOS programs, or find that they regularly crash the entire system. "In many
ways this is an edifice built of baling wire, chewing gum and prayer," wrote
Stephen Manes in assessing Windows 95 for The New York Times.
It is conventional in the industry to say that Microsoft cannot
make great products. It has no spark of genius; it does not know how to innovate;
it lets bugs live forever; it eradicates all traces of personality from its
software. This view, too, misses the point. Microsoft knows that the
technologically perfect product is rarely the same as the winning product.
Time and again its strategy has been to enter a market fast with an inferior
product to establish a foothold, create a standard and grab market share.
Designing the ideal laboratory operating system and competing
in the real world are two problems that have little to do with each other.
Apple has had the benefit of a closed battlefield; it could design its software
for a limited set of hardware that it controlled. That was a huge advantage
for developers and, ultimately, a fatal disadvantage in the marketplace.
I.B.M. created in OS/2 an operating system clearly superior to Windows 3.1
in most important respects; yet it failed to persuade the hundreds of crucial
manufacturers of P.C. hardware and the thousands of independent software
developers to fall in line with compatible products. Windows 95, despite
its "32-bit" fanfare, contains so much vestigial 16-bit code that it makes
Intel's new Pentium Pro processor look bad. But that ugly old code means
that users who make the switch will not have to throw out their old software
too quickly. Microsoft's genius has been in navigating—and
controlling—the fantastically complex ecology of the computer
business.
Microsoft's launch of Windows 95 in August, kicking off a planned
$150 million marketing blitz, will live in history as a pinnacle of
public-relations showmanship in a public-relations-driven year. When thousands
of onlookers and journalists gathered under the big top on the Microsoft
campus or watched nearby on giant screens, the subliminal message was, We
can buy anything: Jay Leno (emcee and vaudeville partner for Gates), The
Times of London (an entire day's run of a once-great newspaper), the Empire
State Building (colored lights usually reserved for national holidays). The
press made fun, but it was taken in, too, giving weeks of extensive coverage
to what amounted in essence to a product introduction—and an upgrade,
at that.
Three months later, Windows 95 boxes are stacked high on store
shelves, and Microsoft refuses to re lease sales figures. Anecdotally, it
is clear that millions of high-end users have bought the upgrade but that
millions of corporate customers have chosen to delay the inevitable headache,
particularly when most existing hardware lacks the speed and memory to run
it well. It doesn't matter. In the long run virtually every desktop computer
will run Windows 95 and its successors. New computers shipping now have Windows
95 preinstalled by default. Applications developers have either stopped
developing for DOS and Windows 3.1 or soon will.
Windows has long since stretched the definition of operating
system past the breaking point. The original DOS was little more than a thin
(and clumsy) layer of hooks that applications could use for reading and writing
data to memory, screen and disks. Windows 95 not only provides a rich environment
for controlling many programs at once; it also offers, built in, a word
processor, communications software, a fax program, an assortment of games,
screen savers, a telephone dialer, a paint program, back-up software and
a host of other housekeeping utilities and, of course, Internet software.
By historical standards, you get a remarkable bargain.
Some companies used to live by selling such things. Every time
Microsoft adds a new feature to the operating system, ripples flow through
the software business. When it added a built-in backup program, it instantly
destroyed what had been a modest, competitive market in backup utilities;
the only customers left were those with highly specialized back up requirements.
And when Microsoft asks to license your technology, you may not always find
it easy to say no.
One company that tried was Stac Electronics, which had developed
software that used a compression technology to effectively expand the capacity
of users' disks. Microsoft wanted to build Stac's technology into the operating
system and negotiated in its usual scorched-earth style, demanding a worldwide
license for a one-time flat payment and threatening to move ahead with or
without Stac's license. Stac refused, Microsoft acted on its threat and unlike
most small companies that brush up against Microsoft, Stac sued. A jury,
finding that Microsoft had stolen Stac's property, awarded $120 million for
patent infringement. Microsoft then swallowed its pride and acquired the
technology by settling with Stac, buying a 15 percent stake in the company.
Stac now exists as a happy Microsoft partner and the disk-compression business
is no more. There are pilot fish that manage to swim with sharks, and there
are fish that get swallowed.
A new cycle is beginning: with Windows 95 out, new groups of
software companies are struggling to rethink their place in the market. Fax
software companies are one example; and if Microsoft has its way, Internet
software companies may become an other. The Netscape Navigator leads the
market now, but after all, Microsoft's Internet Explorer is almost as good,
and it's free.
So the operating system has become, from the consumer's point
of view, a useful pack age of software. From a different point of view, however
—the point of view of the essential underlying structure of modern
computing—the operating system Microsoft owns has become something else
altogether: a collection of standards.
Walk Softly,
Carry a Big API
The age of mass production
could not begin until the world agreed on standards for the dimensions of
nuts and bolts. The tire and automobile industries coexist be cause there
are standards for wheel sizes. Standards development acts as a catalyst in
economic development; the Internet itself emerged when, from the grass roots,
open and free standards were created to allow different types of computer
networks to talk with one another. All these standards were set by Government
or international organizations or by industry consortia. No one must pay
a royalty or license fee to manufacture a Class 3 fax machine or a keyboard
with keys arranged QWERTY-style.
From the point of view of standards, no form of machinery rivals
software for the complexity of its interlocking parts—the number of
jigsaw-puzzle interfaces between one element and an other. In understanding
the two-decade history of Microsoft's increasing control over the computer
software industry, nothing matters more than its strategic management of
these points of interconnection: the creation, marketing and then manipulation
of standards.
Let's say you are an expert at a small company in the infant
field of speech recognition, creating technology to turn the spoken word
into stored text. You probably got an invitation from Microsoft during the
past year to attend a series of meetings. You and your competitors, under
Microsoft's guidance, helped create a standard set of hooks into the operating
system, a so-called "application program interface," or API. No single company
in the field had the clout to produce an API that the others would agree
on, so there was danger of conflicting standards. But Microsoft did have
the clout.
The result: Microsoft, in cooperation with virtually the entire
speech-software industry, will release early next year a "Microsoft Speech
Software Development Kit," containing "all the necessary tools." Problem
solved. Incidentally, in the course of the meetings, Microsoft received and
filed away an enormous body of intelligence on the speech-software state
of the art and even the specific product plans of your company. That's a
risk you had to take.
"I think it's a good thing," says Bathsheba Malsheen, general
manager of technology at Centigram Communications, one of the speech-software
companies. "To integrate voice and speech into applications is a costly problem."
These standards are open, in the sense that they are publicly available.
But in the long run, who actually owns them? "I guess they really
are the property of Microsoft," Malsheen says.
Microsoft has a mail standard, called simply MAPI (mail application
program interface). It has a new telephone standard, for letting software
interact with telephone equipment: TAPI. It is belatedly but feverishly working
on a proprietary on-line multimedia document-publishing standard code-named
Blackbird. Microsoft abhors industry-wide standards-setting: its pattern,
with increasing consistency, has been to refuse to cooperate with any standards
procedures but its own.
"At one time it may have been, hey, the gang's all here and
let's have a consortium blah blah blah," says Ballmer derisively. "You can't
have things that thrive and get moved forward aggressively if it takes a
consortium."
Money on the Internet will require standards. Visa International
and Mastercard International managed to set aside their rivalry long enough
this summer to announce that they were creating a joint standard for processing
credit-card charges across the Internet. Every major player in electronic
commerce needs such a standard; until money can flow across the public net
work in securely encrypted form, on-line shopping malls and information services
remain more experimental than real. Then, a few weeks ago, the alliance broke
apart.
Mastercard, along with Netscape and I.B.M., charged that the
standard, created by Microsoft and published as an "open" set of specifications,
was actually proprietary, designed to give Microsoft a powerful advantage,
perhaps enabling it to take a slice of every transaction. Microsoft responds
that the specifications are freely available; its own Windows implementation
of those specifications, however, is proprietary and available for those
who wish to pay for a license, possibly on a per-transaction basis. It has
become a familiar scenario: Microsoft claims an architecture is public and
open; its competitors say the crucial details are reserved to Microsoft
alone.
Microsoft is by no means the only company that seeks to exploit
private standards. Netscape itself is playing a dangerous game with the standards
that gave rise to the World Wide Web: creating proprietary "extensions" that
work only with its own software and hoping that its market dominance will
be enough to make them stick. The history of I.B.M.'s downfall in the P.C.
industry is a history of failed attempts to impose standards by fiat. I.B.M.
took its clout for granted. Microsoft gives top priority to its
standards-setting; it "evangelizes" its standards, using every possible form
of persuasion to bring the industry in line.
Ultimately, only one kind of company can play the standards
game risk-free: a company with a monopoly. The risk for everyone else is
that the company that owns the standard can change it without warning, can
give its own programmers special advantage and can freeze innovation
elsewhere.
"We've lost this notion of a public standard as good," says
Alex Morrow, general manager of architecture and technology at Lotus. "Instead
we have this new thing, a quasi-open private standard that's controlled by
one company. That's where innovation is going to suffer."
The ultimate standard—the ensemble of standards—is
of course the operating system itself: the power spot in the digital ecology.
The case against Microsoft, in the eyes of its rivals, comes down to one
central issue: leverage, using the operating-system as a fulcrum to gain
power in new markets.
The market in big desktop applications is a much-disputed case
in point. Not long ago, WordPerfect led the word processor market with a
much-loved product and a toll-free customer support service (something Gates
has never authorized at Microsoft); Lotus 1-2-3 dominated the spreadsheet
market, and Borland International's Paradox led the P.C. database market.
In 1991, Mike Maples, a senior Microsoft executive, described the company's
goals in the aggressive style that its top executives used to favor: "If
someone thinks we're not after Lotus and after WordPerfect and after Borland,
they're confused. . . . My job is to get a fair share of the software
applications market, and to me that's 100 percent."
For all three companies, the fatal "sea change" was the transition
from DOS to Windows, particularly Windows 3.0, the first widely popular version.
Microsoft notes with considerable justice that its rivals made a strategic
blunder in not releasing Windows versions of the software more quickly.
Microsoft's applications group and its system group were able to "fly in
formation," as Ballmer puts it (zooming his hands cheerfully through the
air). Microsoft critics have said that flying in formation included sharing
technical information that gave Microsoft's own programmers an advantage
over outsiders trying to write fast and well-integrated Windows software,
and there is some truth to that. But there is also no question that WordPerfect,
Lotus and Borland were late by choice—in part because, caught up in
the Catch-22 of the operating-system wars, they knew that their Windows versions
would help Microsoft by cementing the establishment of Windows.
The flow of inside information will remain a critical issue for the
antitrust investigators. In the 1980's, Microsoft executives often spoke
of a "Chinese wall" between the systems group, responsible for DOS and Windows,
and the applications group, responsible for the programs that ran in those
operating environments. Ballmer himself once said there was "a very clean
separation" -- "It's like the separation of church and state." Competitors
were dubious, knowing that all neurons at Microsoft led to Bill Gates; these
days Microsoft executives take a different tack. They deny that the concept
of a Chinese wall ever existed. They admit that their own developers sometimes
get an edge in knowing how to take advantage of new Windows features before
the knowledge spreads to competitors, but they insist that the knowledge
does spread sooner or later—because it is in their interest to make
sure that everyone writes for Windows—and they say that's as level as
the playing field needs to be.
The final blow to the applications market came with the emergence
of "office suites"—packages of word processors, spreadsheets and data
bases bundled together. Again, Microsoft saw the opportunity first and made
sure that its package was more tightly integrated than its competitors' could
be. It announced a new standard, called OLE (for "object linking and embedding"),
that allowed, say, a word processor document to display and even work with
a spreadsheet. Again competitors charged, and continue to charge, that Microsoft
manipulates the OLE specifications to its advantage-changing them to suit
its applications programs. Almost as an afterthought, Microsoft also added
its not well regarded Powerpoint presentation-graphics software to the package,
effectively cutting the price to zero and transforming that business over
night. Though transforming may not be the perfect word. "Microsoft
didn't transform the market, but strangled it," says Karl Wong, director
and principal analyst at Dataquest, a research company.
Today, Microsoft says it "leads" the market in office suites.
Yes, indeed: its market share is estimated at 90 percent, closer to Mike
Maples' target than he could have dreamed four years ago.
For Its
Own Good
The essence of antitrust law
is an American view that the public has an interest in preventing excessive
concentration of economic power. In the 1960's, two companies appeared to
have such power, in the two industries with the greatest grip on the future,
computing and telecommunications. The investigations of those companies,
through several Presidencies, formed an era in antitrust law that ended abruptly
on a single day: Jan. 8, 1982. The Justice Department dropped its long-running
case against a jubilant I.B.M. but announced at the same time that A.T.&T.
had, with bitter reluctance, agreed to a historic break-up.
Today, I.B.M. has lost sway over every business it participated
in. It allowed the P.C. industry to emerge at its feet, and it turned itself
from a paragon of financial reliability into a company that for several years
was losing money at a frightening rate. It has become a stagnant noncompetitor,
looking for ways —its only hope—to break itself up into smaller
business units.
At A.T.&T., meanwhile, it is now an article of faith that
the court-imposed break-up was a brilliant turning point in the company's
fortunes. It was the event that freed it from its own hamstrung indolence
and enabled it to compete in new arenas. A.T.&T. is continuing what the
Government began, breaking itself up into smaller and, it hopes, more agile
companies.
Monopolies become their own worst enemies—particularly
in businesses that live or die by technological innovation. They get soft.
They make poor research choices. They bleed both profit and invention. They
poison the marketplace that created them. In the rarest cases, like
A.T.&T.'s, an outside force can save a monopoly from itself, but Government
interference is always frightening and never popular.
It's certainly unpopular with many politicians—witness
the "pinch me" statement, a comment by Senator Bob Dole that Microsoft rushed
into its legal briefs and news releases: "Let us understand what is going
on here. A company develops a new product, a product consumers want. But
now the Government steps in and is in effect attempting to dictate the terms
on which that product can be marketed and sold. Pinch me, but I thought we
were still in America."
Microsoft's lawyers encourage an ideological view of United
States v. Microsoft, employing not just "free-market capitalism" arguments
but also a quaint form of red-baiting, assailing would-be "commissars of
software," and insisting: "Such thinking should have disappeared with the
Berlin Wall. Fortunately for American consumers, we do not have a centrally
planned economy."
"It's like a throwback to the 1950's," says Case at America
Online: `What's good for General Motors is good for America."'
For her part, Anne K. Bingaman, assistant attorney general in
charge of the Antitrust Division, bridles at suggestions that the political
climate could affect the investigation—and also at a widespread industry
view that, in the end, the high-technology business will prove too fast-moving
and too technical for the non-nerd lawyers in Washington to keep up.
"We have a much better handle on the industry than people realize,"
Bingaman says. "The group of people that work on these matters have long
and deep experience. We keep up. We understand it. We have sources."
Bingaman is proud of achieving the consent decree in phase one,
in which Microsoft agreed to end a set of licensing practices without admitting
any wrongdoing or suffering any penalty. The most blatant was an arrangement
in which P.C. manufacturers paid Microsoft the same royalty for shipping
a computer without DOS as with DOS—meaning that, if you were one of
the few people who bought a non-Microsoft operating system, you paid its
manufacturer and then you paid Microsoft on top of that, a huge disincentive.
Microsoft was "locking up the market with practices which every computer
manufacturer despised and which the competitors despised," Bingaman said
in July 1994. "To get these low prices you had to sell your soul and never
leave Microsoft." And she also said: "I hope consumers, within a short period
of time, will have more choice of operating systems."
It has not happened. The practices Microsoft agreed to
forgo had already served their purpose. Gates was right when he summed up
the effect of the consent decree in one word: "Nothing."
And each month brings new issues, all variations on the same
theme: Microsoft's use of not-quite-public standards as a sword and a goad.
The Microsoft Network shipped with every copy of Windows 95 before the
Government's lawyers could decide whether to act. Now they must consider
the new Microsoft-Visa agreement on standards for financial-transaction
processing—open standards, according to Microsoft; closed standards,
according to Mastercard and Netscape -- and as of this month Visa has already
shipped its Windows software implementing the standards. "We are not giving
away our implementations of those specifications, just as we don't give away
Windows or any other software product that we make," says Craig Mundie, senior
vice president of Microsoft's consumer systems division. Microsoft is well
along in the creation of proprietary software to handle every stage of the
process, from customer to merchant to bank.
Meanwhile, the stores are filling with third-party software
boxes displaying the official Windows 95 logo. To get Microsoft's permission,
the manufacturers had to demonstrate not only that their software runs under
Windows 95, but also under the more advanced version of the operating system,
Windows NT—a version that so far, despite all Microsoft's evangelizing,
does not have the support of many popular applications. That logo is a powerful
lever, applying power from one product line to another, and it deserves the
Justice Department's attention.
So does Microsoft's new campaign on behalf of not-yet-available
on-line development tools, like the one code-named Blackbird, for companies
that want to publish news, design games, build shopping malls or deliver
entertainment over the Internet. Designers of competing tool sets—Netscape
and Sun—see Microsoft's as attempts to gain control of another key choke
point in the pathways of electronic commerce.
So does an odd bit of language in Microsoft's contracts with
the computer makers who bundle Windows 95 with their hardware: a forced promise
not to sue Microsoft or anyone else for patent infringement. It happens that
Microsoft is building up a strategic portfolio of software patents, both
home-grown and licensed.
And so, of course, does the intimate connection between Windows
95 and Microsoft-brand Internet access: the bundling of the Microsoft Network
software; the persistence of the desktop buttons; paradoxically, all the
features that make on-line access easiest for new customers. As Microsoft
vehemently points out, every other big on-line service manages to gets its
software into your mailbox and bundled with your new computer. Still, the
Antitrust Division should, if nothing else, see a natural analogy with the
bias A.T.&T. created for itself be fore the days of equal access. Customers
could use M.C.I. —but only by dialing a slightly inconvenient code.
Microsoft retorts angrily to all the telephone analogies by
noting that A.T.&T. was a Government-regulated monopoly. The folks at
One Microsoft Way are merely . . . successful. They are big. If they are
linking together pieces of the hardware-software-network chain, they are
doing it in a way that has lowered prices, added value and made life easier
for consumers. It is not their fault if the economics of scale in the software
business, combined with tactics that press antitrust law to its limits, brings
them huge benefits.
Is Windows an open standard? Yes —when and only when that
suits Microsoft. "We could say, hey, we're not publishing any A.P.I.'s to
our operating system," Ballmer says. "Or we could pick five guys and tell
them what's in this operating system—we're not going to tell other
people."
And that is where the Government should draw its line.
There was a moment in history, just a few years ago, when any
number of operating systems, real and imagined, could have emerged to run
the world's personal computers. That moment is past. The Microsoft architectures
have established them selves so deeply in every segment of the computer business
that they cannot be displaced, not even by Microsoft. Those standards are
an essential facility—to use antitrust jargon—like the 60-hertz
AC current that flows to every American household. To date they have remained
mostly open and mostly public, because that served Microsoft's business interest.
Now the Government could, and should, declare a public interest in open standards
in computing.
The Department of Justice does not need to break Microsoft apart.
It need only—a far-reaching step in itself—require Microsoft to
make its operating system, and the web of standards surrounding it, truly
and permanently open. Other companies should be allowed to clone it if they
could; Microsoft should be restricted from taking internal advantage of new
changes until they were published to the rest of the market.
For that matter, Microsoft should open its standards voluntarily.
It will not, but it should: end the painful cognitive dissonance that comes
from proselytizing for open standards and then threatening to close them
at will.
"It's not like everyone and their brother is going to go out
there and beat them," says Eric Schmidt at Sun. "They'd probably have 95
percent of the market any way. Then all the arguments about their behavior
would stop. If they really did open interfaces, it would change the dynamics
of the industry in a positive way." It would be for their own good, he says:
"They could get back to work and try to build great products and compete."
Gates is right about one thing: Microsoft's future is no more
assured than was I.B.M.'s. The Internet does pose a threat—a new set
of open standards that, so far, Microsoft cannot control. And Microsoft's
own power poses a threat, too—the threat that comes with the self-fulfilling
destiny of any monopolist. Microsoft could fail to drive consumers to new
waves of upgrades; it could stagnate financially even as it retains its grip
on the neck of the market. "The company in some sense is a captive of its
own history of voraciousness," as a former Microsoft executive says. It is
a captive of shareholders who have come to expect nothing less than
Microsoft-style profit margins and growth rates. It is a captive, to its
own horror, of lowest-common-denominator design, the inevitable consequence
of serving a market of 100 million.
The rest of the industry is captive, too. No company has Microsoft's
power to place bets; few companies can afford to chance a new approach in
a product category near the ever-advancing boundary of Microsoft's Windows
package. No quantity can be harder to perceive and harder to measure than
innovation that never occurs—the absent pioneers, the fading of vitality
in a still-comfortable industry.
No monopolist wants to be relieved of its burden. To Microsoft,
it would be nothing short of theft. They own that operating system—they
sweated, invested and fought for it. If they can put a computer on every
desk and in every home, all running Microsoft software—and all connecting
to the Internet —consumers should be grateful.
"You click a button and it's so easy!" Silverberg says, grinning
again. "How could there be anything wrong with that?"
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This article first appeared in the New York
Times Magazine on November 5, 1995, just as Windows 95 was entering the
marketplace. Many readers—maybe most readers—disagreed with it.
But it seems that my explanations of how Microsoft gains and exercises
power--controversial then--have gained mainstream acceptance.
The Antitrust Division began inquiries into
Internet-disabling incident described in the opening section, among other
issues; it has also asked questions about Microsoft's tactics in the battle
against Netscape (a battle that, where browsers are concerned, I believe
Microsoft has already won). As of 1998, it is trying to halt Microsoft's
tying of the operating system to its Web browsing software. I took another
look at one of the issues in the case, here.
The Internet continues to shape and reshape
Microsoft's strategy. The company has reorganized itself, redirected its
online-tools development, and rethought its marketing plans along the lines
Gates had indicated. More than anything else, Microsoft is striving to control
the standards for access to content on the Internet; I hope readers of this
article will understand why.
Meanwhile, the full extent of Microsoft's triumph
over Apple has become even clearer. Apple thought it would be enough to make
good products that its customers liked, without necessarily trying to control
everything. Microsoft knew better.
Reaction to this article continues to be voluminous
and intense.
Many Microsoft supporters -- including, I take
it, happy customers—responded with outrage. In some cases I had the
impression that they were reacting more to a general sense that I was attacking
Microsoft (as published in the Times, the article was accompanied by a possibly
inflammatory cover picture of the proverbial 800-pound gorilla) than to the
specific arguments. A sample of these letters was published in the Times;
in terms of flavor, it was as if I'd stumbled into a Windows v. OS/2 flame
war circa 1994.
Many others, ranging from industry insiders
to academics to journalists with Microsoft experience, have responded
appreciatively. Thank you for your comments—quite a few of which have
given me new insights into the history and the dynamics I tried to
describe.
Microsoft itself appeared upset by the article,
which did constitute an unusual and critical look at its practices. Bill
Gates wrote a long reply, also published in the Times, repeating company
positions that he and others had expressed in the article. Microsoft has
declined to permit his reply to be included here.
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