|WINDOWS TO THE WORLD?|
March 3, 1998
In the first installment of a two-part series, business correspondent Paul Solman examines the Department of Justice investigation of software giant Microsoft.
JAY LENO: This is a man, a man so successful his chauffeur is Ross Perot, ladies and gentlemen. Please welcome Bill Gates.
PAUL SOLMAN: The wealthiest man in the world. College dropout turned billionaire. Magazine cover boy. Subject of gushy profiles by the likes of Barbara Walters.
ANNOUNCER: The richest man alive has plans for you.
PAUL SOLMAN: But because of his wealth and power, Bill Gates also has his detractors. And in the cyberworld Gates' Microsoft helped popularize, anti-Gates Web sites proliferate. Our quick search turned up 59,000 hits, with Gates as the devil incarnate, the Borg, a Star Trek character who kills by assimilation. Here's a Gates look-alike at a trade show hawking Winblows 98, a parody of Microsoft's most famous product.
SPOKESPERSON: Welcome to Microshaft, my personal tribute to the mega software company that is both ruining my life and fair business in the global marketplace today.
PAUL SOLMAN: But it's no joke when Janet Reno's Justice Department accuses the firm of anti-competitive practices.
JANET RENO, Attorney General: Today we have asked a federal court to hold Microsoft in civil contempt.
PAUL SOLMAN: Or when right-leaning Senator Orrin Hatch has the same worry as left-leaning Ralph Nader: that Microsoft threatens free market capitalism.
RALPH NADER, Consumer Advocate: History has never witnessed a more ambitious and ruthless and anti-competitive monopoly.
PAUL SOLMAN: So, is Microsoft bad for the economy? Does it stifle innovation and competition? To explore these charges, we came to a hotel just outside Palm Springs, California. At Demo 98, a few dozen of the country's most innovative high-tech firms were debuting new products: a voice recognition program--you tell the computer what to do, in this case, making corrections; an interactive video game. Hundreds have paid the price of admission: $2300--to see what these innovative entrepreneurs have to offer. Yet, on nearly everyone's mind: How to deal with Microsoft.
MAN: Why would I buy this? Can't I get something like this from Microsoft?
SPOKESMAN: No, not now, not at this time.
|Microsoft's formidable market share|
PAUL SOLMAN: Not now. But maybe soon. Critics charge that if and when it wants to, Microsoft can dominate literally any part of the software industry and put a firm like this out of business. Already, Microsoft has 92 percent of the operating system market for desktop computers; 90 percent of word processing; 87 percent of spreadsheets, having crushed seemingly invincible Lotus; 80 percent of CD-ROM encyclopedias. We were at Demo 98, of course, to see if this dominance is the result of anti-competitive behavior. Though people were eager to talk about Microsoft squelching competition and scaring venture capital from funding them, most wouldn't go on camera, because they said Microsoft might not like it. Chris Shipley, who produces this event, sympathizes.
CHRIS SHIPLEY: Every day they're doing business with Microsoft. Do you want to bite the hand that feeds you? I don't think so. Will they line up at the door of the Justice Department or at their attorney general to say this is happening? No, because they need Microsoft.
PAUL SOLMAN: They need Microsoft so their program can work with the latest version of the Windows operating system, which runs almost all new computers. Any program has to work with the operating system to run at all. Firms also fear Microsoft coming out with its own version of what they're doing and including the technology for free in the increasingly large pack of programs that Microsoft bundles or integrates with Windows. And if you get a free feature from Microsoft, why buy it from the competition? Is bundling okay? Well, some say yes. But not if the bundled technology belongs to someone else, like John Ticer, here demoing a new data-saving program.
JOHN TICER: Looks like I survived another critical mission. What about my computer?
PAUL SOLMAN: Five years ago, Ticer's firm, Stac, sued Microsoft for patent infringement--stealing its proprietary technology for compressing data--and then bundling the technology into Windows.
JOHN TICER: And our product, Stacker, went from $30 million a year to $2 million a year in sales, almost instantaneously.
PAUL SOLMAN: Microsoft settled the case for $120 million. Microsoft is now a major Stac stockholder. And so, it would seem to skeptics that folks here really have four choices; get crushed by micro, sue, play ball, or, if you're lucky, says Ticer, get bought out.
JOHN TICER: I think that 100 percent of the companies in a conference like this would love to be acquired by Microsoft because the deal would just give them all of their future value of the company right up front, and they'd be rich today, instead of having to wait three or five years.
PAUL SOLMAN: But, while the entrepreneurs may strike it rich, innovation in the U.S. economy may suffer because Microsoft is suspected of sometimes buying new technology just to bury it.
|Overwhelming the competition?|
CHRIS SHIPLEY: There are lots of companies who have been purchased by Microsoft in order to be shelved so that they don't compete with Microsoft. Microsoft uses the power of its size and influence and bank account to do what's right for the Microsoft business.
PAUL SOLMAN: And even when Microsoft adopts the technology of others, say critics, it often sets back innovation: by creating clunky, over-complicated versions of what it acquires.
JULENE HUNTER: You can't argue that Microsoft has the best technology. They don't.
PAUL SOLMAN: They do, however, make it hard to compete. Entrepreneur Julene Hunter was demoing a program that can search for images. Firms like hers need venture capital. But if they go up against Microsoft, no matter how good their technology is, they may scare off the venture capitalists.
JULENE HUNTER: Don't come to them with a new word processor or a new spreadsheet. You won't get funded.
PAUL SOLMAN: Even if it's a brilliant new innovation?
JULENE HUNTER: Where's the market? Go talk to Microsoft, or grow in a space where possibly Microsoft might want to acquire you. That's absolutely the advice that you'll get.
PAUL SOLMAN: Heard enough charges yet? Well, you still haven't heard about vaporware. A competitor announces a new product. Microsoft says it's got something better in the wings. Consumers wait for Microsoft. The competitor dies. Microsoft's product never materializes, vanishing in the vapor. Bob Metcalfe is an industry pundit.
BOB METCALFE: Microsoft does vaporware repeatedly, grossly, constantly, and sometimes anti-competitively, I mean, deliberately anti-competitively.
PAUL SOLMAN: Okay. What do all these charges add up to? Enter Silicon Valley anti-trust lawyer Gary Reback, who's been called the one man Bill Gates fears. Reback started fighting Microsoft 15 years ago. He's represented nearly all of its major rivals since. We asked him to join us at the Demo 98 and summarize the case against Microsoft.
GARY REBACK: You'll find little companies all over the place doing their best to innovate around the fringes. What you won't see are the big challenges to Microsoft because they're gone.
PAUL SOLMAN: We sat down in the atrium of the Demo's hotel and asked Reback to elaborate.
GARY REBACK: People want choice. Even if they choose not to avail themselves of the alternative, they want to know that there's a choice.
PAUL SOLMAN: To economists, Reback points out, choice is the driving force of a free market system because if there's only one choice, consumers ultimately won't get the best products, or the cheapest ones, since it's competition that drives up quality, forces down price. At this point, I had an objection. But I've got a million choices. I mean, I can now--
GARY REBACK: No, you don't. Tell me what your operating system choice is.
PAUL SOLMAN: No. There I was forced to go with Microsoft--with Windows.
GARY REBACK: Okay. Now stop for a second. Do you know everything that's in the operating system that used to exist as independent product, where there was choice? Microsoft has told the federal government that they have the right to bundle a ham and cheese sandwich, if they want to, in the operating system. They can take any product they want, bundle it into the operating system, and put competition out of business.
PAUL SOLMAN: Well, but at least I'll get a free ham and cheese sandwich.
GARY REBACK: It isn't free; they'll raise the price of the operating system.
PAUL SOLMAN: In fact, says Reback, while the price of computer hardware has been plummeting for decades, the price of the Windows operating system software has risen, or at best, remained the same, and then only if a computer maker does what Microsoft wants. Now, as Reback talked on, a few people had stopped to listen. We wondered what they thought.
PAUL SOLMAN: Just a show of hands, how many people are sympathetic to the arguments he's making? All of you. See that buddy.
PAUL SOLMAN: When the crowd grew bigger, we asked the question again. We had to obscure one man's face for reasons that will be clear in a moment. You're covering your name tag.
MAN: He's covered.
PAUL SOLMAN: Oh, you're covering your names.
MAN: Absolutely. If they ever found out, they'd come after us.
PAUL SOLMAN: Okay. Thank you.
SPOKESMAN: That's a touchy subject. I mean, people--small companies get muscled around by power and leverage.
PAUL SOLMAN: Later, this man approached us and pleaded that his face be blotted out for fear of retaliation by Microsoft against his fledgling software company.
|Is the industry death toll rising?|
GARY REBACK: I don't think that people outside the technology community really understand what's at stake. I think they want the power, the power to control consumer choice. That's what they want. And it will be over my dead body.
PAUL SOLMAN: Or, if Reback fails, over the bodies of Microsoft's would-be competitors. It was with this portfolio of charges then that we traveled to Redmond, Washington, to get Microsoft's response. Okay. We asked their chief legal counsel, Brad Smith, does Microsoft stifle innovation?
BRAD SMITH: I think a lot of what Microsoft does helps innovation throughout the computing industry--not just software but hardware. We create a common platform that makes it a lot easier for other people to then write applications that run on top of ours. An obvious example is Windows.
PAUL SOLMAN: That is, says Microsoft, it's created a platform or industry standard as basic as VHS for home video, track size for railroad trains. Thirty-eight year old Nathan Myhrvold is Bill Gates' chief technology officer and right-hand man. He helped create the Windows standard, which cost more than $2 billion to develop. We asked him about the charge that bundling new technology into Windows kills competition.
NATHAN MYHRVOLD: I don't know what you mean by bundling. The history of our whole industry, every product, whether it's a word processor or it's an operating system, adds new features over time. New features are integrated. That's what our customers pay us to do.
MORRIS BETON: This is a place where we take our software companies that we work with.
PAUL SOLMAN: Morris Beton responded to the charge that Microsoft crushes rival software firms. He runs a multimillion dollar lab where competitors are invited in to fine tune their software products so they'll work better with Windows.
MORRIS BETON: The reality of it is that some of what we do is counter-strategic. It makes their product more competitive. But that's actually good because we want their product to run extremely well on our platform. And we're willing to give them all the information they need to get that done. We give them the same information that we give to our internal groups.
PAUL SOLMAN: Beton's responding here to a charge we haven't mentioned yet; that Microsoft's own software writers--of its word processor or Web browser, say--have a leg up on competitors, since they know the latest details of windows. Beton insists it's a level playing field for all the 40,000 some odd software vendors out there. And, indeed there were several would-be competitors at the lab. Jeff Smith was tinkering with his program for altering photos.
PAUL SOLMAN: How happy were you when Microsoft said, yes, you can come in here and work with us on this?
JEFF SMITH: Guardedly ecstatic.
PAUL SOLMAN: In fact, only a tiny fraction of all software firms come through here every year; the ones with cutting edge technology that sparks Microsoft's interest.
PAUL SOLMAN: Do you ever worry that you're partnering here with the biggest of the big?
SPOKESMAN: Well, I'm not connected to the network. So, since I have source code here--I'm being cautious. And it's not because I'm concerned abut the company doing anything on an official level, but the group that develops the software that is competing with us is made of ambitious human beings who may in a moment of weakness surf into the wrong net, so I'm being careful.
PAUL SOLMAN: Now, Microsoft says it's set up safeguards to prevent just this sort of poaching by its own employees. But we were reminded of the fear we'd witnessed at Demo 98.
PAUL SOLMAN: When I interviewed Gary Reback at Demo 98, a bunch of people gathered around and I asked them if they were sympathetic to Reback's argument and every one of them said yes, and one guy afterward said he had to hide his face because they'll retaliate against him.
NATHAN MYHRVOLD: (laughing) Once you get something hyped to this level, people can say all kinds of ridiculous stuff. It's ridiculous to think people have to hide their faces.
PAUL SOLMAN: No, but he really was scared, honest.
NATHAN MYHRVOLD: Because our company that's making all of these billions really has nothing better to do than to go squash his little company?
PAUL SOLMAN: Nathan Myhrvold blames a lynch mob mentality for circulating ridiculous charges like misappropriating technology, vaporizing competitors. Well, we asked Microsoft's lawyer, has the company never crossed the line?
BRAD SMITH: I can't think of an instance where we have crossed the line. We ask ourselves as lawyers every day, you know, where is the line, and as technology and the law evolve together, it sometimes takes a fair amount of effort to discern exactly where courts in the United States or overseas would draw the line.
PAUL SOLMAN: So, you sort of feel victimized by all this?
NATHAN MYHRVOLD: Well, you tell me how to feel if you know you haven't done anything wrong and everybody's dumping on you.
PAUL SOLMAN: But what about the charge that Microsoft never innovates, only imitates? Well, that annoyed Craig Mundie, who showed us a range of new products that, he says, a miniature version of Windows makes possible.
|Innovator or imitator?|
CRAIG MUNDIE: We make the operating system. All of these devices have in common the fact that they run Windows CE, which is our new operating system that we've designed to go into these intelligent, digital appliances. So I can talk to it, I can handwrite on it. I can type on it.
PAUL SOLMAN: But, say critics, such devices are already on the market, like the stunningly successful Palm Pilot, and they work on a non-Microsoft platform. Is Microsoft innovating or imitating in order to squash the innovator? Another new technology is Web TV.
CRAIG MUNDIE: I can navigate here with a remote control, so I'm sitting on my couch. And if I wanted to read my mail, for example, I would just say, show me my mail, and it would go off and say here's the pieces of mail that you want.
PAUL SOLMAN: This program allows you to browse the Web with your TV, or watch the tube itself.
CRAIG MUNDIE: Here it tells me it's Three's Company, I have ten minutes left in the show.
PAUL SOLMAN: Jack checks into a hospital to have an embarrassing tattoo removed.
CRAIG MUNDIE: That's right.
PAUL SOLMAN: To critics, though, Web TV is an example of Microsoft the malevolent because Web TV was bought and now runs on Windows when they say it could have been a contender, an alternative to the Windows standard itself. Mundie's response.
CRAIG MUNDIE: It's incredibly hard to speculate. Web TV's business was not that business. They had spent no money, time, or energy, all right, developing that.
PAUL SOLMAN: But was there no possibility that Web TV could be itself used as a platform?
CRAIG MUNDIE: Well, at some level, you could say it could have been used as a platform. The problem is they did not make and had no plan to make the investment.
PAUL SOLMAN: So, says Microsoft in summation, we invested billions to create a great standard and continue to spend billions to create great new technology. What's not to like? Your power, says critics, to kill competition so your products, which are actually inferior, will prevail. In the end then, Congress, the Justice Department, and the American public are faced with two radically different world views. Both of them may be credible, but taken as a pair, they are fundamentally incompatible.
ELIZABETH FARNSWORTH: Paul Solman is preparing a second report on Microsoft focusing on the Justice Department's anti-trust case.