MICROSOFT EXPLORED January 13, 1998 The NewsHour with Jim Lehrer Transcript

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In October, the Justice Department filed a complaint against Microsoft for violating a 1995 anti-trust agreement involving its Internet browser software. Following a background report, Paul Solman and guests discuss Microsoft's business practices and its anti-trust battle with the Department of Justice.

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A RealAudio version of this segment is available. NEWSHOUR LINKS: January 21, 1998 Participate in an online forum on the Microsoft case. January 13, 1998 A background report on the Microsoft anti-trust case. October 21, 1997 The Justice Department formally files its anti-trust complaint against Microsoft. August 6, 1997 Microsoft takes a bite out of Apple. June 11, 1997: Netscape and Microsoft agreed to limit access to private information online. September 20, 1996: Tom Bearden reports on the cyber war between Netscape and Microsoft. Browse the NewsHour's coverage of cyberspace and the law. OUTSIDE LINKS: U.S. Department of Justice Microsoft and Netscape

PAUL SOLMAN: Today, Microsoft and the Justice Department appeared before the judge at a hearing to determine if Microsoft should be held in contempt of court in the Internet dispute. Is Microsoft using anti-competitive practices, or is it getting a bad rap? Let's start with two people who were at the hearing. Charles Rule is a lawyer who worked on antitrust for the Justice Department in the 80's and is now a Microsoft consultant. Edward Black is president of the Computer & Communications Industry Association, whose members include Sun Microsystems and AT&T. Gentlemen, welcome. Mr. Black, what happened at the hearing today?

The federal court hearing.

EDWARD BLACK, Computer & Communications Industry Association: Well, so far what we've seen is a demonstration of a lot of technical information, some legal maneuvering, that relate to a very narrow issue that's part of all this, which is whether or not the judge's order was violated and not complied with in good faith by Microsoft. And there's some key wording in that order that is being focused on, and, therefore, the sides are pretending a lot of technical definition and information about how Windows programs operate, are made up, what they're composed of in terms of code.

PAUL SOLMAN: So we don't probably want to get into all that here, right?

EDWARD BLACK: I hope not.

PAUL SOLMAN: Okay. Well, I hope not too, and I can tell that we're not going to. How did the judge respond? I mean, if they're challenging what he's saying, what was the tone of it today?

EDWARD BLACK: The judge was very careful. He's showing a very good, judicious attitude. I think he--the one thing he did at one point--a little irritation that he was getting objectionable offerings by a Microsoft lawyer and over and over and over again.

PAUL SOLMAN: Offerings meaning?

EDWARD BLACK: He was making comments to the witness in cross-examination that were being objected to that were not really proper, and was driving home certain points, and the judge said, you know, you've made the point, you know, many times, enough.

PAUL SOLMAN: Annoyed, was he annoyed? That's what the wires said. That's why I'm asking.

EDWARD BLACK: I would say that probably, you know, a little bit annoyed, yes.

PAUL SOLMAN: Okay. Mr. Rule, I know you've got to be careful here because you're a consultant to Microsoft, but is that your take on what was happening today?

CHARLES RULE, Microsoft Consultant: Well, I think--let me put it this way: There is the technical issue before the court of whether or not Microsoft is in contempt. Essentially, Microsoft us trying that case before the judge; they're still in court, but I don't really want to comment on that. But let me say that generally I think Microsoft has reason to be happy about events over the last few weeks because I think it is informing the judge, making it clear to him, that there really isn't something separate called Internet Explorer and Windows 95; that really they are two things that are really almost inseparable.

PAUL SOLMAN: So this is not bundling; this is a--the same product?

CHARLES RULE: Well, it's integration. If you go back to the original decree, the original decree said that even though Microsoft couldn't require an OEM and computer manufacturer--

PAUL SOLMAN: An OEM--

CHARLES RULE: Computer manufacturer like Hewlett-Packard.

PAUL SOLMAN: And Original--

CHARLES RULE: Right--Original Equipment Manufacturer.

PAUL SOLMAN: All right.

CHARLES RULE: --to take another product in order to get Windows 95. But there's a provision that says, provided; however, that Microsoft can continue to develop integrated products. And Microsoft makes the point that essentially the Internet browsing functionality is imbedded deeply into Windows 95 and those two functions have really merged, just like the old graphical user interface, Windows 3.1, was merged with MS-DOS, the operating system, and so now in Windows 95, they're a single, integrated product. And I think that's becoming clearer through this process.

PAUL SOLMAN: Mr. Black.

Mr. Black: "Under their definition of integration a Solitaire game that's part of the Windows package should be considered part of operating system."

EDWARD BLACK: I think--he used the word "integration" and that's a core of whether or not there was a violation of consent decree. The difficulty is Microsoft's concept of integration, and the meaning they're giving to the word basically renders a consent decree worthless and meaningless. We do not believe that that was the intent of the parties or of the court in accepting it, to have a meaningless agreement. Under their definition of integration a Solitaire game that's part of the Windows package should be considered part of operating system. It's much too broad.

PAUL SOLMAN: All right. Well, let's open this up now because we're going to be joined by consumer activist Ralph Nader, who's here in Washington and who chaired a conference about Microsoft's business practices several months ago, and Dale Beckles, who runs Valadeo, a software firm in Toronto, and he joins us from there. And he had an online forum that went--actually was created because of your conference. So the obvious question to you: What's the problem for consumers here?

RALPH NADER, Consumer Advocate: Well, the problem is that Microsoft dominates 90 percent of the operating systems. That's the platform for the information highway.

PAUL SOLMAN: That's this Windows?

Mr. Nadar: "They're the great imitators--Microsoft--historically."

RALPH NADER: Right. Now, it also wants to dominate applications. It wants to go into cable. It wants to go into publishing, electronic commerce; it wants to go into travel reservations, into banking. How does it do that? Well, from its immense profits from its operating system monopoly it proceeds to make sure that competitors can't get on because of incompatibility; it bundles its operating system with its browser; it engages in predatory pricing, saying, okay, we're going to give away free what the other little companies are trying to sell. Now, it's one thing if they did this through innovation. But they're the great imitators--Microsoft--historically. It's another thing if they didn't have this monopoly profit machine from their operating system. And so software for those who don't operate in computer worlds, software is not just about spreadsheets and word processing. It's about electronic commerce, the business he did with banks, insurance companies, real estate, travel. It's about content. They're moving into cable. It's about communications.

PAUL SOLMAN: So what are they going to do bad to me, I mean, as a consumer?

RALPH NADER: Three things: One, they're going to be stifling innovation; their domination of spreadsheet and word processing, 90 percent of that market, there's very little innovation. Very few venture capitalists will fund start-up companies to take on Microsoft. They say, forget it. The second, the price factor will kick in as the monopoly increases anaconda style, embrace and extend, embrace and extend, gluing their applications to their operating system. And third, we'll see an unhealthy concentration of power, regardless of antitrust laws, where this giant company is at the choke points in the toll gates into more and more sectors of our economy. History has never witnessed a more ambitious and ruthless and anti-competitive monopoly such as Microsoft. Standard Oil, at least in the old days, stuck to oil and gas.

PAUL SOLMAN: Okay. Mr. Beckles, you've got a lot to contend with there, and it is, after all, Ralph Nader we're talking to here. But let's take them one at a time. Innovation: You're a young company, right?

DALE BECKLES, Software Executive: (Toronto) Yes.

PAUL SOLMAN: You're in Toronto. So aren't you worried about Microsoft steamrollering you?

A competitive industry.

DALE BECKLES: Well, first of all, I'd like to say that the computer industry for those who aren't in it, you have to understand that it's a highly competitive industry. It's probably the most competitive industry on earth, and because it's competitive and due to the fact that the barrier to entry is so low, I fear not only the Microsofts and the IBM's that are, quite frankly, ten times the size of a Microsoft, but I also fear the individuals sitting in their garage that's a recent college student that's trying to come up with the next great idea to unseat Microsoft. So innovation to me is not a valid argument at all.

PAUL SOLMAN: Is not a valid argument because--I don't think I follow it.

DALE BECKLES: It's not a valid argument because innovation is greater than ever in this industry, I would contend. One simply has to go to their local computer store and view the breadth and depth of products that are available. And I think you could see very quickly that it's a highly competitive and innovative market.

PAUL SOLMAN: Mr. Black, you're shaking your head here.

EDWARD BLACK: Got to get in on that. I think--

PAUL SOLMAN: There is too much innovation for most of us to handle. I mean, you do know that, right?

EDWARD BLACK: Too much complexity.

PAUL SOLMAN: All right. Fair enough.

EDWARD BLACK: And a lot of innovation is moving to make things simple. Now, I think we have the most tremendous dynamic industry in the history of the world in our current high-tech industry, and it's correct, it has come from competition and innovation. What we want to do and why we're concerned and why we're concerned about Microsoft is we see that climate changing because of Microsoft's presence in it. We have the goose that lays the golden egg. You don't change the diet. Microsoft's changing the climate for new entrants to enter the market, for new products and technology to have a chance to thrive, right now, a key to innovation has been venture capital. Right now, if you've got a new product and you go out there and to the venture capital community, which has been historically critical to the high-tech industry, you know, you get asked, is your product going to compete with Microsoft, how can you deal with the Microsoft phenomenon, are you planning to sell out to them, at what point in time? It's changed the climate tremendously, and you still have mixed innovation and a lot of it, but we're concerned it will erode.

PAUL SOLMAN: Mr. Beckles, that isn't true? I mean, you must have gotten venture capital or perhaps you got it, I guess I should say.

DALE BECKLES: Yes. That's a valid question. I mean, I spend my life day to day worried about competition from a number of sectors--Microsoft, as well as many others that are today unknown. We are competing directly against Microsoft in a specific area, the area of Internet publishing, where they have an established product that's the market leader known as Microsoft Front Page. And Mr. Black is correct in suggesting that when you try to raise capital, one of the first questions that an investor--a potential investor will ask is: How do you deal with Microsoft? They also ask: How do you deal with IBM--and Sun--and Netscape? From where I sit, all of those organizations are competitors. It doesn't stop me. I don't wake up in the morning and say, gee, I'll go back to sleep because there's someone who's dominant, or that's a competitor. That's what makes this industry so dynamic, I would argue, and I have not had--my organization has not had any real issue dealing with the competitive issue, other than saying here's how we differentiate ourselves; here's how we provide a better solution than our competitors, including Microsoft; here's the value we add to customers. And that, to me, is the beauty of a free market system.

PAUL SOLMAN: So, Mr. Nader, I mean, this guy is in the business; he's not worried about Microsoft; he's in Toronto; and he's got a thriving software company.

RALPH NADER: Talk to him three years from now as this monster increases and wipes out more and more competitors. We want an open architecture to the information highway, so competitors and innovators, entrepreneurs can come up with the most meritorious products. We don't want like a--if Microsoft was a railroad company and controlled the gauges and could change them any time and it wanted also to monopolize the freight train manufacturing, and it wanted to monopolize what's in the freight train in terms of produce, and you couldn't get on because they kept changing the incompatibilities, where would we be? When IBM was hit with antitrust laws and had to open up its system 370 to third party developers, it helped develop the entire software industry.

PAUL SOLMAN: All right. Mr. Rule has been trying to get in here for quite a while.

CHARLES RULE: I think, you know, one, it's important to put Microsoft in context. Microsoft represents--its revenue represents about 4 percent of all software revenue, 2 percent of all computer industry revenues, 1 percent of all information revenues. The fact is that they have never by any court been found to have monopoly power or market power.

PAUL SOLMAN: What about this issue that Mr. Nader raised about price? He talked about stifling innovation, then he said prices--they could, after all, raise prices if they controlled the market.

RALPH NADER: 90 percent of--

Mr. Rule: "The Windows 95 software, I think, has 8 million lines of code, which is four times greater than the total amount of code in the FAA's air traffic control system."

CHARLES RULE: There's an interesting statistic. The Windows 95 software, I think, has 8 million lines of code, which is four times greater than the total amount of code in the FAA's air traffic control system. They spend enormous amounts--

PAUL SOLMAN: This is computer--

CHARLES RULE: Right; the thing that controls the planes that you fly on. But it's an enormously complex product that is constantly being updated that Microsoft spends, you know, hundreds of millions of dollars in innovation, and it's the--I mean, it's amazing how low-priced that operating system is. It's extremely low, and Microsoft has been a key to getting PC's out there to everybody, to inundating the market with PC's, and making computing easier. And the issue here is: Are we going to make it tougher for Microsoft to make it easier for you and me to use our computer by bringing functionality together and making the computer easier to use? And that's what the Department of Justice, at bottom, is complaining about.

PAUL SOLMAN: And, Mr. Black, you're shaking your head yet again.

EDWARD BLACK: Well, because at the end there was a confusion here between what Microsoft will do for the consumer versus what the industry will do, and we tend to see kind of Microsoft thinking of itself as the industry. But at the earlier point I think the key here is nobody's done, I think, extensive analysis. You don't have cost figures of Microsoft, but whether it's main frames, chips, work stations, the high-tech industry in general has had a tremendous price performance increase. The consumer gets huge amounts of bang for the buck; it increases every year. Against that scale you put operating software, you do not see the same kind of increase in quality and decrease in price that you see everywhere else. We would suggest the reason is we do not now have competition. Right now the consumer is paying probably a lot more for his operating system software than he needs to.

PAUL SOLMAN: Well, Mr. Beckles--yes, you want to say something. I'm sorry.

DALE BECKLES: Yes. I just wanted to respond to Mr. Black. You know, one of the things that intrigues me about this whole debate, which I think has taken off--taken on the connotation of religious war, more or less--is where is the consumer hurt in this? I respect Mr. Nader's perspective and have the greatest admiration for him, but where today is a consumer hurt by this? Microsoft gives away a piece of software that's as competitive as any other product on the marketplace, and it does it for free. When I speak to my friends outside of the industry, they wish that the automobile industry, the housing industry, and others would follow suit. We'd all love to have great products for free. So how does this harm the consumer?

PAUL SOLMAN: Well, quickly, how does it harm--

Predatory pricing explained.

RALPH NADER: Predatory pricing has been defined as giving a product below cost, and when you give it away free, after Microsoft's put in hundreds of millions of dollars in it, that's an attempt to drive Netscape out of business! And--

PAUL SOLMAN: And then they'll hike up the price?

RALPH NADER: And then they'll hike up the price! It's like the chain stores coming in--the grocery--

DALE BECKLES: It's not really free anyway.

PAUL SOLMAN: Mr. Beckles.

DALE BECKLES: I was just going to respond. Sorry. Didn't Netscape do this to gain market share? I mean, Netscape, I recall, when they started, they gave away their browser for free--

RALPH NADER: But they don't have a 90 percent monopoly on the operating system.

DALE BECKLES: They had 100 percent.

RALPH NADER: To tie in the operating system with the browser. You're comparing the little mouse with a giant.

PAUL SOLMAN: A monopolistic mouse but a small monopoly.

RALPH NADER: That knows how to retaliate, knows how to engage in brutal non-competitive practices.

PAUL SOLMAN: Let's get to the last question, which is the unhealthy concentration of power. That was your third point, Mr. Nader. Mr. Rule, no, do you think that such a thing is too big?

CHARLES RULE: If you look at the top 20, I think, companies in software, they represent something, I don't know, 20/25 percent of all the revenues in the business. This is an incredibly dynamic business, where there are a lot of players like Mr. Beckles and others who are constantly coming in here. And I agree with Ed, that this is--this is the industry, but it's important to recognize that Microsoft's role has been driving innovation and frankly, if Microsoft stopped and tried to act like the classic railroad monopoly, for example, they'd get squashed. You wouldn't hear of Microsoft in a year, which is exactly an example of what happened to IBM in the 1980's, and everybody first complained about IBM hitting the tank. You've got to keep moving forward.

PAUL SOLMAN: Do you really think that it's possible that Microsoft could get squashed? That's my last question.

CHARLES RULE: Absolutely. Absolutely. If they stop innovating, if they stop moving forward, making computing easier, there are plenty of competitors out there, including Netscape, who will eat their--

PAUL SOLMAN: Mr. Beckles, you think that's true too?

DALE BECKLES: Absolutely. I was with an organization 10 years ago by the name of Lotus Development, and at that point I was a general manager here in Canada. Lotus had approximately 10 percent of the spreadsheet market. I would suggest today that most people use Excel because Microsoft came out with a better product. And--

PAUL SOLMAN: I have to get to Mr. Nader for his last comments because we're running over.

RALPH NADER: If huge Microsoft changes conduct which is monopolistic and retaliatory, once it changes its conduct and allows other competitors to get in, then we'll see which product is the best; we'll see whether Microsoft can really innovate, instead of imitate.

PAUL SOLMAN: Okay. Great. Sorry. No time left. Thank you all very much. I appreciate it.

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