TOPICS > Politics

Playing Monopoly

April 14, 1998 at 12:00 AM EDT
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TRANSCRIPT

PAUL SOLMAN: A flyover, a few years ago of the mushrooming Redmond, Washington campus of Microsoft–Microsoft the monopoly, according to most in the computer industry. That’s because almost any new desktop computer was forced to use Microsoft’s operating system, Windows 95, to, in the words of Mick Jagger and Microsoft’s TV ad, “start me up.” Microsoft, the company, was as in-your-face as its new ad’s song, licensed from the Rolling Stones for at least $4 million. And when it came to its rivals, the company seemed even more aggressive. Here’s marketing VP Steve Ballmer, in pep rally footage in the mid 1990′s, exhorting his troops to take the competition.

STEVE BALLMER: These guys can be taken but the only way we are going to take them is to by studying them, know what they know, do what they do, watch them, watch them, watch them, look for every angle, stay on their shoulders, clone them, take every one of their good ideas and make it one of our good ideas.

PAUL SOLMAN: Ballmer was talking about business challengers. But his firm’s aggressiveness had already attracted a bigger opponent: the government, in the form of the Department of Justice. In 1995, Justice formally opposed Microsoft’s announced merger with rival Intuit, fearing Microsoft’s monopoly would now extend to personal finance software. Facing lengthy litigation, Microsoft backed off. But the battle quickly moved to another front: emerging competitor Netscape, whose super software, Navigator, is used to navigate the Internet. In early 1996, Netscape’s CEO Jim Barksdale was strutting.

JIM BARKSDALE, CEO, Netscape: Thirty-eight million copies in eighteen months and three days. Why? Because it works–just rated by an independent service at a 99 out of 100–they said it was one of the highest, if not the highest, customer acceptance of a piece of consumer software they had ever tested.

PAUL SOLMAN: The problem was Netscape’s breakthrough Navigator not only took the browser market by storm, it even threatened someday perhaps to bypass Microsoft’s Windows monopoly. So Bill Gates used his power. He spent hundreds of millions of dollars to upgrade Microsoft’s browser, Internet Explorer, and unveiled it in the summer of 1996 to nullify Netscape.

BILL GATES: Well, the product we are introducing tonight is Internet Explorer 3.0. And there’s a lot of neat new things about Internet Explorer 3.0. The product is priced to sell. (laughter among audience)

PAUL SOLMAN: They’re laughing for a very important reason. “Priced to sell” meant the product was apparently free: computer makers had to buy Windows from Microsoft. The new browser would automatically come with it, in which case why buy Netscape Navigator? Furthermore, computer makers weren’t allowed to remove Microsoft’s browser in favor of Netscape’s. The results: in one year Microsoft’s share of the browser market rose like a rocket, from 3 percent to 39 percent, dropping Netscape from 80 percent to 58 percent. It was at this point, in the fall of ’97, that the Department of Justice really bore down on Microsoft, raising the question that’s been key ever since: Was Microsoft using its monopoly power to unfairly knock off the competition? In anti-trust law parlance, was it performing bad acts? Joel Klein of the Justice Department.

JOEL KLEIN, Justice Department: I believe Microsoft is a monopoly with respect to the Windows operating system, and I don’t have any doubt about that.

PAUL SOLMAN: But is it an illegal monopoly in the sense that they use that power to perform bad acts?

JOEL KLEIN: If they use that power to perform bad acts, that violates the anti-trust laws. Being a monopoly, per se, is not illegal. But if you use monopoly power in a way that is predatory or harmful to the market, that is the kind of thing we would obviously be looking into.

PAUL SOLMAN: The specific predatory act Justice looked into most deeply was “tying,” Microsoft tying or bundling its browser with Windows and forcing computer makers to install them together. A federal judge agreed with Joel Klein’s complaint that this was harmful to competition.

JOEL KLEIN: You’ve got to take our browser, and you can’t un-install it. That was a forced tie. And that’s what the anti-trust law is here to stop, taking that monopoly power and trying to push products that are competitive products to end up being part of your monopoly.

PAUL SOLMAN: For the moment, Justice prevailed. Computer makers can remove Microsoft’s browser from the screen, while Microsoft appeals. But to Netscape attorney Christine Varney, who joined us at Computer Renaissance in Virginia, Microsoft has used other tactics to eliminate her company as competition.

CHRISTINE VARNEY: There is one way to get to the Internet on every computer in this story, and it’s going to be the Internet icon, and when you click on that Internet icon, you’re going to get what Microsoft considers the best way for you to get to the Internet, which is the Internet Explorer that’s produced by Microsoft.

PAUL SOLMAN: In fact, the only browser pre-installed on any of the computers here was the Microsoft’s Internet Explorer.

PAUL SOLMAN: There’s a globe called “The Internet.” And what happens if I click on this?

CHRISTINE VARNEY: You will begin the process of installing the Microsoft Internet Explorer.

PAUL SOLMAN: But it just says “Internet Connection Wizard.”

CHRISTINE VARNEY: That’s right. And if this computer were connected to a phone line, what you would get is a list of Internet service providers that are Microsoft-approved Internet service providers that will offer you a connection to the Internet using the Microsoft Internet Explorer browser.

PAUL SOLMAN: In fact, Microsoft is tying Explorer more and more closely to Windows. For instance, on an IBM computer we picked out at random in early April, the very first screen that popped up was this: Internet Explorer 4.0. And notice that channel bar on the right. It provides instant links to sites in cyberspace, sites Microsoft chooses, prominent among them other Microsoft businesses like MSN, Microsoft’s rival to America On-Line, and MSNBC, Microsoft’s news Web site. What happens when you click on “travel?” You get a link for Microsoft’s on-line travel agency, Expedia. Click on “business” and Microsoft’s on-line stock trading system appears.

CHRISTINE VARNEY: The most precious real estate in America is right there, and Microsoft controls it completely. You want a piece of that real estate, you play by their rules, and their rules include you do not carry competing products.

PAUL SOLMAN: Now, Nathan Myhrvold, Microsoft’s chief technology officer, says his firm has been acting in self defense. Netscape, he says, when it controlled the browser market, tried to make exclusive deals with computer makers to keep Microsoft’s browser, Internet Explorer, off the screen.

NATHAN MYHRVOLD: Netscape tried to buy an inclusive. They tried to pay companies to kick Explorer off at a time when they had the dominant market share. So this whole thing is just ridiculous. A company that has 60, 80, 90 percent market share at various points in recent history was trying to buy exclusives to kick our things out because they wanted to integrate the whole world at one level, and we wanted to integrate the whole world at a different level.

PAUL SOLMAN: Myhrvold is clearly right, but to critics, the key is that Microsoft must not behave like other competitors because it’s a monopoly.

CHRISTINE VARNEY: There’s nothing wrong or illegal with exclusive deals per se. But when you’re a monopolist and use your monopoly power, the first screen, the operating system, the guts of the computer, and you condition the sale of the essential element to make the computer run on an exclusion of any competitor’s products in another market, that’s illegal.

PAUL SOLMAN: To Silicon Valley anti-trust attorney Gary Reback, the battle is over bigger stakes than just the browser. It’s over who controls the main channel on the TV of the future: the computer.

GARY REBACK, Attorney: It’s one thing if a company monopolizes software; it’s quite another thing if a company monopolizes access to the Internet because our lives increasingly are going to be conducted over the Internet. You’re kids are going to do their homework over the Internet. You’re going to deal with your bank over the Internet. You’re going to buy symphony tickets over the Internet.

PAUL SOLMAN: And the fear of the Justice Department is you’re going to have to do it all with Microsoft.

JOEL KLEIN: I don’t want to live in a town in which there’s one gas station. I don’t want to live in a town in which there’s one drugstore, and I don’t want to have the guy who has control of the operating system decide what browser I should use.

PAUL SOLMAN: Now, however, comes the crucial question: Is what Microsoft’s been doing really one of those illegal bad acts? Attorney Rick Rule says his client, Microsoft, is just being a tough competitor.

RICK RULE, Attorney: The law is pretty clear that when you’re talking about unilateral behavior of companies, we allow them to engage in conduct that may be innovative, that may be different, that may even have some adverse impact on competitors if it has a legitimate business justification, if it’s bringing benefits to consumers. And if it’s doing that, it’s not illegal even if somebody is proven to have monopoly power.

PAUL SOLMAN: Now, Microsoft says it doesn’t have a monopoly since software is the fastest moving, most competitive industry on earth. But even if it did, how is it hurting consumers? When it buys up cutting edge companies, for example, and eliminates them as competition, Microsoft makes their products cheap and widely available, as when it bought Front Page, software for consumers to create their own Web sites on the Internet. Mike Angiulo.

MIKE ANGIULO: We’ve been able to ship version after version in a really short time line, get out there and win a whole lot of industry awards, and give customers an easier and easier product, with more features in it. So we’ve taken something that worked and made it into something that’s just the best and the easiest out there, but we’re never done.

PAUL SOLMAN: As to the core charge that Microsoft is tying or bundling separate products into Windows, and thus killing competition, Nathan Myhrvold thinks government intervention would hurt consumers more than it could ever possibly help them.

NATHAN MYHRVOLD: If you want to create a principle that says if anything is ever sold separately, we can’t add it in, then you’re going to stop innovation in operating systems. I think that’s bad for everybody.

PAUL SOLMAN: Joel Klein, of course, begs to differ.

JOEL KLEIN: The question is, if you’ve got a monopoly on this desktop operating system, what are the limits of what you can bundle? Can you decide all the content that goes on the desktop, which TV shows get put on the desktop, which travel agencies, which commercial operations? What are the limits, which spreadsheets? All of those things are things that certainly need to be thought about.

PAUL SOLMAN: To Joel Klein the bottom line is consumer protection. And surely if Microsoft didn’t keep adding new features to Window, the price would be a lot lower than it is. But wait a second, says Microsoft, the total price would be a lot higher if the features had to be purchased as separate products; the process would be more complex. So, is Windows helping or hurting consumers? Well, it depends on how you and I look at it. And that may turn out to be the decisive issue–how we perceive what Microsoft’s doing. On the walls of the Justice Department office, a reminder, almost a century old, of when the government fought the Standard Oil monopoly and other so-called “trusts” as well. Arguably, it was the court of public opinion, not legal opinion, that drove President Theodore Roosevelt and the political process to break up Standard Oil. Bob Metcalfe is a high-tech entrepreneur turned columnist, now that he’s made his fortune. He thinks that these days the public is uncertain and uneasy about Microsoft, which will, in turn, prompt Bill Gates to at least listen to the Justice Department.

BOB METCALFE: I calculate he’s about to have his anti-trust epiphany where he’s going to go, I see, these guys have F-16′s, I’m going to have to play ball; my customer–his customers, by the way, want him to behave himself. My readers, his customers, want to be served by Microsoft, and among the things they want from Microsoft is choice. They want Microsoft to allow them to have the freedom to choose other things. So to better serve their customers, they’re going to have to play ball with Justice.

PAUL SOLMAN: In fact, some say Gates is already having his anti-trust epiphany and point to recent compromises by the company and an appearance before Congress.

BILL GATES: Mr. Chairman, members of the committee, thank you for this chance to present my thoughts on competition in the software industry.

ELLEN FITZPATRICK, Historian: It’s sort of like the wizard has come out from behind the smoking ball to make his appearance.

PAUL SOLMAN: Historian Ellen Fitzpatrick has studied how anti-trust targets of the past have responded to government pressure. You go into PR overdrive–

ELLEN FITZPATRICK: And you put a public face, a personal, a human face, on this vast corporate wealth. And it has the effect of calming the public and soothing them about what monopoly really means.

PAUL SOLMAN: Fitzpatrick thinks a key component of public perception is size–if we think a corporation and the guy in charge, whether Rockefeller of Standard Oil or Gates of Microsoft, simply has too much power over lives. So, is Microsoft just too big? We asked Nathan Myhrvold.

NATHAN MYHRVOLD: If Microsoft makes fundamental investments in research & development, we come up with great products and people choose those products, that’s okay.

PAUL SOLMAN: No matter how big you get?

NATHAN MYHRVOLD: What’s wrong with that? You tell me what’s wrong with us creating great innovative products and people choosing it. And if that’s okay once, it’s okay five times, it’s okay more.

PAUL SOLMAN: But Justice says it isn’t making its case on the basis of Microsoft’s size. Size can mean efficiency, Joel Klein thinks. What it can’t mean is what we as a people consider unfair competition.

JOEL KLEIN: You know, most Americans have a pretty good sense about competing fairly and in a way that protects consumers. And they also have a pretty good sense when you put your thumb on the scale, and I don’t think anything we’re doing will seek to impair Microsoft’s ability to be an innovative and a true competitor. In the end, markets work best. We ought to intervene if we have an effective, meritorious claim, and then we ought to let the market get back to work.

PAUL SOLMAN: For all its caution, though, Justice thinks it does have a meritorious claim when it comes to Microsoft tying products to Windows. But to the company, that’s government interference with the essence of its business. Chief Operating Officer Bob Herbold.

BOB HERBOLD: Integration is the core issue here, and it applies not just to Internet capabilities. We’re talking about integrating features into products on an ongoing basis, which is the heart of this industry. And I can guarantee you that if the companies in the software business have to go through complicated guidelines or committees or whatever it is, that two things will happen: The innovation rate will slow down and the costs will go up. And that’s bad for consumers.

PAUL SOLMAN: We had one last question for the standard bearer of the America software industry: Will Microsoft go to the mat against the U.S. Government?

BOB HERBOLD: Of course. This is very important, and it is something that we must fight for it for the entire industry, not only Microsoft.

PAUL SOLMAN: If that’s true, Microsoft and Justice could be fighting for quite a while.