04/20/19 SCENARIO 1: UNCLE SAM LEAVES BILL GATES ALONE

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SCENARIO 1: UNCLE SAM LEAVES BILL GATES ALONE

The argument for leaving Microsoft alone is both simple and powerful: If it ain't broke, don't fix it. Look around. Is the company hurting consumers? Does the economy appear to be suffering? Is the computer industry experiencing a lack of competition or innovation? The answer is a resounding ''no'' on every count.
Consider the statistics. The number of software companies founded in the U.S. last year was 191, twice as many as in 1990. Industrywide software revenues have grown from $39 billion in 1990 to $122 billion last year, according to International Data Corp. Much of this good news is attributable to Microsoft. The company's Windows operating system runs on 90% of personal computers, and its more powerful sibling Windows NT accounted for 40% of all network servers sold last year. Those nearly ubiquitous programs--along with Intel Corp.'s microprocessors--help establish economies of scale for PC makers that have pushed the price of an average desktop computer down 15% in just two years, from $2,192 in 1996 to $1,863 today, and have fostered a thriving software-applications industry.
SINGLE STANDARD. The key to Windows' amazing influence is that it has become the software standard for the PC industry. As such, thousands of PC hardware makers, tens of thousands of independent software companies, and millions of individual programmers depend on it. The Windows standard assures those companies and programmers of a huge market for their goods. And, for consumers and corporate customers, Windows serves as a warranty that software programs will work on any of the 250 million PCs that have been shipped worldwide since 1990.
Yes, Microsoft is the chief beneficiary of its monopoly. But Microsoft got where it is today, in large part, by competing harder and smarter than its rivals. Take Apple Computer Inc., the only semblance of competition in PC operating systems. Early on, Apple made a crucial decision not to license its operating software to other PC makers--which could have established it as the standard instead of Windows--and pursued a high-price-tag strategy. Then, over the past decade, Apple squandered its technological lead and today the computer maker has just 3% of the worldwide market.
There are those who even say it wouldn't be a problem if Windows became the only operating system. Why? Because Microsoft's track record shows it has steadfastly improved Windows, even as the competition has dropped off. ''Microsoft doesn't behave like a monopoly,'' says Mark Hoffman, CEO of Commerce One Inc., which has hitched its success to Windows. ''It's always worried about another competitor coming up and beating it.''
TALL ORDER. Even if the Justice Dept. decides that Microsoft has behaved illegally or is becoming just too powerful for the good of the software industry, it must establish that consumers have been harmed. That will be a tall order--given the PC industry's track record for keeping prices low, even while adding new features.
One of the things competitors complain about most is Microsoft's practice of adopting others' innovations and integrating them into its own operating system. In the past three years, Microsoft has snapped up or taken equity stakes in more than two dozen startups with leading-edge technology. Such acquisitions bring great benefits to consumers. And by packing into Windows new technologies such as the graphical user interface, data compression, and faxing capabilities, Microsoft has spared consumers from having to buy those features separately and stitch them together. To be sure, Windows has risen in cost: In 1990, the retail upgrade cost was $50. Now it goes for $109. Microsoft says that's because Windows is now much more powerful. Nonetheless, higher prices are remarkable in an industry where prices are falling.
Meanwhile, there's no shortage of innovation in Windows applications being made by other companies--including corporate software for tracking inventory and order-taking, as well as programs designed for traveling workers and games and education software.
And, although Microsoft may look invincible, some of the company's most feared initiatives have bombed. Intuit Inc. remains the No.1 maker of personal-finance software, despite Microsoft's repeated attempts to topple the Silicon Valley company. When all else failed, Microsoft tried to acquire Intuit Inc. in 1994--but was blocked by the feds. The following year, rivals were fretting about Microsoft's launch of Microsoft Network (MSN), an online service that would compete with America Online Inc. Microsoft planned to include the MSN icon right on the Windows opening screen, so customers could sign up for the service with a single mouse click. Three years later, there's not much clicking: MSN has gained just 2.5 million subscribers, while AOL has zoomed to more than 11 million.
Beyond these small skirmishes, there's a bigger force at work that could keep Microsoft in check: the amazing capacity of the computer industry to correct itself through innovation. Every decade or so, a seismic change in technology comes along that alters the rules of computing and--if the combatants aren't careful--shifts the balance of power. In the 1980s, it was nearly impossible to believe that IBM could be unseated from its high-tech throne. But the computer giant failed to anticipate the PC revolution and allowed Microsoft to control key standards that it rode to dominance.
Similarly, the Internet or some unforeseen phenomenon could topple Microsoft someday. That kind of technological break ''will make Microsoft irrelevant in our generation,'' predicts venture capitalist Roger McNamee, a partner at Integral Capital Partners. Several years from now, the computing landscape could well be dominated by smart devices, new kinds of networks and embedded systems--in cars, buildings, interactive television, and credit cards--for which Microsoft's general-purpose operating systems are not well suited. Whether the technological successor is Sun Microsystems Inc.'s Java or a software scheme yet to be hatched in a garage, it's likely to create a new powerhouse--until the next big thing comes along.
In the meantime, simply having the government spotlight trained on Microsoft may ensure the giant doesn't overstep its bounds. Bill Gates has already shown that he's willing to budge--at least a bit: A month ago, on the eve of his appearance before the Senate Judiciary Committee, Microsoft unilaterally altered contracts with 40 Internet service providers, lifting provisions requiring them to favor Microsoft's browser over that of Netscape Communications Corp. as a condition of getting referrals from the Windows screen. ''We listen to criticism,'' says William H. Neukom, Microsoft's chief counsel. ''If there are sideshow issues that we feel we're not wrong about but we see it's in the company's and our customers' best interests to move on--we're willing to do that.''
Microsoft is now reconsidering the way it handles quid pro quo relationships with the content partners whose Web sites are featured on the Windows 98 opening screen inside its ''Channel Guide.'' (Microsoft can afford to rethink this, since it admits that the channels so far drive little traffic.)
Will Microsoft change its behavior when sizable profits are at stake? Probably not. That may yet prompt the government to take action. But any tinkering could damage one of America's most successful companies--and a vibrant industry along with it. Says Robert P. Taylor, a law partner at Howrey & Simon in Menlo Park, Calif.: ''The notion that we can make a system better that is functioning perfectly well should be viewed with skepticism.''
By Amy Cortese and Mike France in New York, Susan Garland in Washington, D.C., Steve Hamm in San Mateo, Calif., and Michael J. Mandel in New York

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