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SCENARIO 2: JUSTICE SLOWS THE GIANT WITH 'SURGICAL STRIKES'In Silicon Valley, there's a catch phrase that's applied to the fool who falls for a line of reasoning that's passionately argued, seemingly logical, yet ultimately unsupportable: ''He drank the Kool-Aid''--a reference to the Jonestown suicide pact. And, according to critics of Microsoft Corp., anybody who swallows the argument that the software titan is a national treasure and therefore shouldn't be messed with has done just that. Sure, they'll agree, Microsoft's Windows helped spawn the personal-computer revolution. That has been good for the high-tech industry, the economy, and consumers. But, critics say, Microsoft has gone too far. It has unfairly squashed software competitors. And now it's using its Windows desktop monopoly to extend its dominance to key emerging markets such as the Internet and a new crop of ''smart'' appliances. Some antitrust experts are crying foul. The history of computing may suggest that no one company will rule for long--but then the world has rarely dealt with the ultra-competitiveness of Gates. Consider how effectively his company has become a top player on the Net, the next crucial technology battleground. Microsoft has grabbed some 40% of the Web browser market in just three years, in part by giving its Internet Explorer away free and by pressing PC makers to ship it as a condition of licensing Windows. Because Microsoft has woven browsing into Windows 98, due in June, it is practically assured of owning that market. GIVING IT AWAY. What's more, Microsoft is doing the same with Windows NT, bundling freebies including a basic Web server--making it difficult for smaller competitors such as Netscape Communications Corp. And the software giant has poured hundreds of millions of dollars into creating Web sites offering travel reservations, mortgages, car buying, news, and entertainment services. All of this adds up to a Big Brother scenario: a world where computers are everywhere--and Microsoft software controls them. What's more, by owning the first screen that people see when they turn on their computers, Microsoft is in a position to funnel Web surfers to its own sites and, potentially to charge monopoly rents to other companies for a piece of that beachfront real estate. In the absence of any formidable competition, there won't be much pressure on the company to keep a lid on prices, either. Already, it has phased out the pricing deals that allowed corporations to pay for server software based on the number of people who are using it at any one time--rather than the number of people who are equipped to use it. That simplified contracts, Microsoft says, but it raised the overall cost of a license as much as fivefold for some customers, say analysts. At the same time, Microsoft is encouraging corporate customers to adopt Windows NT as the software of choice for their desktop machines. Analysts estimate that Microsoft gets an average of $80 or more for NT from PC makers--double what it gets for Win95. So while PC prices are falling, Microsoft gets an ever larger piece of the pie. Because of worries over such power, it's unlikely that Justice antitrust chief Klein will choose the ''do nothing'' option. Considering all his saber-rattling, he'll feel considerable pressure to take action. ''If they bring no case, they'll be viewed as wimpy,'' says Joe Sims, a Washington antitrust lawyer. Indeed, Klein & Co. are now studying potential ''surgical'' strikes--lawsuits that would target specific anticompetitive practices, say insiders. His goal would be to devise a special set of competition rules just for Microsoft. Those guidelines would come from four primary remedies, which could be applied alone or in combination. Each one targets what's alleged to be a distinct unfair practice:
One of the most pervasive complaints about Microsoft is that it exploits its monopoly power by coercing business partners to agree to exclusionary deals. Take PC makers. It forced them to ship its Internet Explorer browser with each computer as a condition of their Windows licensing contract. That has been fixed. But the company still requires PC makers to show the Windows desktop screen--as mapped out by Microsoft--when a computer is turned on. That screen must include icons for Microsoft products such as the Internet Explorer browser and Microsoft Network. Microsoft also has cut deals with Internet service providers (ISPs) requiring them to promote its browser to customers who sought out the ISP based on information from the Windows desktop. Microsoft backed off, but there's nothing to prevent it from doing this again. Indeed, it has similar agreements with Web site operators that are featured as ''channels'' on Internet Explorer. Additionally, Justice is looking into allegations that Microsoft has violated the terms of its license for Sun Microsystems Inc.'s Java language in an attempt to undermine it. Java can be used to create software programs that can run on any operating system and, if it is widely adopted, could loosen Windows' lock on the market. To crack down on Microsoft's dealmaking practices, the government could establish new ''rules of the road'' for the company's business contracts. These guidelines would limit Microsoft's ability to discourage business partners from selling or promoting its rivals' products. They might also force the company to abide by Sun's conditions for using Java. Proponents trumpet this as being much easier to administer than other remedies. The government simply has to set out its guidelines and then make Microsoft turn over its contracts to Justice. ''This is best because it is in the business realm rather than the technical realm,'' says Carl Shapiro, an economist at the University of California at Berkeley and former chief economist in Justice's Antitrust Div. There's a good chance that this remedy would limit Microsoft's ability to bully its business partners--especially ISPs. Unlike PC makers, these players aren't dependent on Microsoft to make their ''product'' successful. If the government restricted Microsoft's ability to demand exclusionary contracts, the ISPs might well do more to promote Netscape's browser and other competing products. This solution, however, isn't guaranteed to work. In an attempt to help rival operating-system makers, the Justice Dept. applied the fair contracts remedy to Microsoft in its 1995 consent decree--but it was a case of too little, too late. The company had little trouble overcoming the contractual restrictions, since Windows already claimed some 80% of the market at that time. Moreover, this remedy is unlikely to help Netscape win more business from PC makers because of their dependence on Windows.
Microsoft's ownership of the Windows desktop makes it, in essence, the major on-ramp to the Information Highway. Last September, when the company introduced Internet Explorer 4.0, it began offering PC makers the opportunity to feature a so-called ''channel bar'' on the right side of the Windows desktop screen that would allow computer users to click on a spot, launch the browser, and then proceed to a number of Web sites. Today, the first set of channels features the software maker and several of Microsoft's handpicked partners, including Walt Disney, Pointcast, and Warner Bros. No fair, competitors say. Terrell B. Jones, president of Sabre Interactive, which operates the travel-arrangement site Travelocity, says that Microsoft denied him the opportunity of a favored position on the Channel Guide for his site. Instead, the company gave the top spot to his rival, Microsoft's own travel site, Expedia. Justice's on-ramp remedy could prevent Microsoft from giving its own services and content favored locations on Windows. The Justice Dept. would do this by giving control of what appears on the opening screen to PC makers, which account for some 90% of Windows sales. PC makers call this the ''first boot'' issue--referring to when a computer is turned on--and are itching to get their hands on the prime real estate. A similar approach was used to regulate the Sabre airline-reservation service, which travel agents use to receive flight information. American Airlines Inc. launched the system 20 years ago--and it used to list its own flights first. Now, the flights must be listed in random order. If a court placed a blanket restriction on Microsoft's ability to dictate what Internet content appeared on the Windows desktop, it could dramatically open up competition on the Web. Shifting the power to decide which icons are situated on the opening screen to PC makers would diminish Microsoft's sway over them. PC makers would be able to negotiate with software and content companies--including Microsoft--and to differentiate their plain-vanilla machines. ''We'd like to control our own screen,'' says Stan Shih, founder of Acer Group Ltd. The result: PC makers would gain leverage, perhaps opening up a new revenue stream as they auctioned off space to the highest bidder. Internet-content companies, meanwhile, would no longer face the prospect of begging Microsoft for a prominent spot on the Windows screen.
To prevent Microsoft from folding other features and services into its dominant operating system, Justice could try to force the company to market many of these as separate products, or a la carte. Instead of selling Windows 98 to Compaq Computer Corp. for $45, say, Microsoft would be forced to offer the PC maker a basic operating system for $35. A browser might cost an additional $10. And new features that are coming down the pike, such as speech recognition, would come with their own price tags. The goal: to force Microsoft to sell new technology for its real cost of development rather than including it free of charge in Windows. Such bundling gives PC makers and consumers little incentive to buy competing products. The a la carte remedy would wipe out that advantage, says Washington antitrust lawyer Douglas E. Rosenthal, and ''would respond to charges that small companies that are making better software are not getting a chance.'' To be sure, many in the software community object vehemently to this notion of ''forced unbundling.'' They argue that integrated functions, such as browsers and speech recognition, make operating systems better and easier to use--and that these are not necessarily separate products. And many lawyers and techies, alike, abhor the idea of government trying to define what is ''operating-system'' software, and what is ''application'' software. They fear this would inevitably lead to a situation in which a federal District Court Judge made key business decisions, much as Judge Harold H. Greene did while supervising AT&T for years. ''The last thing you want is the government putting in concrete definitions of what you can do with software,'' says Paul A. Maritz, Microsoft's group vice-president in charge of platforms. Theoretically, the a la carte approach would give companies such as Netscape a better shot. But in reality, few PC makers are likely to switch from the Microsoft browser or other applications. Why? For one, Microsoft's browser wins critical praise. And Microsoft clearly has PC makers over a barrel. They need to package Windows with their PCs, and their margins are so thin that getting a good price is crucial. Under this remedy, Microsoft would still have control over the price of the basic operating system. As a result, it's unlikely that the a la carte solution alone would prompt computer makers to risk angering Gates by choosing rival programs. This would be especially true if the price for a stripped-down Windows was the same or not that much less than the browser-loaded version.
A more radical solution to the problem is to force the company to make its operating system public property--to a certain extent. The code that makes up Windows, as with most software, is private property protected under copyright law. Because Microsoft controls its Windows code, software developers must rely on applications programming interfaces (APIs) that work with it. Essentially, these APIs are hooks in the operating system that allow other companies to make their products work with Windows. This situation sets up the potential for Microsoft to favor its own applications group with hard-to-get information about Windows APIs. Not so, says Tod Neilsen, Microsoft's director of developer relations. He insists the company gives outside software companies the same information about Windows APIs as its own applications developers--and at the same time. But some software executives have long complained that Microsoft occasionally delays release of APIs. Netscape, for instance, claims Microsoft withheld information about Windows NT to get an advantage over Netscape's Web server software. Justice is looking at ways to ensure there is no favoritism. One possible solution frequently talked about among software developers: having the government supervise Microsoft's release of APIs. This would likely require installing some sort of independent auditing body on the Microsoft campus--probably under the supervision of a judge--to approve the interfaces and disburse them to software makers. Something similar to the ''Public Access'' remedy was done during the 1984 breakup of AT&T, when a judge forced local phone companies to open their switching systems to competitors. Sure enough, that required a lot of bureaucratic oversight. But according to Berkeley's Shapiro, this may be ''a rare case where it's justified'' because applications developers rely on Microsoft's assurances that its operating system is open. It's unclear, though, whether there is any skulduggery surrounding APIs. In spite of cries for the open access remedy, complaints that Microsoft withholds information about its software have always been sketchy and are becoming increasingly rare. The company, after all, has a strong incentive to give outside developers accurate information to keep up a steady flow of Windows applications. Even Sybase Inc. CEO Mitchell E. Kertzman, one of Microsoft's loudest critics, says that, ''They're very timely with sharing technology. They don't withhold it.'' So which of the remedies, if any, will the Justice Dept. seek? Unless scheduled talks with Microsoft result in a settlement, the feds are expected to bring an initial suit targeting Windows 98 by the end of April. The agency probably would seek an injunction incorporating a number of quick temporary remedies, including versions of the a la carte, on-ramp, and fair-contract solutions. Klein is sensitive to the problems his surgical-strike tactic could raise. ''In thinking about a remedy, you don't want to set in place a process where you become a de facto regulatory commission monitoring all of their activities,'' he said in a recent interview with BUSINESS WEEK. But as frightening as this may be, many people consider the prospect of leaving Microsoft alone worse.
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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Updated Apr. 9, 1998 by bwwebmaster
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