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MICROSOFT: THE BATTLE FOR THE CYBER FUTUREAs Bill Gates and Justice spar, the industry foresees sweeping changeOn May 18, while Bill Gates was briefing the world's news media in an auditorium on the company's Redmond (Wash.) campus about the historic antitrust suits that had just been launched against Microsoft Corp. (MSFT), engineers in another building were celebrating. They had just completed three years of work on Windows 98. And, despite the antitrust suits, they were determined to keep up tradition. They marked the occasion by tossing their boss, Bill Veghte, into a pond and running a Windows 98 banner up the corporate flagpole. Microsoft employees--especially the chairman (page 40)--are convinced that they have violated no laws, that the Justice Dept. and the 20 states suing the software giant won't prevail, and that business will proceed pretty much as usual. But across the high-tech industry, there's a far different view. While few observers predict immediate, dramatic changes, a consensus is developing: Win, lose, or draw, the battle between Microsoft and regulators will alter how the computer industry and the Internet develop over the coming years. The key variable is the degree to which Microsoft continues to plot that course. At the heart of the government case is a portrait of Microsoft as a manipulator, using its clout to shape the industry and bend new technology--particularly the Internet--to its strategic advantage. Justice's most damaging bombshell in its May 18 filing was quotes from Microsoft employees who laid out plans to bundle new features such as the Web browser into Windows specifically, it seems, to thwart threatened competition--in the words of one Microsoft exec, to ''cut off Netscape's air supply.'' JUST THE START. If that evidence persuades U.S. District Judge Thomas P. Jackson to grant a preliminary injunction, Microsoft will be forced to change Win98--by adding Netscape Navigator or offering versions with and without Internet Explorer. And, if that injunction were to hold up on appeal, Microsoft's ambitions to extend the Windows ''platform'' into a range of new markets--from consumer appliances such as interactive television to computer servers for electronic commerce--could be constrained. Even if the government doesn't win the injunction, which it wants before Win98 hits stores on June 25, the legal challenges to Microsoft's business practices won't end. ''This is just the first step of a bigger battle that will shape the industry,'' says Peter Schwartz, chairman of Global Business Network, a think tank in Emeryville, Calif. Indeed, the Feds and the states made it clear that their investigations are continuing. ''We're concerned about the principle of using the operating system as leverage to sell other products,'' says Iowa State Attorney General Tom Miller. ''The browser is only the most current example.'' Sources close to Justice and the state's attorneys general say that the trustbusters hope the suit will establish general principles on practices like exclusionary contracts and product bundling that can then be applied to markets beyond browsers. That could affect Microsoft's ability to integrate new features such as speech recognition into its operating systems--forcing changes in the software giant's strategy. That's why even though it's probably too late for Justice's proposed remedies to erode significantly Microsoft's position in operating systems or browsers, Gates isn't apt to give an inch. He's thinking about the future. ''It's quite a crucial and interesting juncture,'' says Rudolph J. Peritz, antitrust professor at New York Law School. ''The notion of the desktop computer has been expanded to the virtual space of the Internet.'' Industry executives and observers paint two starkly different scenarios depending on the suits' outcome. If the government prevails, Microsoft will still dominate PC operating systems, but there will be more room for innovation, they say. The downside, however, would be more government intervention. If Justice loses, critics say Microsoft would emerge emboldened and could run roughshod over new markets while impotent federal regulators look on. Eventually, doomsters predict, it would control corporate computing, the Internet, and the new world of digital appliances every bit as tightly as it now rules the desktop. But the simple fact that government has taken on Microsoft has given some investors and executives in the technology business cause for hope. They see an opening as the feds and the states prepare for years of jousting with Gates. With the giant in court--and presumably on its best behavior--rivals that feared to tread anywhere near Microsoft's elephantine path may now take the chance. ''It would encourage more companies to write software, compete with Microsoft, and feel that they won't be knocked out by predatory conduct,'' says Carl Shapiro, an economist at the the University of California at Berkeley. RAPID PACE. The Justice suit could make a big difference for entrepreneurs, agrees Yogen K. Dalal, a partner with Mayfield Fund, a Silicon Valley venture capitalist firm. ''Those companies will feel they can make it on their own. It's going to embolden the entrepreneur and the investor.'' The government scrutiny could also cause Microsoft to slow its rapid pace of acquisitions--the software maker acquired some 40 companies in the last two years. That may cause some short-term problems for startups that hoped to be acquired by Microsoft--a common goal in the Valley these days. But it could also stimulate more disruptive forms of innovation--beyond the imaginings of Microsoft, the current standard setter. This scenario is likely on the Internet. That's where, Justice alleges, Microsoft has used illegal means to fend off Netscape's browser, which Microsoft execs worried would marginalize Windows. Now, as the Internet is beginning to unlock a new world of electronic commerce, Microsoft wants to ensure it can play a big role in that, too. ''The next software boom is the Internet, and Microsoft is moving to capture everything in it,'' says Trevor D. Traina, president of CompareNet, a Net startup. ''They've moved very aggressively to own all of it.'' Indeed, the remedies Justice is seeking in its preliminary injunction--to restrict the bundling of Internet Explorer with Windows, ban exclusionary contracts, and shift more control over the Windows opening screen to PC makers--may do more to provide an even playing field a few years hence than to change anything now. PC makers, for example, aren't screaming for control of the opening screen. But the opening screen--the portal to the Internet--will become critical when high-speed communications transform the Web into a more mainstream medium that hordes of newbies will tune into from TVs and smart phones as well as PCs. ''The real question is what will happen to TV by then?'' asks George Bell, chief executive of Excite Inc. (XCIT) ''Who gets to program the set-top box? Microsoft wants to be in that space.'' Indeed, Microsoft is already muscling in. Last year, it bought WebTV and made big investments in cable operators. It's pushing Windows CE as the operating system for digital set-top boxes and other consumer devices. The prospect of Microsoft controlling the future as well as the present is what riles Microsoft's enemies most. ''Anyone who cares about the Internet and the digital marketplace has got to care that there be competitive, alternative routes to get there,'' says Roberta R. Katz, general counsel for Netscape. Some Net entrepreneurs say they already find themselves stymied by Microsoft's power in cyberspace. Ask Payam Zamani, co-founder and executive vice-president of Autoweb.com, a Santa Clara auto sales site that competes with Microsoft's Carpoint. Zamani contends that CarPoint has an unfair advantage since Microsoft can funnel traffic to the site from its browser. ''They don't even have to do any brand marketing,'' says Zamani. ''If Microsoft wins this battle, it means the Information Age will be Bill Gates's.'' How will the legal battle play out? The first test will be the injunction. ''It will be a decisive battle,'' says George Mason University School of Law Professor William E. Kovacic. ''If Justice wins, it will give tremendous leverage to their case. If the DOJ loses, they will be forced to march through the litigation swamp that tends to eat government lawyers alive.'' And if Microsoft heads off the injunction? ''We're back to the status quo, except that Microsoft would be much smarter about everything,'' says Rob Enderle, an analyst with Giga Information Group Inc., who's critical of the Justice suit. ''If they're scary now, they'd be truly frightening.'' The battle begins.
By Amy Cortese in New York, with Susan B. Garland in Washington, Steve Hamm in San Mateo, and bureau reports RELATED ITEMS
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Updated May 21, 1998 by bwwebmaster
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