CHAIRMAN BILL BARKS BACK
Why risk years of litigation and the possibility of losing an antitrust battle with the federal government and 20 states? On May 19 -- a day after the Justice Dept. and the states filed their suits against Microsoft Corp. -- an uncompromising Chairman William H. Gates III told Business Week's Steve Hamm why he called off the settlement talks -- and discussed how his decision will affect his company and the industry.
Note: This is an online-only version of the interview that appeared in the June 1, 1998, issue of Business Week.
Q: If the preliminary injunction is granted, to the Department of Justice and state attorneys general, which option would you choose [what Microsoft Senior Vice-President William H. Neukom calls the "Hobson's choice"]: to ship Windows 98 with Internet Explorer (IE) removed or ship Netscape Communications Corp.'s Navigator with every copy of Windows 98?
A: The key point is that the government doesn't like the fact that we're putting Internet technologies into the operating system in an integrated way. They just don't like that design decision. And yet, it's been integrated in a lot of ways, so when you get Help text, it relies on Internet technology -- the way the software is kept up to date, the way we display directories. And so it is a very fundamental part of the operating system and provides a lot of user benefits. And so you'd certainly have a very inadequate product if you ripped all that stuff out. You know, every operating system company is putting Internet browsing into their operating system and doing more and more integration, so it'd be bizarre to have an operating system without that.
So, fundamentally we feel quite confident that the law that has been upheld 100% of the time will continue to prevail, and that's that the courts are not going to get involved in the design of computer technology. In fact, the appeals court said that very specifically when dealing with exactly this issue on the stay. They were asked, "What about the technological integration in Windows 98?" and they cited a leading anti-trust authority, including the quote about not getting judges and juries into computer design.
So we're quite confident that the law the U.S. has had will continue to be how things are done, and that therefore we won't face that choice.
Q: But if you had to make the choice, which is the more important, strategically and based on principle?
A: I don't think it's worth getting into that hypothetical. We had a lawsuit with Apple that went for six or seven years, and people constantly were saying to us, "What if you lose, what if you lose?" because they were saying that they were the only company that could do graphical interface, and throughout it we said, "Look, we've done original work and this is going to be upheld," and in fact in that case it was. Here, in this case, you just can't contemplate the notion that the government's going to be deciding for every new feature we come up with which one is going to be in and which one is not going to be in. So it's not only are they objecting to the browser, they have a basic view that most of the improvements we make we shouldn't be able to integrate in.
Q: On the surface, neither choice seems all that onerous in terms of damaging your operating system franchise, especially the one about including Netscape. I don't understand why that would be so harmful. So maybe you can explain what you're really concerned about. Is it a slippery slope?
A: It's unreasonable to ask somebody to include a competitor's product. It's like requiring Coca-Cola to include three cans of Pepsi in every six-pack. And they don't include us in their product. We're in competition with them. I don't understand how we'd ever negotiate the size, or the compatibility, or the support, or any of those issues. It's just an outrageous request.
Likewise, ripping out all of the Internet support is very anti-customer. And it's also very anti-developer. Developers are writing applications that use our Internet capabilities so they can reach out to the power of the Internet while you're running applications. And we'd break all of those things if we didn't have our Internet capability inside the operating system. So for both developers and end users, the integration we did is a fantastic thing. And we're not going to go backwards on that.
Q: The other big issue seems to be this issue of the boot-up. When I boot up my PC I see the Microsoft name and the Windows flag waving, then the desktop, start button, toolbar. Some people are wondering why isn't it enough for Microsoft to have those things? Why not give control over the rest of the desktop to the PC makers?
A: I don't know if you've actually looked at PC machines that you go out and buy. In fact, you'll find incredible variety on the PC desktop. We do insist there are a few minimal elements that are maintained, particularly the Start button and the icons we put up on the screen. But the vast majority of the screen is left to the OEMs to put up any icons they want or any active controls that they want. In the demonstration we did yesterday, we showed the immense variety of add-on software and user interface things people put on that desktop. It's important when people buy Windows that that mean something. And what the government wanted was for somebody to be able to come in and pay OEMs to eliminate our interface, and we would have no way of asking them to provide the interface. So the Windows brand would become absolutely misleading. When you buy a machine, none of the ways you've learned to use other Windows machines would make sense.
The computer industry, before PCs came along, was one of very high prices and very few choices, because there was nothing common between the machines. There was not a common user interface, as we're providing with Windows, and so asking the computer industry to go back to the days before PCs is really taking all of the innovation and efficiency...and saying that it's completely worthless. Having a common Windows UI is a central element of that, and we do give OEMs really quite incredible flexibility beyond our basic Windows elements. The splash screen you see -- most OEMs do replace the splash screen, and then, of course, the user can replace or delete anything they want.
Q: The splash screen is the screen that has the Windows logo on it?
A: That's just an image. You can replace that yourself, as well, as an end user.
Q: But clearly, the PC makers seems to be wanting more control over this. I'm sure they tell you that, too, right?
A: Computer makers were able to charge higher prices before the PC came along. And so the idea that if all these machines were incompatible, you could go back to locking customers in, sure, there's some people who are nostalgic about that. In fact, most of the PC makers I've talked to are enthusiastic about the volume that the PC industry created and are anxious to continue to have a consistent standard, and the customers they've talked to are very keen on those Windows elements being there and very very pleased with the flexibility that we give. I'm sure you'll find some OEMs who'd like to have their cake and eat it, too. But some commonality of interface is a huge benefit for users. And that's what the word Windows means.
Q: What happens to Microsoft and the PC industry if Justice gets an injunction and wins the suit?
A: We're very confident that the government won't be successful with this case. The law on our ability to innovate on behalf of consumers is crystal-clear. You know, look at every technological integration case there's ever been, and they all say exactly the same thing. Why the government didn't look at what the appeals court said last week is pretty unbelievable. Likewise, all the contracts we did are perfectly normal, legal contracts that in no way made it impossible for Netscape to market their products. Their product is easy to get to across the Internet. That's where most people have gotten it, and it's very simple. There's not shutting out of them. Internet Explorer has been successful because it's the best product. Look at all the product reviews, talk to anybody out there who's used both products, IE is a better product. We only gained market share when we had the better product. IE was in Windows from the very very beginning, and that didn't get us much usage. It's when we listened to the customers and did great work we got it. So, this is a lawsuit where the government had its best day when it filed the suit. Now we get to bring out the real facts about what has taken place here. Will it be resolved in the next five years? I hope so. The sooner the better, as far as we're concerned.
Q: I appreciate your argument that you feel like you have the legal advantage now that it gets to judges and process and law. But I want to ask what the negatives would be if what Justice is asking for were actually done. How would it affect Microsoft and the computer industry?
A: Windows has been key to the PC industry. The fact that we can go to developers and say, "In all these machines, things like these Internet capabilities, the graphics interface, are there, so you have a high volume of machines that you can sell to," has allowed there to be an incredible increase in successful software companies, record employment, record levels of investment. Windows' uniformity is central to that, and if we get a situation where we're not allowed to add new features like Internet support, or Windows has been fragmented as various people delete various things on different machines, you've got the old computer industry, the computer industry before the PC and Windows came along. And that's an industry that is not oriented towards high volume and the ability to have software applications that are independent of your hardware choices as well as independent of your peripheral choices. So, it would be a huge setback for consumers not to have what has been at the core of all the benefits they've received from the PC.
Q: So, you see prices going up? Incompatibilities? Splintering?
A: Look at the software industry before Microsoft had a high-volume platform that was absolutely uniform across all the hardware. Back in those days, people had to do special development and testing of their applications for each machine. Compare it to the UNIX environment, which is exactly like that, where each manufacturer does make some changes to the interface, or other changes. It started with a common core, but because everybody could play with it, they do play with it. And the net effect for customers is incredibly negative. It's very hard to mix and match those machines; you end up getting locked in with one manufacturer.
This has been the big breakthrough of the PC industry: the openness and the choices provided for customers. And the principles the government's after here would erase everything that's been done by the PC industry: the consistent interface, the ability to consistently run applications, and the ability to consistently improve what's in the product.
Q: What would be the effect on Microsoft itself? Would it be a serious competitive threat for you?
A: Well, certainly every company in this industry has to keep improving its products very rapidly. That's why you've seen our R&D investment go up by a factor of 10 over the last eight years. We're investing in some things that we think are very exciting. Customers are asking us to unify concepts and make things simpler on the PC, they're asking us to build in an ability to understand spoken language or to have visual recognition. That's what we're hard at work investing in. And when I talked with the government I asked them whether there was any feature that they thought it was OK for us to put into Windows, and their basic answer was no, there were no features that met their criteria that we could ever add to Windows. So, our vision of making the personal computer better and better does rely on enhancing the products, including things like Internet support.
It's ironic they've chosen Internet support here in this case, because it's almost the easiest to defend. The Internet is clearly a good thing, and virtually every user wants easy access, and every developer wants to build on the Internet things we have here, and so this one is crystal clear.
Q: I know innovation is one of your issues here. What things will you be prevented from doing if Justice wins?
A: Well, the principles Justice has put forward never would have allowed us to do Windows 95. We never could have put a graphical user interface into the operating system. We never could have put font management in. We never could have put networking support in. We never could have done Windows NT, which has its built-in rich security. In the future, we wouldn't be able to do speech recognition or visual recognition. Their basic approach says you can't put new features in because somebody might want to offer it separately, and instead of helping customers, let's help the person who wants to offer the thing separately.
Q: So, the idea is that every single feature would have to be offered as, in a sense, an application?
A: They don't use the word application, but they say that any new features we do, and this would have been true in the past as well, everything has to be offered as a separate item. So you end up with literally hundreds of things the customer has to buy and integrate on their own.
Q: If you are correct and if the Justice Dept. suit fails, how do you see the industry evolving? And how about Microsoft?
A: Microsoft has three primary businesses, and they'll be our primary businesses for the next decade. Those are Windows, Office, and BackOffice. We're investing a lot in the entry-level Windows, Windows CE, and we continue to invest in Office -- things like natural language, and now knowledge management or Web support. That's a big deal. In BackOffice, there's a lot we're doing that has to do with clustering, scalability, reliability. We see huge opportunities in each of those areas. We're going to stay true to the vision and principles we've had since our founding, in terms of hiring smart people, listening to our customers, investing a lot in R&D. The key for us is just to keep doing that great work and make sure that there's no distraction here.
Q: Do you expect to have predominant market share in all those operating systems -- Windows 98, Windows CE, and Windows NT?
A: If you call my competitors, they're on the verge of wiping out Windows and all the other products. It's a very competitive business, and you're going to get a diverse set of opinions. All I do is come in every day, work with these developers -- you know, I just came out of a session where we were talking about all sorts of customer feedback about what things we need to do better. All we can do is come in and do our best at enhancing these products. Windows NT 5, for example, is a very exciting product. But there are lots of companies that are competing to replace us.
Q: The papers Justice filed have what looks like evidence of attempted market collusion at a June, 1995, meeting between Microsoft and Netscape. What really went on?
A: [Long pause.] It's an outrageous lie, the way Netscape has characterized the meeting. I was not involved in the meeting, in any way, shape, or form. There were a couple of people from Microsoft who had been requested to go down by Netscape. None of our people who were doing the browser development were there...but we were very far along in developing our browser. Remember, we talked about putting a browser into the operating system before Netscape was even founded. And we actually shipped our browser a few months after this meeting, and we'd been working on it for more than a year. To say that it was something about collusion is just absolutely wrong.
Q: The allegation was that you told them to continue going after Mac and Unix and Windows 3.1, while you would concentrate on Windows 95. Is that not true?
A: That's, I don't think, even what their lies say. I think you've got that wrong. At no time in any way was there a discussion about dividing up a market.
Q: So there's no chance for a settlement?
A: I put in day and night for a couple of weeks -- doing our best to settle this thing. It's kind of interesting that what the government was asking for in the settlement was not less than they're asking for in the lawsuit. The notion that we have to completely hide the Windows interface and make the Windows name meaningless and that we have to hide the Internet support that we built in for users and developers or that we have to ship a competitor's product with our product, like Coke having to ship cans of Pepsi with every six-pack -- those don't make sense to us because they're anti-consumer.
Q: The Feds weren't willing to compromise on those issues?
A: That's right. All three of those demands they were immovable on. What they requested in the settlement was identical to what they're requesting in the lawsuit. There was nothing reduced in their settlement discussion at all.
Q: Why, then, did Microsoft restart the talks on Thursday, May 14, but then almost immediately come to an impasse?
A: That's not true. You've got the chronology. We were on the phone with them very late Wednesday night and very early Thursday, agreed to meet face to face. There hadn't been a face to face meeting. I'd been on a lot of phone calls, as had Bill Neukom, but they'd been with the DoJ, not the states. So then Neukom went back and spent all day on Friday and a part of Saturday talking face to face with the DoJ and the states, and that was the first time that we understood that they weren't, [laughs] they weren't compromising in any way, shape, or form. They wanted 100% of what they were asking for in the lawsuit, including those three things.
Q: So, it was a misunderstanding in that you thought there was room for compromise because you thought they were going to compromise some more, and then it became clear that they weren't?
A: [They] never said that they were sticking absolutely to those three things. To me, I was going to go the extra mile to try to settle the thing. I was glad to delay Windows 98 over the weekend, I was glad to move heaven and earth to make sure we had done everything possible to try to settle this thing and avoid a lawsuit.
Q: One last thing. Over the last few months I've talked to many people, many of them fans of Microsoft, who feel there has to be a change, who have welcomed this investigation. People in the PC business -- it's not like they're your enemies, but they just wish that this model was working a little more to their advantage and a little less to your advantage. Are there adjustments that could be made that would satisfy these people but wouldn't harm your sacred principles? Isn't there any way to compromise?
A: We compete with Netscape and many other companies, so we're going to continue to do what we've always done: Make the best product by listening to customers and investing in the research. There's no compromising on making the best products. You might say I should sit down with Netscape, but the irony is that that's the lie that they said that we did. That's not appropriate to suggest that at all.
Q: To sit down and cooperate with them?
A: That would be utterly inappropriate.
Q: Personal-computer makers' prices have fallen by half in the last few years, but your price for Windows is the same. You're not sharing the pain with them...
A: Look at the R&D investment that we make in Windows and how those costs have been going up. They are dramatically higher than they were in the past. Windows 98 is a product that we priced exactly the same as Windows 95, and yet it has substantially more capability. Windows has always been a pretty small percentage of the cost of a PC, and the key thing that PC manufacturers ask us for, Steve, is consistent pricing -- which we absolutely give them.
Q: Consistent between them? So they all get the same price based on volume?
A: That's right, because they just pass that through. It's like any other cost they have. They just want to make sure they have consistent pricing, and we're very very careful to give that.
Q: Any last points you want to make?
A: The key thing here is that it's right to innovate on behalf of customers. If you slice through this whole thing, the government objects to us putting Internet support into Windows, and that's crazy. I feel quite sure when people think about this, they're going to recognize that.
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