FTC Could Come Down Hard on Microsoft : Software: The agency is expected to decide this week whether to move ahead with an unfair-trade-practices complaint.
One of the most closely watched antitrust investigations of recent years is expected to come to a head Friday when the Federal Trade Commission decides whether to move ahead with an unfair-trade-practices complaint against software giant Microsoft Corp.
The FTC’s probe of the Redmond, Wash., company has been the subject of intense speculation in the computer industry since it began more than 2 1/2 years ago, and Microsoft’s rivals are desperately hoping for action that might erode the company’s increasing power.
Many observers believe the FTC will take some action. But few expect sweeping measures, such as a forced separation of the company’s two main businesses, and Wall Street has largely ignored the matter in driving Microsoft’s stock to new highs.
The decision comes at a critical juncture for the still-youthful PC software industry. Even as growth slows and price competition intensifies in many traditional product categories, the growing power of the PC--and its continued advance into new markets--is creating myriad opportunities.
Corporations that once looked to IBM to provide complete computer systems are now buying commodity desktop PCs and work stations and relying on software to tie it all together--opening a big new market for more sophisticated software.
At the same time, consumers and small businesses are buying PCs in record numbers. That has boosted demand for computer games as well as software for education, personal finance and simple, low-cost business applications.
Many industry observers fear that if the FTC doesn’t act, Microsoft will dominate most of these new markets, stifling competition and ultimately crippling a vibrant and vital industry. Microsoft’s near-monopoly on the so-called operating systems that control the basic functions of a PC--DOS and Windows--yields enormous profits and gives the company an unassailable advantage in every segment of the business, critics say.
Already, Microsoft’s revenue and profit are several times those of its closest competitors combined, and its total stock market value--nearly $30 billion--equals that of IBM. Rivals such as Lotus Development, Novell Inc. and Borland International are straining to keep pace.
Microsoft denies engaging in any unfair business practices.
And the company’s defenders say it would be folly to handicap a company that, since its founding by Chairman Bill Gates, has emerged as a significant job creator, a major exporter and a standard-bearer for American high technology. They dismiss complaints as mostly sour grapes from competitors that have been out-maneuvered.
“Some of these vendors need to take a good, hard look in the mirror,” says John McCarthy of Forrestor Research, a Cambridge, Mass., consulting firm. “This whole thing has been blown out of proportion.”
Although the FTC investigation is non-public, industry executives questioned by federal officials in connection with the probe say it has focused on the way Microsoft licenses the DOS operating system, and on whether Microsoft uses its dominance in operating systems to gain advantage in other business areas.
According to published reports in the newsletter FTC:Watch and Business Week magazine, FTC staff attorneys have recommended that the commission take action. Specifically, they’ve cited Microsoft’s DOS licensing policy, which requires PC manufacturers, who generally ship their machines with DOS already installed, to pay a royalty even for machines that don’t include DOS.
Far more sensitive is the relationship between Microsoft’s operating systems group and its applications group, which makes products such as word processors and spreadsheets that enable PCs to perform specific tasks. Because applications must be written to the specifications of the operating system, Microsoft could gain a big advantage if it gave its own applications developers privileged access to information about new versions of the operating systems. Microsoft denies that this is done.
The five-member FTC has broad latitude in determining what constitutes an unfair business practice, and it can choose among a number of possible remedies.
Though the FTC is nominally nonpolitical--commissioners are appointed for seven-year terms and can be removed only for cause--the accession of a Democratic Administration creates a more favorable climate for antitrust enforcement, attorneys say.
“From a political point of view, the FTC in the past had to be very careful, because if they took a position that was viewed as too extreme, their funding would be cut,” said Barbara Reeves, a partner in the Los Angeles office of the law firm Morrison & Foerster. “They can now feel a little less constrained.”
Still, she noted, “antitrust is a very dangerous area,” especially in an industry such as high tech. A basic philosophical split remains: Some say entrepreneurship is the key to a healthy high-tech sector, but others believe firms must not be penalized for growing big and powerful if they are to compete effectively in international markets.
Many expect the FTC and Microsoft to reach a settlement in which the company will agree to refrain from certain practices. Bill Neukom, Microsoft’s senior vice president for legal affairs, won’t comment on specifics of the case.
Whatever the final outcome, software companies are likely to have their hands full competing with Microsoft.
Novell, for one, intends to repel Microsoft’s thrust into the corporate networking arena. The company’s Netware product is already the standard for linking PCs together, and it recently spent $350 million to acquire Unix Systems Laboratories. Unix is a highly sophisticated operating system whose acceptance in the corporate world has been hindered by a proliferation of different versions, and Novell hopes to standardize it and make it the traffic cop for Netware networks.
Novell and Unix will be going head-to-head with Microsoft’s new Windows NT operating system, which will be ready for market late this year.
Borland Chairman Philippe Kahn describes Microsoft as “the IBM of the 1990s”--a reference to the old, monopolistic IBM, not the new, crippled one. What Microsoft’s competitors must do, he says, is position themselves as the Compaqs of the 1990s--a reference to that PC company’s early success in building IBM-compatible PCs better then IBM itself, as well as its recent move to become a low-cost provider.
The IBM analogy, of course, can cut both ways. After years of investigation, the Justice Department decided in 1982 not to pursue an antitrust case against IBM. Ten years later, IBM has been brought to its knees by its failure to deal with technological change. Eventually, the same could happen to Microsoft. The danger, though, is that the competitive software industry will have long since been destroyed.
