Microsoft’s ‘Threat’ Stems From Laudable Success

What everybody should understand--but few do--is that we all have a stake in the Microsoft antitrust case, in which a federal judge last week threw out a settlement and called the company “a potential threat to this nation’s economic well being.”

The question is does antitrust law, which is central to American business and our national life, put a limit on success, or is it a useful rein on a champion thoroughbred?

The answer, on balance, is the rein on the thoroughbred, but the issues are subtle and take understanding--and are not made clearer by rhetoric that calls a company with $5 billion a year in sales of computer operating systems and software programs a “threat” to the nation.

To most business people, a company that achieved global leadership in a new industry while rewarding shareholders handsomely--including founder William H. Gates, 39, who is worth $9.8 billion in Microsoft stock--is to be praised, not criticized. To most business people antitrust is a subject for the law schools, not the rough-and-tumble world they inhabit every day.

But such attitudes underestimate the importance of legal principle and the country’s stake in emerging technology. Judge Stanley Sporkin was insightful in calling Microsoft a monopolist in a field that is “central to this country’s well being, not only for the balance of this century, but also for the 21st Century.”

The truth is Microsoft is both an admirable company and a monopolist, which is not illegal in itself but is a market position that bears watching because power corrupts. Market dominance can lead to suppression of competitors through unfair tactics. That, essentially, is why Microsoft will be reined in.

But we get ahead of our story, which will tell us how Microsoft led by Bill Gates--one of the smartest business people anywhere--grew to prominence, dominance and legal troubles.

The crucial field to which Sporkin referred is computing and its emerging marriage with communications. It is the world’s most important industry, ranging across telephone, computer, cable and television companies.

In that universe Microsoft grew by supplying the disk operating system (DOS) for IBM personal computers. But Microsoft didn’t serve only IBM. It made DOS available at a relatively low price to any company making a personal computer. Thus Microsoft’s operating system became the foundation for Compaq, Dell, AST and others--the system that runs more than 80% of the personal computers in the United States.

Then Microsoft created Windows, a computer functions system that uses pictures and a clicker instead of a keyboard, in direct competition with Apple Computer’s Macintosh. Again, Microsoft made Windows available to all, while Apple restricted use of its system to its own computers. So Windows became the standard and Apple, with only about 10% of the market, is troubled because independent programmers create software first for the Windows system.

Microsoft then produced a word processing program, Word, to compete with WordPerfect, and an accounting program, Excel, to compete with Lotus 1-2-3. It made these available within Windows for the one price, as car makers often include options as a sales incentive. And again Microsoft vanquished competitors.

But what’s wrong with success, and why is Judge Sporkin getting hot and bothered? Because competitors complained and the Justice Department found evidence that Microsoft had used coercive tactics to discourage customers from buying the others’ products. Justice threatened an antitrust suit, but settled with the company on its promise to avoid unfair tactics.

The reality is that Microsoft, at this stage of its growth and development, could hardly avoid getting into trouble. “Microsoft’s aggressiveness now that it has become such a dominant company stifles alternatives; power does corrupt,” says a Silicon Valley executive.

Sporkin threw out the settlement because he sees a greater threat to future competition as the personal computer becomes central to the new field of computer-communications.

Microsoft is launching its own Microsoft Network in competition with America Online, CompuServe, Prodigy and other services. Also, it is trying to acquire Intuit Corp., owner of the Quicken personal finance programs, to gain a position in interactive computer services.

Acquisitions by market leaders always ring alarm bells; Justice is examining the Intuit deal. “There is a tension in your country between the up-from-nothing success story and broader industrial questions. That’s what this case is about,” observes Manfred Leuthard, a U.S. based consultant for European computer companies.

Leuthard is right. Many technology experts fear that Microsoft’s hold on key systems will give it an unfair advantage--a tollgate on cyberspace. “The principle here is that Microsoft’s dominance discourages innovation, discourages the emergence of new Bill Gateses,” says Paul Saffo, a technology scholar at Palo Alto’s Institute for the Future.

The principle he refers to dates at least to 1807, when steamship inventor Robert Fulton and his financial backer, Robert Livingston, lost a New York state-granted monopoly of shipping on the Hudson River and in New York Harbor after a competitor running a different type of steam vessel sued and won. The ruling was that commerce is served best by making room for outsiders to compete.

Not everyone agrees. Technology author George Gilder says Microsoft’s success forces competitors to innovate and that rulings like Sporkin’s only “screw things up.” In any event, says Gilder, computing technology is about to change to a fiber-optic system with vastly more capacity that no company will dominate.

So what’s the upshot of all this? Judge Sporkin’s ruling may be reversed by the appeals court because he reached beyond the issue before him, says Joseph Sims, a Washington antitrust lawyer with Jones Day Reavis & Pogue.

Still, Sporkin’s action will spur Justice to closely examine the Intuit acquisition and the resulting delay may kill that deal.

Meanwhile, Microsoft will remain a great company but, under tightened antitrust scrutiny, it will be more chary of pulverizing its competitors. Changing technology will reduce its dominance as it did the former market powers of IBM, AT&T;, General Motors and many other companies that once seemed to bestride industries.

The emerging computer-communications field will attract entrepreneurs and competitors as did New York Harbor two centuries ago. Legal constraints are not the rewards entrepreneurs dream of, but they’re part of the price of industrial leadership, not to mention incredible riches. Gates can look on the bright side.