Microsoft’s Peril Grows in Evolving Marketplace
Even before Judge Thomas Penfield Jackson issued his legal broadside against Microsoft Corp. on Friday, the company was facing some of its gravest threats in years.
Jackson’s ruling is likely to make all these threats worse.
Morale at the company is already thought to be slipping as the world changes around it, with many top executives having quit in recent months. Its strategy of buying up rivals to absorb their technology no longer works as well as it has in the past, in part because of the greater likelihood of firmer antitrust scrutiny of such deals.
And then there are the purely technological threats.
These include the emergence of new computing systems, or “platforms,” independent of its potent Windows franchise; changes in the way consumers use e-mail, word processing and a host of other programs that could render its most lucrative products outmoded; and the evolution of such devices as wireless phones, hand-held devices and even television cable boxes into appliances that can perform functions that until very recently were reserved to personal computers.
Jackson’s finding that Microsoft commanded a monopoly--and the implication that he will rule shortly that the company broke the law--may well hobble its efforts to meet these challenges, raising the fundamental question of whether it can maintain and expand its hold over the software industry in the future.
For Jackson’s ruling comes at a pivotal moment for the world’s richest corporation. In important ways, the software behemoth’s arsenal for coming battles looks depleted.
In Judge Jackson’s view, the way in which Microsoft’s Windows operating system became an indispensable foundation for the operation of a wide range of other programs, or “applications,” gave the company its overwhelming competitive edge.
Because tens of thousands of popular applications wouldn’t run on computers that lacked Windows, Microsoft’s threat to withhold the operating system from computer makers that refused to meet its marketing terms, including such rival behemoths as IBM Corp. and Compaq Corp., amounted to a threat to destroy their businesses. Software developers who needed access to Windows technology to ensure their programs ran properly on the system were also easily cowed by the giant company.
But Windows is gradually becoming less dominant as computing moves away from the PC and onto other devices.
“The world of computing is getting more complex and more heterogeneous and should create new opportunities for competition,” said Mitchell Kertzman, chief executive of Liberate Technologies, a Microsoft competitor that creates software for Internet-connected appliances such as television set-top boxes.
A clue to how seriously Microsoft executives from Chairman Bill Gates on down view this trend can be found in their treatment of companies developing “middleware.”
Jackson focused at length on Microsoft’s reaction to the growth of this category of software, which includes the Navigator Web browser from Netscape Communications; RealNetworks’ Media Player, which facilitates the transmission of sound and video over the Internet; and Sun Microsystems’ Java programming technology, which allows users to write programs that will theoretically run on the Windows operating system and its competitors without being rewritten.
In each case, Microsoft feared that the middleware would eventually allow programmers to develop applications that would not need Windows to run. That represented a real threat to its applications franchise, built upon such popular products as its word processor Microsoft Word and its spreadsheet program Excel.
So Microsoft created competing middleware products. It rallied Internet service providers, including the powerful America Online, around its own Explorer Web browser to defeat Netscape, incorporated its own media player into Windows and Explorer to make the Real Networks product superfluous and tried to develop a version of Java that would work better on Windows than other platforms.
“Many of these actions have harmed consumers in ways that are immediate and easily discernible,” Jackson wrote. “They have also caused less direct, but nevertheless serious and far-reaching, consumer harm by distorting competition.”
That condemnation, experts say, means rivals may be emboldened to challenge similar moves by Microsoft more aggressively in the marketplace and the courts.
“Anybody who feels that their market position has been weakened because of Microsoft will be able to cite that finding,” said Chris Le Toq, an analyst at the technology research firm Dataquest. “Microsoft will find itself on the defensive on a wide range of competitive areas.”
Countering Threats May Be Tougher
Microsoft is also likely to find it harder to attack other novel threats to its dominance, including network appliances, Web-based software and changes in computing patterns associated with the rise of high-speed Internet access, experts agree.
But they also stress that the company was already having more difficulty reproducing its unassailable PC position on other platforms. Its Windows CE program, a stripped-down version of the PC operating system designed to power television set-top boxes, hand-held organizers and other small appliances, has been less than an unalloyed success.
CE often requires more powerful and expensive hardware than do competing products. The (non-Windows) Palm Pilot hand-held organizer, for example, continues to dominate its segment, despite a wide range of Windows CE-based competitors. And several incompatible software standards are vying for supremacy in the booming digital cable box market.
To overcome CE’s shortcomings Microsoft has dipped into its deep pockets.
It purchased WebTV, a company that supplies television-based Internet access, and took a sizable stake in Thomson Multimedia, a designer of interactive TV technology. Most notably Microsoft bought a $5-billion stake in AT&T; Corp., the leading cable provider, in return for which it obtained an agreement that Windows CE would be the operating system in millions of cable boxes.
That checkbook strategy may be harder to execute in light of Jackson’s conclusions.
“It raises a big red flag over any acquisitions and any future litigation,” said Rob Enderle, an analyst for Giga Information Group. With the onus on Microsoft to compete more narrowly on the merits of its products, competitors--ranging from America Online, now pursing a major effort in Internet appliances, to Liberate--like their chances of success on a more level playing field.
That’s because, as much as Gates is widely viewed as a business genius, his company is seen as technologically mediocre.
“It’s an intellectual roach motel where all the big brains check in and nothing comes out,” said Paul Saffo, a technology futurist. “Not an innovator but a fast follower.”
Saffo believes that Microsoft’s history of using economic power to destroy competitors may not work against another rising foe, the upstart Linux operating system. Linux is developed, not as a proprietary corporate product, but by thousands of independent software programmers who donate their time to improve and adapt the program, which is available free from many sources.
Jackson in his ruling downplayed the threat to Microsoft from Linux, but many of its fans believe it is on the verge of winning widespread consumer acceptance.
Major computer manufacturers, who have traditionally been Microsoft’s docile partners, have embraced Linux, offering it as an option in place of Windows.
The growing availability of Web-based software programs also poses a threat to Microsoft’s lucrative business applications franchise. Online versions of word processors, database programs, spreadsheets and the like are coming to market from a range of vendors. Internet sites like Yahoo and Excite provide users with free calendar programs and address books in which user data resides, not on their own computers but on the Internet. If consumers begin to trust their personal data and documents to Web companies and dispense with desktop versions of Word and Excel in favor of generic programs offered by Web services, a large Microsoft market may evaporate.
As these trends have begun to unfold, morale at Microsoft is believed to have slipped.
“It’s a siege mentality in Redmond,” Saffo said.
Top Executives Have Left Company
For several reasons--such as the temptations of exciting start-ups, the prospect of early, wealthy retirement and the pressures of working for a company that is so widely criticized, among others--Microsoft faces a hemorrhage of top talent.
In the last year it lost interactive media head Pete Higgins, former Windows and Internet Explorer chief Brad Silverberg, WebTV founder Steve Perlman and enterprise sales chief Sam Jadallah, among many others. The company’s chief technology officer, Nathan Myhrvold, is on a yearlong sabbatical.
Nevertheless, many observers believe this relentlessly driven company may choose to fight its antitrust case all the way to the Supreme Court rather than settle.
“Bill Gates is the energizer bunny of anti-competitive behavior,” said Saffo, who predicts that the company will not settle out of court.
No one in the industry doubts Microsoft’s resilience.
“Unchecked, they could probably do similar things to any of the competitors they face now,” said Liberate’s Kertzman. “That’s why I and other executives favor structural remedies,” a euphemism for breaking up the company.
