Microsoft’s Success Beyond Software Is Mixed at Best
Microsoft Corp. may have been a ferocious competitor in the software industry, as U.S. District Judge Thomas Penfield Jackson depicts in his antitrust ruling.
But in many other businesses in which the software behemoth has expended billions of dollars to win market share for its products, it has been more of a paper tiger.
Its Microsoft Network service remains a distant fourth among Internet service providers, about one-tenth the size of its most powerful rival, America Online Inc. WebTV, which Microsoft acquired two years ago for nearly a half-million dollars, is running far behind subscriber projections and faces heated competition for television viewers from a host of newer companies.
Perhaps most telling, the company’s efforts to replicate its dominance in personal computer software in the cable and interactive television worlds have faltered, despite its having made as much as $6 billion in investments in leading cable operators.
Few in the television and Internet industries are writing Microsoft off, despite its checkered record in non-PC businesses. In part that is because the company has financial resources that no competitor can match.
“It is Microsoft, and what they bring to the playing field is billions and billions of dollars,” says Mitchell E. Kertzman, president and chief executive of Liberate Technologies, a San Carlos, Calif.-based developer of interactive television technologies.
Jackson fired a stunning broadside at Redmond, Wash.-based Microsoft on Friday when he ruled that the company commanded a monopoly through its Windows operating system and used it ruthlessly to dominate such other markets as office applications software and Web browsers. Jackson must yet rule on whether Miscrosoft’s actions violate antitrust law and, in turn, what legal remedies are appropriate.
Microsoft Chairman Bill Gates insisted in taped interviews and in an ad placed in several national newspapers Monday that the company considered its actions to be legal and to have benefited consumers. He said the company had no intention of settling the case on unfavorable terms.
Meanwhile, spokesmen for the 19 state attorneys general who have brought their own parallel antitrust case said Monday they would pursue their action even if the federal government reconsidered--a possibility if, say, an incoming Republican administration placed all such major cases under review.
“If they abandon the case, then it’s pretty clear what would happen--the 19 states would continue it,” said Iowa Atty. Gen. Tom Miller, who heads the multi-state effort.
Wall Street’s reaction to Friday’s blockbuster ruling, which was issued after the close of stock trading that evening, was muted Monday. Microsoft shares closed at $89.94 in exceptionally heavy trading on the Nasdaq Stock Market, down $1.63, after recovering from a sharper decline.
Microsoft’s experiences outside the software industry give weight to Jackson’s contention last week that only by parlaying its monopoly in personal computer operating systems has it been able to dominate other software markets. That monopoly does not transfer easily to the world of cable television or Web content.
That could be important if the outcome of the antitrust trial is a forced or negotiated breakup of the company--itself still only a distant prospect. Industry observers say Microsoft’s operating system, software applications and other software businesses would probably remain strong competitors after a breakup, if only because of the vast ocean of existing users of its products.
But a breakup would weaken its competitive position in a host of other markets.
Jackson’s ruling is the latest development undermining Microsoft’s reputation as a business juggernaut capable of expanding its domination of software to a wide range of other industries, including entertainment, cable TV and Internet service.
In truth, however, many of its forays outside its core business have yielded disappointing results.
Industry observers say Microsoft’s most financially successful move outside has been its $1-billion investment in Comcast Cablevision. That investment, initially made in mid-1997, has more than quadrupled in value.
But that is true partially because Comcast has soared in price along with many other cable television stocks, which were seriously undervalued at the time of the Microsoft investment.
“The Comcast investment is spectacular,” says an investor who has followed the industry. “They bought in at the bottom, and in fact their investment signaled the turnaround in the cable industry.”
Another venture, Microsoft’s Expedia travel services Web site, may also produce a positive return when it is spun off this week as a separate company.
Other Internet ventures have fared less well. Microsoft sold its money-losing Sidewalk arts and entertainment site in July to its rival Ticketmaster Online-Citysearch for a $280-million stake in the latter company.
Another contrast is its experience with WebTV, an independent company with a promising technology that Microsoft acquired in August 1997 for $425 million. WebTV markets a set-top box that allows subscribers, who today pay about $25 a month, to surf the Internet via their TV screens.
Industry analysts expect WebTV to reach about 1 million subscribers by the end of this year. That’s far short of the 2 million that company executives once predicted would be signed up by the end of last year. And although the unit’s strategy is aimed at making deals with cable TV operators to bundle the Web and cable services together, to date its most notable cooperative deal has been with EchoStar, the second-ranking satellite television service.
But EchoStar’s Dish Network has only 1.5 million subscribers, well below the 7.5 million claimed by its rival DirecTV and far behind the 65 million U.S. households receiving their television services from conventional cable.
Moreover, WebTV faces proliferating competition, most significantly from AOL, which earlier this year announced an alliance with DirecTV, Philips Electronics and other firms to develop an interactive television service that would incorporate Internet access, specialized content and enhanced television programming.
Microsoft’s most determined marketing effort in the cable field has focused on Windows CE, a stripped-down version of its PC operating system. The company’s idea is for CE to become the crucial software enabling cable operators to provide electronic commerce, video-on-demand and other television enhancements to subscribers.
But critics say CE is a costly and inflexible program for the purpose, requiring as much as twice the memory of competing systems--a much more critical shortcoming in the cable world than in personal computers.
Nevertheless, Microsoft has secured agreements from AT&T;’s cable units to place CE in as many as 7.5 million digital set-top boxes to be offered to subscribers over the next few years. That could translate into 59% of AT&T;’s 16 million cable customers.
Sources say, however, that AT&T;’s commitment to CE is actually much less firm than it seems; it is contingent, for one thing, on CE meeting tough technological standards for speed and flexibility.
Other observers say Microsoft’s ability to strike advantageous deals with new partners has been hampered by its record in dealing with software companies.
“Don’t discount the fear factor,” says Josh Bernoff, a principal analyst at Boston-based Forrester Research. “Microsoft’s position in the operating-system market scares the heck out of potential partners” in other industries.
In fact, leaders in the cable industry and others have apparently taken the experience of their software-writing brethren to heart. In 1998, for example, cable giant Tele-Communications Inc. agreed to license Windows CE for at least 5 million set-top boxes. But TCI Chairman John C. Malone turned away Gates’ request to become a $1-billion shareholder in TCI. He also refused to give Microsoft a cut of revenue generated by the new boxes. (TCI has since been acquired by AT&T.;)
