Still King of Software, Hardball
After four years of antitrust litigation that could have torn the company apart, Microsoft Corp. today enjoys the same comfortable position it occupied before the landmark case against it began -- on top of the software world, looking down.
Technology executives and analysts said the prosecution of the most important antitrust case in a generation has done almost no discernible harm to Microsoft.
That’s because the remedies ordered by U.S. District Judge Colleen Kollar-Kotelly come too late to weaken Microsoft’s dominance in personal computers, and they won’t slow the company’s drive into a range of new markets. Kollar-Kotelly’s order excludes software for hand-held devices, television set-top boxes and Internet-based services -- three important arenas for Microsoft and competing software companies.
“What’s most interesting is how much the tech landscape has changed,” said University of Chicago antitrust expert Randal Picker. “At the beginning, we were at the dawn of the Internet era, and now we’re looking in the rearview mirror. Microsoft is still a behemoth, and it looks like a battle between the big guys” -- Microsoft, IBM Corp. and AOL Time Warner Inc.
When the Justice Department and 19 states launched their suit against Microsoft in 1998, the Internet explosion was just beginning. The antitrust enforcers warned that unless the firm was stopped, it would extend its monopoly of computer desktop software to the Net, stifling what otherwise could be an era of unprecedented innovation and competition.
Even though the attorneys general won the most important arguments in the original case -- establishing Microsoft’s violations and winning the right to restrict the firm’s conduct -- they couldn’t move fast enough to prevent their dire warnings from coming true.
The last two years have been extremely tough for technology companies, whose sales have plummeted as corporate customers tightened their belts and consumers lost their fervor for new PCs. By contrast, Microsoft reported record quarterly sales last month. And it has surpassed General Electric Co. as the company with the highest stock market value in the world.
The Redmond, Wash.-based company has prospered in large part because it can charge computer makers what it likes for its products. Its Windows operating system powers more than 90% of the world’s PCs.
As Microsoft attempts to extend its hegemony from the office to the living room -- with products such as the Xbox video game console and MediaPlayer multimedia software -- it is bound to face competition. In fact, Microsoft dominates few of the fields it recently has entered.
Gerard Tellis, professor of marketing at USC’s Marshall School of Business, said innovation is alive and well in the technology industry, so Microsoft shouldn’t be demonized for its success. The company won its powerful position, he said, by offering quality products.
Tellis, an outspoken opponent of the government’s antitrust action, pointed to IBM and Xerox Corp. as examples of companies that appeared to have a monopoly at one point but lost clout because they weren’t innovative enough. If Microsoft becomes lethargic, it could find itself in the same position, he said.
“The whole industry is so competitive and so innovative it doesn’t take a huge laboratory,” he said. “People can do it on their laptops.”
Microsoft executives said the ruling “imposes significant requirements” but allows the company to keep innovating. “We recognize that we will be closely scrutinized by the government and our competitors, and we will devote all the time, energy and resources needed to ensure that we meet our responsibilities,” the firm said in a statement.
Even with that scrutiny, Microsoft is expected to pursue new markets aggressively.
The company is going after the technology that will determine how services will be delivered over the Web. It is gaining in software for computer servers, which power Web sites and corporate networks, and hand-held computers at the expense of struggling competitors such as Sun Microsystems Inc., which makes large machines, and Palm Inc., which makes tiny ones.
It is also trying to establish proprietary formats for audio and video as de facto standards for digital music and movie products and services. It is rolling out software that places a Microsoft-powered computer at the heart of home entertainment. And it is pushing Windows into a new generation of Internet-enabled mobile phones.
A key issue for Kollar-Kotelly was deciding whether to extend restrictions on Microsoft’s actions into these areas, as many of its competitors sought. The judge focused on enabling software developers to compete with core pieces of Microsoft’s monopoly in personal computers, but she declined to give similar protection to competitors in other, emerging arenas.
A good example is interactive TV software, a market in which Microsoft has struggled to gain a foothold despite billions of dollars in investments. Kollar-Kotelly offered protection to competing developers of interactive TV “middleware” -- the software that provides a foundation for applications such as electronic program guides and video on demand -- only if their software ran on personal computers, not on cable or satellite set-top boxes.
Mitchell E. Kertzman, chief executive of Liberate Technologies Inc., a San Carlos, Calif., company that makes interactive TV software, said he was disappointed if not surprised by the limited protection in the ruling. Still, he said Microsoft is under so much scrutiny now, it will be harder for the firm to crush competitors that produce revolutionary technology, as it did in the market for Web browsers.
“Your eternal hope in technology is that technology changes the playing field,” Kertzman said.
Analyst Tim Bajarin of Creative Strategies said the ruling loosens Microsoft’s control over the programs that receive a prominent place on computer screens. But he added, “In the long run, Microsoft still is in very real control as far as the direction of the desktop PC, and potentially how they integrate certain pieces of technology,” particularly those related to audio and video.
In fact, much of Microsoft’s research and development has been in consumer electronics, portable devices and other audio- and video-oriented arenas, said analyst Richard Doherty of Envisioneering Group, a technology research and consulting firm in Seaford, N.Y. Those devices “are still very dependent on the PC infrastructure for their perceived growth,” giving Microsoft an important advantage, he said.
And the area in which Kollar-Kotelly restrained Microsoft “is to them no longer the be-all and end-all that it was from 1995 to 2000,” Doherty said. “Had this come out four years ago, during what was clearly the midpoint of the Internet explosion, I think it would have had a tremendous effect.”
Despite its competitors’ concerns, Microsoft isn’t dominating the new fields it has entered. For example, sales of its Xbox video game console are running far behind those of Sony’s PlayStation 2, and its software for playing digital media is locked in a hotly competitive race with products from RealNetworks Inc., Musicmatch Inc. and Apple Computer Inc.
Yet Microsoft’s ability to build support for its proprietary security software into the Windows operating systems -- and to tie the security uniquely to computer hardware -- gives it a leg up that rivals simply cannot match, warned attorney Fred von Lohmann of the Electronic Frontier Foundation, which advocates civil liberties online.
“It becomes a whole situation where, as a content company, you’re given certain assurances [about security] by Microsoft that nobody else can give you,” Von Lohmann said.
Nevertheless, officials at RealNetworks praised Kollar-Kotelly for adding provisions that allow computer makers to launch non-Microsoft products, such as Real’s media player, when their computers are turned on.
“Microsoft may have a monopoly on operating systems, but it doesn’t have a monopoly on innovation, as we’ve demonstrated through our industry leadership for years,” said Real’s general counsel, Kelly Jo MacArthur.
Actually, one casualty of Microsoft’s monopoly power has been innovation, contended Timothy Bresnahan, a professor of economics at the Stanford Institute for Economic Policy Research and a former Justice Department economist who worked on the Microsoft case. After Microsoft crushed Netscape Communications Corp. in the Internet browser war, he said, many entrepreneurs concluded that they couldn’t obtain widespread distribution of their software or make much of a return on their investment.
Analyst David Smith of Gartner Inc., a technology research firm, wasn’t so convinced that Microsoft hadn’t squelched new ideas or would continue to do so.
“We’re going to see a lot more exciting things in the industry, from big companies and little companies,” regardless of the decision on Microsoft, he said.
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Times staff writer P.J. Huffstutter contributed to this report.
