NEWSMAKER Q&A November 12, 1999
Sun's McNealy: "Bill Gates Has Run Out of Good Ideas"
Microsoft's harshest critic talks bluntly about the state of his archrival
When it comes to criticizing Microsoft, Sun Microsystems Inc. CEO Scott G. McNealy is a champion. Sure, software executives like Oracle Corp. CEO Larry Ellison and James Barkdale, former head of Netscape, have sounded off on the subject, too. But McNealy has made it a downright crusade. He contends that Microsoft should be forced to make public the prices it charges computer makers, to stop using exclusionary contracts that prohibit PC makers from using rival software products, and to open up its technology so rivals can more easily build applications that work with Windows. He also argues that Microsoft should be prevented from using its huge cash hoard to buy Internet startups and or take ownership stakes in potential customers.
So, what does the Sun CEO think of Judge Thomas Penfield Jackson's damning findings of fact in the Justice Dept.'s antitrust case against Microsoft? McNealy spoke with BW Correspondent Peter Burrows by phone from his home on Nov. 7, two days after the findings were made public. Here are edited excerpts from their conversation:
Q: How does it feel to hear about the findings of fact? Do you feel you had any hand in the way it came out?
A: Oh, no. The Department of Justice gets all the credit on this one.
Q: Do you think the findings of fact will cause a change in Microsoft's behavior or loosen its lock on the personal computer industry?
A: If someone is caught on the radar gun for speeding but all they get is a small fine, then nothing's changed. And that's the case here. If all Microsoft gets is some bad press out of this, nothing's changed -- especially with that crew. They've proven, with their behavior after the 1995 consent decree, that a warning will only accelerate their misbehavior.
Q: What are the chances that Microsoft will settle?
A: I don't see Microsoft settling. It's just not their M.O. Microsoft doesn't settle. With them, it's "grind 'em into the dirt."
Q: You've been vocal about suggesting remedies. In particular, you're known for your argument that Microsoft should be prevented from using its huge cash hoard to buy Internet startups or to invest in potential customers. So what should Microsoft do with all that cash?
A: They should pay it back to investors in the form of dividends. What shareholder could complain about that? Or they should put it back into their business to create innovative products. How could Bill Gates complain about that? That's what you're supposed to do.
Q: What about the investments they've already made?
A: They should be forced to get rid of all their minority equity investments within six months. They were able to get in fast, so they ought to be able to get out fast. If that sounds harsh, it's a lot less harsh than what a lot of other people are calling for. It's not breakup and divestiture. That would be a last-stand kind of thing, in my mind -- a three-strikes-and-you're-out measure.
Q: Why should Microsoft be prevented from using its cash as it sees fit, as other companies do?
A: Because nobody else is allowed to invest with the cost of capital that a monopoly provides. [Microsoft is] operating at 51% pretax margins or something ridiculous like that. With those kinds of profits, their cost of capital is less than zero. So every investment they make is anticompetition and anti-innovation.... And I'm just saying, we [should] try this for five years.
Q: What do you think of Microsoft's record as an investor?
A: My dad [a long-time American Motors executive] told me something a long time ago. He said CEOs have only three things they can do with cash. They can give it back to investors as a dividend if they have no more good ideas to pursue. They can invest it in great ideas, like you're supposed to do. Or they can invest it in other companies that have great ideas, and be like Warren Buffett. Well, Bill Gates has run out of good ideas, so now he thinks he's a better shareholder than Warren Buffett.... He's been hanging around Warren Buffett too much.... But he's not a smarter investor than anyone else.
Q: What about Microsoft's record as an innovator?
A: Microsoft has never innovated on anything. They've acquired or stolen their way to everything. They bought DOS, they copied Windows from Apple, they bought WebTV and HotMail. And they bought their market position with customers of mine like AT&T.... I mean, [Sun] spends about $1.5 billion a year on R&D, and I can rattle off all kinds of things that have come from that.... But do you ever wonder what's going on with the $2.5 billion or so that Microsoft spends each year? There should be a stunning amount of new products. I mean, 3M only spends about $1 billion a year -- and at least we got Post-It Notes out of that. And I never even had to boot up my Post-It Note!
Q: You've criticized Microsoft's practice of using its cash as part of deals to sell its Windows CE product. What's wrong with these deals?
A: We've had this huge partnership with DoCoMo [a unit of Japan's NTT that makes sophisticated cell phones]. But last week, Microsoft went over there with a big bag of money and did a joint venture themselves [with DoCoMo].
Q: But if Windows CE is as lousy a product as you say, will DoCoMo really use it in its products? Will it matter in the end? What did DoCoMo's executives tell you?
A: What you'd expect: "This isn't going to affect our relationship with you at all." Yeah, right.
Q: What about the deal in which Microsoft invested $5 billion in AT&T, which committed in return to purchase licenses for up to 10 million copies of Windows CE for its set-top boxes?
A: I understand that [AT&T CEO] Mike Armstrong has to take care of his shareholders. I mean, he's getting $5 billion in cash in exchange for 10 million copies of Windows CE at $2 a copy. That's just $20 million to him -- not a bad deal. But Windows CE would be nowhere if [Microsoft's] equity partners didn't feel obligated to use it.
Q: Any other suggestions for the Justice Dept going forward?
A: They're doing a good job. They don't need my help.
Copyright 1999, by The McGraw-Hill Companies Inc.
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