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'Knifing the baby': High-tech cooperation or collusion?
Copyright c 1998 The Seattle Times Company
Posted at 02:05 a.m. PDT; Sunday, September 20, 1998
by James V. Grimaldi
Seattle Times Washington bureau
Microsoft and Apple Computer, once fierce rivals, now business partners, have frequent and relatively routine meetings about the everyday business of designing their products to work together.
But a series of meetings between the summer of 1997 and April of this
year has drawn the attention of government investigators who see the
talks as another example of Microsoft crossing the line from cooperation to attempted collusion.
To the antitrust investigators, the ideas floated in the meetings look
like an attempt by Microsoft to divide with Apple the growing consumer
market for what's known as "media players," an important new software
technology for transmitting sound and pictures over the Internet.
To Microsoft executives, the ideas simply were meant to help computer
users by creating one seamless industry standard for the new technology.
To Apple executives, Microsoft's proposal that Apple abandon its ongoing development of QuickTime video and audio software was unthinkable, if not impossible - something that one executive is said to have told Microsoft counterparts would be akin to "knifing the baby."
The federal government and 20 states are continuing to investigate at
least five meetings and phone calls during which they contend that
Microsoft asked Apple Computer to surrender the market for its QuickTime software.
In exchange, they allege, Microsoft made several offers, from promising to boost Apple's tools to edit video to offering not to compete with Apple over the media player for Macintosh computers or even Windows CE, the operating system for hand-held consumer devices.
If such a proposal were made, a deal was never accepted, thrusting the
two companies into fierce competition in the media-player market, where Apple has yet to gain a foothold against dominant Microsoft and
RealNetworks of Seattle.
Nonetheless, the allegations, if proved, could provide powerful new
ammunition in establishing a pattern of anticompetitive behavior during the Microsoft antitrust trial set for trial Oct. 15. A federal judge yesterday refused a Microsoft motion to exclude the Apple allegation from the trial.
The U.S. Department of Justice and 20 states are suing Microsoft,
alleging it has used its operating-system dominance to keep competitors at bay in other consumer markets, including Internet software. The Apple situation, the government contends, shows "a pattern of anticompetitive conduct and agreements."
Federal and state prosecutors declined to comment about the ongoing
investigation. But, in court records and pretrial hearings, prosecutors have noted the striking similarity between the Apple allegations and another key government allegation considered to be at the heart of the suit: that Microsoft attempted to divide the market for Internet browsers with Netscape Communications in mid-1995 and, after failing that, proceeded to use its monopoly in operating systems to demolish Netscape.
"The problem with this stuff for Microsoft is the cumulative nature,"
said Herb Hovenkamp, an antitrust-law expert at the University of Iowa.
The Apple meeting, at the very least, paints a complex picture of the
relationship between Microsoft and Apple, two companies whose
competition stretches back virtually to the birth of the personal
computer and whose cooperation implicitly began last year with
Microsoft's $150 million investment in Apple and an additional $100
million or so for access to Apple patents.
Microsoft, for its part, denies there was any attempt to divide the
market.
The meetings, from Microsoft's viewpoint, were a perfectly legal way to devise cross-licensing and technology-sharing arrangements, said Gary Schare, the lead manager of Microsoft's media technology division.
Microsoft offered to provide support for QuickTime's video-editing
software "so they could have a business for selling tools for creating
content that runs on Windows," Schare said.
Microsoft also offered to provide Apple with the technology needed to
put Microsoft's media player inside QuickTime so it could play video
sent over the Internet by Microsoft's computer servers, Schare said.
Servers are the costly computers used by Internet content providers to
send media over the World Wide Web; they also are a major source of
revenue for software companies.
"Our discussions with Apple on streaming-media technologies are the
kinds of positive discussions that happen every day in the high-tech
industry where companies outline their respective technologies and work together to ensure that their technologies will operate well together for consumers," said Microsoft spokesman Mark Murray. "We did not at any time attempt to divide the market with Apple or anyone else."
For the record, Apple has been circumspect since the allegations first
arose. While Apple spokeswoman Tami Begasse acknowledged some problems
with Microsoft in the area of multimedia software, she also said the two companies "enjoy a partnership that has produced great products for Macintosh customers."
"As partners, we are going to agree on many issues and have a
disagreement from time to time," Begasse said. "That is just the nature of any modern partnership in the technology industry. Multimedia is an area where Microsoft and Apple have some disagreements, but we're trying to work together."
'Knife the baby'
In the software industry, media players are seen as crucial pieces of
software: Some theorize that Apple's media player, Quicktime, which
works on both Macintosh computers and Intel-based personal computers,
could be used in conjunction with Sun Microsystems' Java or Netscape
Communications' Internet-browsing software to form the guts of an
operating system to compete with Microsoft's dominant Windows.
Indeed, the link between Apple, Sun's Java and Netscape was highlighted earlier this year when the companies, along with Oracle and IBM, successfully lobbied the International Standards Organization to accept QuickTime as the industry standard for transmitting sound and video over the Internet.
And it is the link to Java and the Internet browser that the government has seized upon in arguing that the Apple allegation should be allowed as new evidence in the government's antitrust case.
The facts of the meetings between Microsoft and Apple will determine
their legality, Hovenkamp said. Simple discussions about the exchange of certain technology is not illegal, but it is illegal to talk about where the two companies will compete or not, such as saying "we will stay out of this if you stay out of that."
According to sources close to Apple executives who attended the
meetings, Apple saw Microsoft's offers as an inducement to drop its work on media players so Microsoft would be left with only one competitor - RealNetworks, a company that has licensed technology to Microsoft. Apple also saw it as an insult - because Microsoft was implicitly saying it thought very little of QuickTime, a core Apple technology.
Neither Microsoft nor Apple officials would confirm details of the
meetings, but sources give this account of what took place:
The first market-division proposal was made in late summer 1997 when
Microsoft executives Eric Engstrom and Chris Phillips met with Apple's
Tim Schaaff, director of QuickTime engineering, and Peter Hoddie, senior QuickTime architect.
Engstrom said Microsoft was troubled that QuickTime was being used on
Windows and that this was regarded as trespassing on Windows turf. So,
Engstrom proposed conceding to Apple the market for software used to
edit the video in exchange for Apple getting out of the media-player
business.
Hoddie was confused and asked if Microsoft had proposed that Apple could continue to offer its media players to professionals, such as companies that put video on the Internet, or if Microsoft had suggested that Apple simply get out of the business: "Or are you suggesting that we "knife the baby?" Hoddie asked.
Phillips is said to have replied: "You'd have to knife the baby."
The Apple executives refused.
At the next meeting in late September 1997, the month after Microsoft's $150 million investment in Apple, sources say that Engstrom repeated his Microsoft market-division proposal, telling Schaaff that Microsoft Chairman Bill Gates was willing to concede the media-editing market to Apple because he considered it too small to pursue.
On Oct. 17, 1997, Phillips met with Schaaff in Cupertino, Calif., to
discuss how Apple and Microsoft could work together. Phillips suggested that QuickTime might be permitted on Windows CE, the operating system for hand-held computers - if Apple backed out of the media-player market being pursued by Microsoft.
The next meeting occurred Feb. 13 when Don Bradford, Microsoft's Silicon Valley-based general manager of MacIntosh Internet products, met with Apple's Avi Tevanian, vice president for software engineering.
Tevanian complained to Bradford about Microsoft's plans to include its
media player in its Internet Explorer 4.0 for MacIntosh computers.
Bradford countered that Gates offered this solution: Apple should adopt Microsoft's technology for video players and Microsoft would adopt Apple's editing tools.
Tevanian said he wasn't interested.
James Grimaldi: 202-662-7455. E-mail: jgrimaldi@seattletimes.com
Copyright c 1998 The Seattle Times Company
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