The Microsoft case is a boon to lawyers and those they support and a bust for consumers and investors:
April 5, 2000
That's Some Fine Mess
You've Made, Mr. Gates
By Michael A. Cusumano. Mr. Cusumano is a professor at the MIT Sloan School of Management and co-author of "Competing on Internet Time: Lessons From Netscape and Its Battle With Microsoft" (Free Press, 1998) and "Microsoft Secrets" (Free Press, 1995).
The Microsoft antitrust trial is a messy affair that is only getting messier. The states and private litigants will pile on more lawsuits, adding to the current federal suit brought by the Justice Department, which 19 states have already joined. Microsoft is the defendant in some 100 private suits filed by individuals and organizations that allege they have been harmed by Microsoft's monopoly power.
Now, it is always good to see a bully humbled, but I used to think piling on was un-American. No more. We are a highly litigious society, and there will be lots of legal work in the months and years to come, as lawyers attack, defend and monitor the Microsoft behemoth.
Microsoft and government lawyers still have their work cut out for them. The conclusions of law Judge Thomas Penfield Jackson issued on Monday mark only the second stage of the federal trial. The next phase will be hearings on a remedy, followed by a final ruling in a few months or less. This ruling will probably order Microsoft to accept severe constraints on how it behaves -- such as how it writes contracts, develops new operating-system products, prices and bundles new products and releases programming information and source code. (We may see a proposal to break up Microsoft, but the Justice department did not discuss this possibility with Microsoft.)
Consumers Will Pay
Next, we will most likely see Microsoft seek a review by the U.S. Circuit Court of Appeals, and then whichever side loses will appeal to the Supreme Court. Meanwhile, the European Union continues its own separate actions against Microsoft.
Who will pay the legal bills? Consumers, of course. Merely adding a few dollars to the price of Windows (of which Microsoft sells more than 100 million copies a year) will pay the salaries of lots of lawyers for many years.
Then we have other messes that could get messier. We have damage to the price of Microsoft's stock and the shares of many other high-tech firms, which have lost hundreds of billions of dollars in value over the past two days. Though a correction in the Nasdaq Stock Market was probably overdue, Monday's precipitous drop was almost certainly sparked by the Microsoft case, which fed investor uncertainty about technology stocks in general. This malaise could affect the ability of these high-tech companies to raise money if it continues.
Worst of all, we have the prospect of the U.S. government intruding for the foreseeable future into the product development and marketing of personal computers and Internet software. Who will define the future boundaries and prices of Windows and other products that evolve into "platform" status? It will probably be the U.S. government. This can't be good for anybody. Government oversight could slow down and cripple whole industries. All high-tech companies with market shares above 70% in key platform technologies -- Intel with microprocessors, Cisco with Internet routers, Qualcomm with digital cell phones and even Palm with personal digital assistants and their operating systems -- had better watch their step.
Be all this as it may, it was Microsoft that got itself into this mess. It would have been far easier to settle the case over the weekend. Nothing the Justice Department has proposed seems as bad as what the judge may now impose, which could even be a breakup of the company.
Bill Gates must bear the brunt of the blame for creating and continuing this mess. Microsoft is an extension -- some 30,000 people strong -- of his unique personality. Mr. Gates and other Microsoft people are extremely smart, hardworking and relentless, and they understand the business of mass-marketing software like no one ever has. At the same time, they are arrogant, insecure and oblivious to how the world views them.
The insecurity comes from the knowledge that high-tech markets change quickly, advantages are fleeting, and Microsoft as a company has been lucky. After all, IBM gave Microsoft the software platform business in 1981 by asking Mr. Gates to develop the DOS operating system and not restricting his ability to license DOS to other companies. Mr. Gates knows that luck can as easily be bad as good. A few wrong turns in the marketplace or lack of attention to innovations that don't depend on Windows, and Microsoft goes into the history books as just another once-great company that failed to sustain its advantage.
This almost happened. Netscape gave Microsoft a better run for its money than any other company we have seen so far. If not for Netscape's many blunders, Microsoft may well have lost the browser war.
Of course, nothing Netscape did wrong or badly with its browser excuses illegal behavior on Microsoft's part. And what Mr. Gates as well as his advisers and lawyers did wrong -- really wrong -- was fail to understand that they have for years violated antitrust law. True, how antitrust law applies to high-tech markets is murky; since product boundaries are murky, illegal tying of one product to another is hard to prove. True, it is possible to make technical arguments that Microsoft, even if it is a monopoly, has not behaved like a traditional monopolist in the sense that it has generally priced products low and continually improved them. True, Microsoft won an appellate court ruling in 1998 that allowed it to bundle its browser with Windows because the company was able to demonstrate some consumer benefit.
But the list of ways in which Microsoft used Windows as a hammer to force its will on other companies is much too long. When a company has more than 70% of a market, it has a monopoly and must play by different rules to avoid abusing this position. Microsoft has not changed its aggressive behavior from the days when it was a small company struggling to survive in the world of IBM and mainframe computers, fighting to fend off Apple, Lotus and WordPerfect. Microsoft and Mr. Gates did not grow up soon enough, so the judge and Justice lawyers have intervened with "adult supervision."
Most distressing is that none of this mess was really necessary. David Yoffie and I have shown that Microsoft could have achieved most of its objectives (such as overcoming challenges from Netscape and dominating the Internet browser market) by competing totally fairly. No company has better PC software engineers, better marketing people, better managers or deeper pockets than Microsoft. No company has a better understanding of the computing platform -- Windows -- used on more than 80% of desktop computers, or more influence over how that platform will evolve in the future.
Driven by Insecurity
There has been no competitive need for Microsoft to play unfairly. The need has been psychological -- driven by insecurity, immaturity and fear of losing market share. Unlike Intel, Microsoft has not acted with the restraint of an industry leader that understands the special responsibilities and legal risks of having a monopoly.
Now Mr. Gates and his employees and shareholders must pay the price for Microsoft's hubris and shortcomings. The operating-system wars and the browser wars are over, and no court ruling can reverse this history. The high-tech battle is also shifting to non-PC devices, like cell phones and personal digital assistants. But if the government's actions can force Microsoft to grow up and prevent it from making "road kill" out of a future Netscape, then perhaps this mess will have been worth it.
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