Hi everyone. I read this article over the weekend in the NEW REPUBLIC. Thought it might be of interest to those out there. This is neither an endorsement or condemnation of Microsoft, merely for information because I found it somewhat thought provoking. Enjoy :)
March 29, 1999
Open Windows
By Michael A. Cusumano
Antitrust in the information age.
A decision in the government's celebrated antitrust case against Microsoft is still weeks away, but because of the firm's pattern of anti-competitive behavior over the past few years--not to mention its legal blunders in the trial--there is already seriou s talk of remedy. And, if the most enthusiastic pursuers of Bill Gates have their way, this remedy will take the form of drastic action: breaking Microsoft into two or more "Baby Bills," just as the government did with AT&T almost two decades ago.
Yet, as one who has studied Microsoft as well as its competitors, I believe such a course would be unwise and counterproductive. (Full disclosure: I've also previously informally discussed the ideas in this article with the Justice Department's Antitrust Division.) Microsoft is one of the most successful companies in history and the leader of what may be the most significant new industry in any country. We should avoid any solution that permanently damages its ability to develop and deliver new products. The government's objective should be to curb Microsoft, not to cripple it.
We need a workable standard of antitrust law suited to the information age--an era in which the old models of regulation don't easily fit. Computer and telecommunications technology has been evolving rapidly and unpredictably. Innovations like Java and th e network computer appear with incredible hype, then fade quickly. Billion-dollar companies are stock market dynamos one day, disasters the next. Netscape just announced a merger with America Online, which is a polite way of saying that it will no longer exist--except as an AOL subsidiary--in a few months.
Another complicating factor in software is that there has been continual integration of what we once considered separate technical domains. At one time, it made sense to think of operating systems (like Windows) and communications software (like Internet browsers) and desktop applications (like word processors) as distinct products. But now Microsoft has embedded the browser as well as many other communications features and small applications like screen savers and word processing into Windows. And, from a user's point of view, it may make sense to have those in one package.
The high-tech industry's fast pace of innovation, combined with the industry's volatility, means that competitors are constantly ganging up on firms like Microsoft--and not just joining forces, but pushing the envelope of technology. In early March, for e xample, IBM, Motorola, Sun Microsystems, Lucent, and eleven other companies joined to create a new set of standards based on Sun's Java programming language. These standards would allow the creation of "smart" devices ranging from computers to washing mac hines. The same month, U.S. West teamed up with Network Computer Inc., a spin-off from Oracle, to offer a non-Windows system that will integrate television, telephones, and the Internet.
Bill Gates and his minions know this. (They learned the lesson well after they failed, before late 1995, to anticipate the Internet's impact on their industry.) And, for that reason, Microsoft doesn't act quite like a traditional monopoly. It spends a lot on research and development, to the point of sacrificing profits. More fundamentally, Microsoft simply doesn't think of itself as a monopoly, as the firm's defense arguments make clear.
And yet Microsoft is close to a monopoly by any ordinary definition. It controls about 90 percent of the market for desktop personal-computer operating systems and a large share of PC applications. In 1998, with just about 25,000 employees, Microsoft had sales of nearly $17 billion and ranked behind only Ford, General Electric, and Exxon--giant firms with more than 80,000 employees each--among U.S. companies in profits. While its position is not entirely secure, it has successfully used its leverage to th wart competition. The government has charged, for example, that Microsoft threatened to stop licensing Windows to vendors who promoted Netscape's competing browser; this move essentially would have put companies like Compaq and Dell out of business.
On the surface, dividing Microsoft into several smaller companies seems appealing. And, if Microsoft were broken up (Windows/Explorer/Exchange as one company, Office applications as another, Web content and publishing as another, tools and miscellaneous a pplications as another), this might indeed level the competitive playing field. A Microsoft applications company would be more innovative and faster-growing if it were not tied to the Windows group.
But it's not a given that breaking up Microsoft would have prevented the kind of alleged anti-competitive behavior that caused the lawsuit in the first place. Imagine that the government had split Microsoft into a systems company and an applications compa ny back in 1994. That would not have prevented Microsoft from bundling its browser with the Windows operating system, nor would it have solved Netscape's problem, which prompted the antitrust suit. And, since most computers would still be using Windows, w e'd still have the Windows "monopoly"--and Microsoft's unique ability to leverage this product in the future.
If the government had split Microsoft into more pieces and kept networking groups apart from the operating systems groups, then Microsoft would not have been able to bundle the browser. This move, though, would probably have been bad for users. There are many extremely useful features in Windows that might not have made it into the operating system under these conditions, such as the telephone dialing, local area networking, and fax features (which some people once considered applications). The lack of go od networking features made ms-dos (Microsoft's non-graphical operating system, which preceded Windows) and Windows 3.0 and 3.1 (the first widely used versions of the graphical Windows system, which Microsoft introduced during 1990-1992) extremely awkward systems for nonexperts to set up for any kind of dial-up function or networking.
The problem with a structural solution--indeed, any structural solution--is where to draw the line between divisions and how many lines to draw, because, again, it's so hard to know how those lines should look just a few years from now. Should Microsoft b e two, three, four, or five separate companies? Any division of the company also suggests that integration of different technologies and products is bad for users, which it is not. After all, sometimes it's nice to have an Internet browser built into the desktop operating system. If the government uses this case to determine what high-tech companies will look like in the future, it will be undertaking an experiment that could damage not just Microsoft and its stockholders but the U.S. high-tech industry.
That's why the best course of action would be, simply, to seize the Microsoft case as an opportunity to clarify the rules of antitrust law in the high-tech era--to make clear, for Microsoft and its competitors alike, the boundaries of acceptable behavior. From there, the federal government should concentrate on educating Microsoft on how to abide by these rules, rather than stipulating precisely what the company should look like or attempting to enforce unenforceable restrictions on how it does business. While there is a place for some intellectual property changes--for instance, forcing Microsoft to grant a Windows license to any computer manufacturer willing to pay for it--the focus must be on clarifying rules and educating the industry.
What would this mean in practice? Courts must declare exactly what it means to be a monopoly in the age of the Internet. Second, the government should have Microsoft appoint an executive who will direct its antitrust compliance--and it should require all Microsoft executives, group program managers, development managers, group product managers, and sales managers to undergo one- or two-day seminars annually on antitrust issues, the responsibilities of industry leadership, and Microsoft compliance in the p ast year. Third, the government should appoint a neutral industry council made up of representatives from Microsoft competitors, partners, customers, and academia. This council would work with Microsoft to clarify and, where necessary, advise the governme nt on the firm's compliance.
To an outsider, this might not seem like much. But a reeducation of Microsoft executives and managers--along with a threat of more severe punishment if they don't play along--could succeed in promoting a more competitive environment while allowing Microso ft and its competitors to thrive. Managers like Bill Gates are practical. If the rules are clear, and they are convinced that the rules will be applied uniformly, they will stay within legal boundaries--even if they test the limits occasionally. They know it is in their interest. Fortunately, it's in ours, too.
Michael A. Cusumano is the Sloan Distinguished Professor of Management at MIT and the coauthor of Competing on Internet Time: Lessons from Netscape and its Battle With Microsoft as well as Microsoft Secrets (Free Press).
(Copyright 1999, The New Republic)
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