Bill Gates and Microsoft have committed the crime of understanding the Information Age better than anyone else. Now the Reno Justice Department has joined forces with Gates’s competitors to teach him a lesson, ignoring what his brilliant career could teach them.
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Third, Microsoft puts hidden sections of code into DOS and Windows that interact with its own applications programs, making them work faster and better than the competition. Microsoft long denied doing this, but in a 1992 book, Undocumented Windows, Andrew Schulman verified it beyond dispute. Microsoft later acknowledged it used at least 16 such codes.
Finally, competitors believe that Microsoft, even though practicing open architecture, secretly favors its own applications writers by cluing them in on pending upgrades of the operating system. At one point a “Chinese wall” supposedly existed between the operating and applications divisions at Microsoft, but Gates himself reportedly says no such wall exists.
Overall, Microsoft is known for taking other people’s innovations, making inferior imitations of them, and incorporating them into its overarching system. Basically, the company acknowledges this strategy. In Overdrive, former Microsoft executive Jeff Lill told James Wallace: “[F]rankly this is Microsoft’s forte: A competitor comes in and does something interesting, we basically clone it; do it marginally better and throw some marketing clout behind it, then relentlessly make it better over the years. That’s our strategy. And it has worked damn well.”
Some deride this approach as lowbrow. “Gates is a postmodern P.T. Barnum, a master at educating the great unwashed about their latent desires for computers,” writes Zachary Pascal in Mother Jones. “Like Henry Ford, who tried to put a car in every driveway, he is a slave to the mass audience.” Virginia Postrel, of Reason, gives a more favorable interpretation: “Great products did not make Microsoft number one. Good-enough products did.”
By 1987, IBM was growing restless with its own open architecture. The company had not foreseen — as Gates had done — that software would be the more valuable product. IBM clones dominated the PC market, while IBM itself owned only a small share. Big Blue began developing OS/2, an operating system designed to pull the PC back under the umbrella of IBM’s older mainframes. Remarkably, although OS/2 was meant to undercut MS-DOS, IBM asked Microsoft to collaborate. Microsoft, which had just gone public, asked IBM to buy 30 percent of its stock. IBM turned down the offer.
The Armonk behemoth was soon showing its weakness. As Gates wrote in The Road Ahead: “IBM, with more than 300,000 employees, was stymied by its commitment to company-wide consensus. Every part of IBM was invited to submit Design Change Requests [for OS/2], which usually turned out to be demands that the personal-computer-system software be changed to fit the needs of mainframe products better. We got more than 10,000 such requests, and talented people from IBM and Microsoft would sit and discuss them for days. I remember change request #221, ‘Remove fonts from product. Reason: Enhancement of product’s substance.’ Someone at IBM didn’t want the PC operating system to offer multiple typefaces because a particular IBM mainframe printer couldn’t handle them.”
Although Microsoft delivered, it also began dissociating itself from IBM. OS/2 appeared in 1989 but failed to catch hold. A software package called OfficeVision, in which IBM invested $2 billion, never saw the light of day. Meanwhile, after two poorly received attempts at imitating Apple’s point-and-click environment with “Windows,” Microsoft finally hit the jackpot in 1990 when Windows 3.0 became the industry standard. In 1992, IBM and Microsoft parted ways. In that year, IBM lost $5 billion, an all-time record for an American corporation. On January 20,1993, Microsoft’s total stock value slipped past IBM’s market capitalization of $26.76 billion. David had overtaken Goliath.
IRONICALLY, it was during this period that the Justice Department started to get interested in the relationship between IBM and Microsoft. When Microsoft put out a press release in November 1989 downplaying the rivalry between OS/2 and Windows, the Federal Trade Commission smelled collusion. As Randall Stross wrote in U.S. News & World Report, “The commission… turned out to have been the last group of people to have noticed that the IBM-Microsoft marriage had completely come apart…. [Instead] the FTC staff apparently decided that looking into this newfangled software industry was kind of interesting. Software is cool in ways that, say, the pulp-and-wood-products industry most definitely is not. The commission’s lawyers set off to learn the rudiments of the industry by inviting Microsoft’s competitors to provide complaining depositions that served as tutorials.” In 1993, the Federal Trade Commissioners deadlocked 2-2 on whether to file a complaint against Microsoft. Normally such a deadlock would have ended the investigation. But in an unprecedented step, the FTC, at the urging of its staff, turned the matter over to the Justice Department.
After inviting numerous complaints against Microsoft about arm-wrestling and stolen software, DOJ came up with a substantial charge. According to a long-standing practice, Microsoft offered computer manufacturers deep discounts in exchange for a royalty on every computer they shipped, whether or not it featured Windows. Microsoft claimed: 1. it was easier to count computers than to count computers with Windows installed; and 2. if manufacturers didn’t install Windows, customers would pirate copies and install it themselves. DOJ insisted, to the contrary, that Microsoft was using its market leverage to force manufacturers to pay for copies of Windows they didn’t use. In order to avoid a lengthy struggle, Microsoft signed a consent decree in 1995. In one provision, Microsoft agreed not to “tie in” any new applications with the purchase of its operating system. It was, however, allowed to “integrate” software products.
The tie-in turned out to be the most important issue. The argument is that Microsoft uses its near-monopoly in the operating system to force customers to buy its inferior software. If consumers find Microsoft Word, Microsoft Excel, Microsoft Network, Microsoft Outlook, Microsoft Money, and Microsoft Publisher on their screen, they will have little incentive to buy anything else. Critics claim that this stifles innovation in the software industry. But the logic of engineering works against this argument. Integrating software is precisely what the personal computer revolution has been all about. A computer has only so much memory, so the more that software can be compacted, the faster and cheaper computers become. If Word, Excel, Publisher, and Photo Shop all have their own print functions, for example, it is much more efficient to combine than duplicate them. As Peter Huber has written in Forbes: “Almost every new feature added [to Windows] was sold by some other vendor in a separate box first. Modem drivers (Hayes’ Smartcom, $155 in 1998); memory management (a Quarterdeck product, $ 79 in 1991); CD-ROM drivers (Corel’s SCSI, $99 in 1993); drive compression, fax utilities; disk defragmenters….. All of these and countless other now-standard features, once came in separate packages. Most of them originally cost more than the whole of Windows costs today.”
By 1994, Microsoft had discovered that even a supposed monopoly in operating systems was no guarantee of success. Online services such as CompuServe, America Online, and Prodigy had begun attracting customers. There was talk about an “Information Highway” (a term coined by Gates) that would bring the world’s databases into the home. Characteristically, Microsoft decided to duplicate what already existed, building its own online service. Gates believed that cable television would be the main thoroughfare and was soon negotiating with Time Warner and Tele-Communications Inc. (TCI).
Others took a different tack. In 1969, the Department of Defense’s Advanced Research Project Agency had created ARPANET, the first “Internet.” In 1989, Tim Berners-Lee, a researcher at the European Laboratory for Particle Physics in Geneva, invented HyperText Markup Language (HTML) and HyperText Transfer Protocol (HTTP) and distributed them for free over the Internet. Sites developed with these tools became the World Wide Web.
In 1992, programmers at the government-funded National Center for Supercomputing Applications, at the University of Illinois, designed a system enabling ordinary users to browse the World Wide Web without using UNIX and its arcane commands. The system was called “Mosaic.” One of these programmers, 21-year-old Marc Andreessen, developed a form of Mosaic and moved to Silicon Valley where Jim Clarke, of Silicon Graphics, helped him form Mosaic Communications Corporation. Although Andreessen claimed that the idea of a Web browser had come to him in a coffee shop in 1992, others argue that many people — particularly David Thompson, of NCSA — were more involved. (A 1997 GQ article entitled “Imposter Boy” charged that Andreessen was a second-rate programmer who essentially stole Thompson’s ideas.) In November of 1994, Mosaic Communications brought out PC and Mac versions and the Internet came into its own. A month later the company — now called “Netscape” — paid the University of Illinois $2.2 million in damages and up to $1.4 million in future licensing revenues for its unauthorized use of Mosaic.
Preoccupied with developing the Microsoft Network, Gates remained strangely oblivious to the Internet. Then in February 1994, a Microsoft employee was snowbound in Ithaca, New York, for the night. Wandering the Cornell campus, he found American undergraduates had already downloaded Mosaic and were surfing the Internet with ease. In November 1994, Microsoft brought MSN to market. Industry analysts predicted it would have 20 million subscribers within a year and AOL, CompuServe, and Prodigy quickly appealed to the Justice Department on the grounds that Microsoft’s operating system gave it an unfair advantage. They could have spared themselves the trouble. MSN still has only 3 million subscribers and loses $20 million a year. Meanwhile, AOL has absorbed CompuServe to take a dominant position in the market.
One thing about Microsoft that both friend and foe agree on is that it does not persist in its mistakes for long. When Microsoft realized it was pioneering in the wrong direction, it quickly changed gears. The University of Illinois had licensed Mosaic to eight other companies — one of them, Spyglass, was Netscape’s closest rival. Rather than spend a year developing its own browser, Microsoft licensed Spyglass’s version of Mosaic for $3 million in December 1994. After the deal, former Spyglass owner Mike Tyrrell told Overdrive author James Wallace: “I’m a huge Microsoft fan, even though I’ve sat across the table from them. I admire the hell out of them…. They don’t waste time and they get things done. That’s an amazing, amazing, amazing company…. It’s not often that you can walk away from a deal, particularly a deal with a company of Microsoft’s size and reputation, and six months later both companies can look each other in the eye and say that was a fair deal….”
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