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.
On May 18, the Department of Justice filed an anti-trust suit against Microsoft Corporation, charging it with anti-trust violations in promoting its Internet Explorer over rival Internet browser Netscape. Simultaneously, attorneys general from 20 states filed companion suits on almost identical grounds.
The case could take a decade to decide. The anti-trust suit against IBM, filed on the last day of the Johnson administration in 1969, was not dismissed until the first weeks of the Reagan administration in 1981. But one thing is already clear — the government has again become a player in the Information Age.
For almost five years, the private economy has been so strong, so self-sustaining, that even politicians have a hard time claiming credit for it. Microsoft is the flagship of this armada, charting America’s course into the Information Age. The vista we now see unfolding before us — capitalism made “frictionless” by the nearly free flow of information — is a vision perceived by Bill Gates while at Harvard more than twenty years ago.
But of course such a transformation always upsets the status quo. In this case, a largely West Coast based revolution has diminished the East Coast, New-York-to-Washington “policymaker” axis. A measure of this came in April when New York Times editorial-page columnist Thomas Friedman visited the center of the computer industry. “I don’t think I like Silicon Valley,” reported Friedman. “There is a disturbing complacency here toward Washington, government and even the nation. There is no geography in Silicon Valley, or geopolitics. There are only stock options and electrons. When I asked an all-too-typical tech-exec here when was the last time he talked about Iraq or Russia or foreign wars, he answered: Not more than once a year. We don’t even care about Washington. Money is extracted from Silicon Valley and then wasted by Washington…. If I don’t care enough about the wealth-destroyers in my own country, why would I care about the wealth-destroyers in another country?”
Unfortunately, the answer to that executive’s question is,
“Because they may soon be appropriating your wealth.” The Microsoft
anti-trust suit puts politics back at center stage. After years of
sitting on the sidelines, politicians now have renewed importance.
Bob Dole, who once criticized the Justice Department’s pursuit of
Microsoft on the floor of the Senate, is now representing Netscape,
Microsoft’s alleged victim. Robert Bork, supposedly the most
libertarian Supreme Court nominee in recent history, is also on
Netscape’s payroll. The archconservative Orrin Hatch, whose Utah
constituent Novell is one of Microsoft’s bitterest enemies, has led
the attack in the Senate.
“[W]e may be seeing a welcome new consensus emerging that government has a role to play and that it should not be ridiculed on reflex for every intervention,” celebrated the New York Times. Before long almost everyone of political import will have chosen up sides — except Bill Clinton, Al Gore, and Michael Kinsley.
What is harder to fathom is the fear and loathing Microsoft has generated in the business community. Rival computer companies have long hated Microsoft. Silicon Valley sees the Redmond, Washington giant as poaching on its territory. But the hostility is not limited to Gates’s rivals. In a widely reprinted article, Fortune recently warned the nation’s top executives: “Microsoft: Is Your Company Its Next Meal?” Bob Ingle, president of new media at Knight-Ridder, Michael Eisner, CEO of Disney, and David Coulter, CEO of BankAmerica were all reported to be terrified of Gates. “Everybody in the communications business is paranoid of Microsoft, including me,” said Rupert Murdoch. (Some people, of course, also worry about Rupert Murdoch.)
“In the past two years, Microsoft has launched aggressive, Internet-based businesses that threatened the status quo in automobile retailing, newspapers, and travel,” reports Fortune’s David Kirkpatrick. Microsoft has launched “carpoint.com,” a Web site that allows consumers to make point-by-point comparisons among new cars of all makes and then solicit bids from nearby new car dealers. Carpoint.com is threatening General Motors’ “gmbuypower.com,” where customers can only buy GM cars. “With all deference to Mr. Gates,” said Ann Noel Pattyn, GM’s “top Nethead,” “I don’t think it is advantageous for one entity to get exclusive ownership of the World Wide Web.”
There is even a half-baked theory floating around that Microsoft is trapped in some kind of Marxist dialectic of self-destructive growth. “Microsoft has no choice but to expand,” says U.S. News & World Report. “It is driven by the rules of Wall Street, and those rules require that the company’s profits continue to grow by at least 20 percent a year…There is only one way Microsoft can continue to meet that target — by moving well beyond the desktop PC and into new business.” “Gates can’t afford to let Microsoft stop growing, even if a few customers’ flower beds get trampled,” echoes Fortune. “Its phenomenally talented staff is compensated largely by means of stock options. If Microsoft’s historic growth of 25%-plus per year slows and the stock’s steep climb halts, many of those people may no longer find it worthwhile to devote most of their waking hours to the company…This isn’t megalomania; it’s just business.”
How did Microsoft become the most feared American corporation since Standard Oil? How did Bill Gates, the child prodigy from Seattle, become the object of a nationwide manhunt? The issues here are much greater than some alleged anti-trust violations. The story that follows is a history of a cultural transformation — as seen in the birth and growth of one corporate entity.
ON A COLD DECEMBER MORNING in 1974, 22-year-old Paul Allen, a programmer for Honeywell Corporation, was walking through Harvard Square when he spotted a copy of the January issue of Popular Electronics. “World’s First Minicomputer Kit to Rival Commercial Models — Altair 8800,” proclaimed the cover. Allen grabbed a copy and ran to see his high school friend Bill Gates, a 19-year-old sophomore at Harvard.
At the time, Allen was writing code for 24-ton, $100,000 mainframes called “minicomputers.” Gates had been programming since he was 13. While still at Seattle’s Lakeside School, the pair had founded a small company, “Traff-o-Data,” which analyzed traffic counts for the City of Seattle. Now they knew their moment had arrived. As Gates wrote in The Road Ahead, “We glimpsed what lay beyond the Intel 8080 chip [Altair’s major component], and then acted on it. We asked, ‘What if computing were nearly free?’ We believed there would be computers everywhere because of cheap computing power and great new software that would take advantage of it.” The following spring, both Gates and Allen quit Cambridge and headed for Albuquerque to meet Ed Roberts, the designer of the Altair, who owned a small company called Model Instrumentation and Telemetry Systems (MITS).
Roberts was operating out of a run-down shopping center, sandwiched between a bar and a massage parlor. The Altair (named after a planet in Star Trek) was only a mock-up and Roberts had little manufacturing capability. He had severely underestimated the demand and was desperately trying to keep pace. The size of a breadbox, the Altair had no monitor or keyboard. Its user interface was a set of sixteen red-light switches on the front panel. Inputting information meant switching the lights over many times in succession without a mistake. Gates and Allen took up residence in a nearby motel. They agreed to supply Roberts with a BASIC language that would give the Altair some simple abilities to handle logical and mathematical problems. MITS would own the language, under the condition that it would exercise “due diligence” in promoting it.
The Altair sold thousands of kits but soon had imitators. Gates and Allen — who had incorporated as “Micro-soft” — started to shop their language to other competitors. Sales of the Altair petered out and Roberts sold the company. The new owners soon claimed exclusive rights to Micro-soft’s BASIC. Gates, who had once considered going to law school, had written much of the contract himself. Microsoft (now without the hyphen) went to court and won back the rights to its BASIC on the grounds that MITS had not exercised due diligence in promoting it. Roberts took his earnings and went home to Tennessee, where he fulfilled his lifelong ambition of becoming a country doctor. Gates and Allen, who had assembled a staff of high school friends, moved back to Seattle.
By the time Microsoft left Albuquerque, the world of personal computers was already exploding. Working out of a garage in Cupertino, California, Steve Jobs and Steve Wozniak had invented the Apple, a desktop computer released in 1977 for $1,300. Jobs and Wozniak, who were hardware specialists, needed someone to write the underlying language. Microsoft got the job. Soon Gates and Allen were writing code for Commodore, Radio Shack, NCR, Texas Instruments, and other brands of personal computer rushing onto the market.
These machine languages are simple sets of instructions that translate a computer’s ability to manipulate 1’s and 0’s into some rudimentary functions such as mathematical calculations and logic. More complicated is the “operating system,” which determines how the different parts of the computer interact. An OS sets up files, organizes the computer’s memory, manages the interaction between the monitor and keyboard, and creates a platform for higher applications.
By 1979 several operating systems were in use. The two most popular were Apple DOS (disk operating system), exclusive to Apple, and “Control Program for Microcomputers” (CP/M) written by Gary Kildall, founder of a small company called Digital Research (shortened from “Intergalactic Digital Research”) in Monterey, California. Kildall had licensed CP/M to many manufacturers, most of whom had created incompatible versions, making it difficult if not impossible to transport data between systems.
Apple took what might be called the traditional business approach to the burgeoning computer market. The company refused to license its hardware, preventing anyone from building compatible systems. If you wanted to use Apple software, you had to buy Apple hardware. Dan Bricklin’s VisiCalc, the first spreadsheet, was written in 1979 for the Apple II, but most Apple software was written in-house. Independent programmers trying to write software for general use had great difficulty because they often had to write a different version for each operating system and each manufacturer.
Then in 1980, IBM, the 800-pound gorilla of the computer industry, secretly decided to enter the personal computer market. Working on a breakneck one-year schedule, IBM decided for the first time in its history to farm out portions of a project. The hardware would be developed at a top-secret plant in Boca Raton. In search of a machine language and an operating system, IBM executives wandered into what was then largely unknown territory, the West Coast. In July of 1980, a three-man team of IBM executives headed by Jack Sams found themselves in the Seattle offices of a young man who had already made his name in the fledgling industry — William H. Gates III.
GATES WAS STILL ONLY 24 years old and looked 19. He never combed his hair, worked obsessively, often slept in his office and did not change his clothes for days. On her first day of work, a new secretary had gone running into the hallways complaining that “a little kid” had gotten into “Mister Gates’s” office and was playing with the computer. In Hard Drive, James Wallace and Jim Erickson recounted Sams’s recollection of his first trip to Redmond:
I knew Bill was young, but I had never seen him before. When someone came out to take us back to his office, I thought the guy who came out was the office boy. It was Bill. Well, I’ll tell you or anybody else, and I told IBM executives this the next week, that by the time you were with Bill for fifteen minutes, you no longer thought about how old he was or what he looked like. He had the most brilliant mind that I had ever dealt with.
What happened when IBM first visited Redmond has become one of the legends of the early days of computing — and perhaps the reason why Silicon Valley still resents Gates to this day.
Gates said he could provide a machine language written in BASIC but didn’t have an operating system. He recommended Gary Kildall, an old acquaintance from Seattle. Microsoft’s BASIC and Digital’s CP/M dovetailed nicely and they had often talked merger. Sams made an appointment to meet with Kildall in Monterey.
When the IBM team arrived, however, Kildall wasn’t there. He was out flying his airplane. Kildall would insist later that he was on a business trip — not just skylarking — but the image would prevail. His wife, who was running the business, was deeply suspicious of IBM’s non-disclosure agreements and refused to let Sams in the door. Both sides ended up feeling offended. A week later, Kildall made an attempt to reestablish communications with IBM but nothing materialized. As a result, Kildall probably threw away the opportunity of a century. (He died in a barroom brawl in 1994.)
Now IBM was back in Redmond, still without an operating system. Seizing the opportunity, Gates said he might be able to come up with one. Only twenty minutes away at Seattle Computer Products, a 24-year-old programmer named Tim Paterson had written a program he called QDOS (“quick and dirty operating system”), which his company had been shipping for about a year. Gates bought the rights for $50,000, eventually hiring Paterson as well. IBM quickly agreed to license MS-DOS with the understanding that Microsoft would retain ownership. And so, the sixth-largest corporation in the country, already under an 11-year investigation for monopolizing the computer industry, put its future into the hands of a small Seattle software firm headed by a 24-year-old college dropout.
The IBM-PC’s immediate success was the result of a stunning new strategy — “open architecture.” Whereas Apple had hoarded the rights to its hardware, IBM licensed its specifications cheaply, inviting other firms to build “IBM clones.” The bet was that by setting the PC industry standard, IBM would create such a large market that even a proportional share would produce huge earnings. As Virginia Postrel, editor of Reason, writes: “Apple in fact acted like the ultimate monopolist.” When the PC hit the market at almost half Apple’s price, Apple refused to cut its own prices, betting that its loyal users would not desert it. The strategy proved disastrous. Today, Apple holds only 4 percent of the PC market, while IBM clones hold 96 percent. Of this 96 percent, however, IBM’s share is only 7.3 percent. The clones hold the other 88.3 percent. The big winner, it turned out, was Microsoft, whose operating system became the industry standard.
After successfully piggybacking aboard the PC, Microsoft began expanding into software applications. Mitch Kapor’s Lotus 1-2-3 had become the standard spreadsheet after Kapor guessed right and wrote the program for the PC. Microsoft tried to challenge it with an office suite called “Odyssey,” but the imitation never got off the ground.
Oddly enough, Microsoft’s first successful software was written for Apple. In 1984, Apple had introduced the graphic user interface (GUI) for Macintosh — a “point-and-click” environment originally developed (but never successfully marketed) by Xerox. Microsoft Excel, developed specifically for the Mac, was a huge success, even though it was not dependent on the MS-DOS operating system. Word and Multiplan were also developed originally for the Mac.
DURING THE 1980’s Microsoft began to earn its reputation as a “silicon bully.” Gates is, first of all, incredibly competitive. In the early days, he worked for days at a time without sleep, and for weeks and months he hardly left his office. Even now he keeps a Herculean work schedule, yet makes time to water-ski, play tennis, drive fast cars, and ice skate. He is forever challenging himself and others with logical puzzles and memory games, a Gates family pastime that has become a Microsoft tradition. Gates demands that employees show the same spirit. (Douglas Coupland’s novel, Microserfs, satirized this perpetual undergraduate life on the Redmond “campus.”)
Microsoft has been accused of several unfair practices. First, as owner of the predominant operating system, Microsoft could always jiggle its code to make other applications slow or dysfunctional. The jingle “DOS isn’t done until Lotus won’t run” is supposed to have originated with Gates himself.
Second, Microsoft has been known to talk about collaboration with small companies, asking to see their software, and then “discovering” that Microsoft already had something very similar. In 1990, for example, Microsoft approached the Go Corporation, a small California company that had developed a technology for recognizing handwriting. Microsoft proposed a buy-out, but changed its mind after seeing Go’s software. Six months later, Microsoft announced its own operating software for handwriting recognition, developed by some of the same programmers who had examined Go’s software.
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….”
Why are the browser wars different from any other Coke-versus-Pepsi-type market, where two firms battle for market share? (In fact, Pepsi sued Coke for anti-trust violations at almost the same time that DOJ sued Microsoft.) The reason is that computer users prefer uniformity. A web browser is, in effect, the operating system for the Internet. “With extra work you can write HTML code that will work on both Netscape and Explorer,” says David Smith, vice president of Internet strategies at the Gartner Group, “but if you want to take advantage of all the bells and whistles you have to choose one or the other.” Anyone developing an “e-commerce” site faces a choice: to develop site for Netscape or Explorer. His decision is determined largely by what everyone else is doing.
OF COURSE THERE IS the possibility that some other standard will eventually prevail. This is what Scott McNealy, CEO of Sun Microsystems, intended in creating Java, the language that enables programmers to “write once, run anywhere.” McNealy has put together a consortium of Microsoft rivals — IBM, Oracle, Novell, Netscape, and TCI — in the hope of creating a “network computer,” a personal computer that stores both its programming an memory on a giant “server” — the Internet itself. Sun has licensed Java cheaply and there are now 700,000 programmers writing in the language. Writing in Wired in 1996, George Gilder predicted that the anti-Microsoft consortium could soon make Windows obsolete.
But Microsoft has not stood still. On April 3 of this year, the Wall Street Journal reported that, following several missed deadlines, Federal Express had canceled its contract with Sun for the replacement of its older UNIX system, and had turned to — would you believe it? — Microsoft. The Redmond giant had once again turned on a dime. Gates has purchased a small Florida company with competing technology and is already marketing its own network computer. Sun has filed an anti-trust suit charging that Microsoft is trying to create a version of Java incompatible with Sun’s system.
So what does the Justice Department hope to accomplish by suing Microsoft? In building its case, DOJ has relied heavily on the theory of “path dependence” developed by economist Brian Arthur. Along the road of progress, Arthur argues, early decisions, made arbitrarily, often establish technologies that are “objectively inferior.” His favorite example is the QWERTY typewriter keyboard, designed with no apparent logic, which has been almost impossible to dislodge.
Microsoft’s efforts to “set the standard” surely qualify as a case of “path dependence.” But will Justice be able to establish that Microsoft products are objectively inferior or arbitrarily chosen? It seems unlikely.
The irony is that path dependence cuts both ways. In the office market, Windows NT — an industrial-strength version of Windows — is a clearly superior product yet still holds only an $8.5 billion market share as opposed to UNIX’s $49 billion. “UNIX is too technical — it’s too hard to learn,” Roger Kash, manager of Saturn Corporation in Tennessee, told Industry Week in 1996. Among other problems, it lacks the point-and-click environment. So why does UNIX continue to dominate? “If it weren’t for the financial investment we have in the UNIX environment, I’d go to NT in a flash,” Jeff Sherman, of Remington Arms Co. in Delaware, told Industry Week. “If we were to start from scratch today, Windows NT would be a very serious consideration,” added Dennis Courtney, of Dunlop Tire in Buffalo. “But we’ve already made the big switch from the mainframe to a distributed client-server environment, so we wouldn’t just change over right now.”
Were the government seeking to break up path dependence in order to clear the way for a better technology, it might go after UNIX. Were it trying to right old wrongs, it might investigate the dubious steps that gave Netscape an early head start in the browser market. Yet DOJ has chosen to go after Microsoft. The question remains, why?
WHAT MAKES MICROSOFT such a different company that even old-line competitors such as Disney, Knight-Ridder, and General Motors feel threatened? The answer seems to be: Not only has Microsoft led America into the Information Age, it has also absorbed the lessons of the Information Age better than anyone else.
The first lesson is in applying information technology to internal management. In the 1980s, Peter Drucker pointed out that the only task of middle management in American corporations was to ferry information back and forth between the foot soldiers on the front lines and the executives who made decisions in remote corporate offices. Computers have short-circuited this process, giving executives more up-to-date information and giving foot soldiers enough knowledge to make more decisions.
Microsoft has an extremely flat corporate hierarchy. Gates is exceptional in his comprehensive awareness of the business (he reportedly knows the license plate numbers of most of his top executives), but he is also extraordinarily accessible: any Microsoft employee can e-mail the CEO and expect an answer. “Microsoft has an amazing ability to communicate internally,” says Carl Howe, director of computer strategies at Forrester Research, in Cambridge. “You talk to fifty different people inside there and they all have exactly the same story.” The result is a company that is very, very fast and alert in responding to market changes. With a cash reserve of $10 billion — more than the annual revenues of most major companies — Microsoft combines the giantism of an American corporation with the speed agility of a corporate “gazelle.”
Microsoft has also understood the implications of the Information Age for consumers. Take the case of General Motors. In tried-and-true fashion, GM has posted its own products on the Internet, waiting for consumers to queue up out of brand loyalty. But things don’t work that way anymore. In the Information Age, consumers have many more choices at hand. Economists have long noted that “information costs” are what prevent us from enjoying Adam Smith’s ideally free market where competition always brings prices to their lowest marginal level. Most real-world transactions take place with imperfect knowledge; there are better and cheaper products available but consumers don’t know about them. The relentless scythe of cheap information, however, is cutting across the entire spectrum of commercial transactions. Buyers and sellers are finding each other as never before. It is Microsoft’s greater understanding of the Information Age that has Michael Eisner and Rupert Murdoch quaking in their boots.
Many of Microsoft’s practices are indeed blatantly anti-competitive. Forbidding computer manufacturers to load or advertise non-Microsoft software on Windows systems is almost certainly illegal. DOJ and the courts will do well to end these practices. Customers should also be allowed to choose which Web browser they want coupled to their operating system. As for forcing Windows to carry Netscape’s Navigator, however, that sounds like one of those jerry-rigged anti-trust solutions that is supposed to “level the playing field,” but only forces all competitors into the same procrustean bed.
But even if Microsoft is forced to sell other people’s products — even if Bill Gates is required to carry a 50-pound sack of Netscape Navigators on his back for the rest of his life — it is doubtful Microsoft will be any less formidable. Consider this: In 2003, a company named Teledesic is scheduled to launch its “Internet in the Sky,” a network of 288 low-orbiting satellites that will link together the remotest parts of the world into one fiberless network with bandwidth broad enough to support high end-uses such as videoconferencing. Founder and president of Teledesic is Seattle telecommunications magnate Craig McCaw. The other two principle investors are Saudi Prince Alwaleed Bin Talal and William H. Gates III. Guess which one is most likely to have his company prepared to take advantage of the new technology?
William Tucker is The American Spectator’s New York correspondent and a columnist for New York Software.
William Tucker is news editor for RealClearEnergy.org.
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By Brit Hume
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