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December 2, 1999

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The case for Microsoft

I have never been a fan of Microsoft, I must confess up front in the interest of full disclosure. As a former employee of Bell Labs, that hallowed bastion of technical brilliance, I have always looked askance at Microsoft's notably inferior products and marvelled at their ability to market these things to a gullible public.

So I was not particularly amazed to read of Judge Jackson's 'findings of fact' -- a legendary and damning philippic as part of his due diligence in the celebrated antitrust case, US Dept of Justice vs Microsoft. But when I attempted to gloat, two members of the aforementioned gullible public -- my friends Varsha and Priya -- threatened to murder me in slow and excrutiatingly painful ways.

That made me pause -- it is clear that there is a constituency that roots for the company; this includes financial types as well as consumers. So Microsoft must be doing something right. It is also one of top ten brands in the world -- well-marketed and well-respected, and, of course, ubiquitous. Therefore I shall attempt to look sympathetically at Microsoft's side of the picture.

The facts, or so says Judge Jackson, are pretty clear -- Microsoft has gained monopoly power, extracted excess monopoly 'rents' from consumers, and adopted unfair and probably illegal methods to thwart competition to maintain its lucrative position.

And what does Microsoft have to say in its own defence? Several things: one, that it has innovated constantly. Two, that is has made a difference to consumers by making computers easier and affordable. Three, that its business practices have been aggressive but not illegal.

Four, that the industry is changing so rapidly that even Microsoft is in danger of being dethroned by some upstart startup. Five, that government regulation (read interference) in the IT industry will kill the goose that lays the golden egg.

Consider these one by one -- take innovation, for instance. Microsoft has, despite its loud protestations to the contrary, created practically nothing new and noteworthy. Here is data from an email that's doing the rounds on the Internet --

MS DOS -- purchased QDOS (Quick and Dirty OS) from the Seattle Computer Company for a mere $ 50,000.

Internet Explorer -- based on code licensed from Spyglass, Inc.

Flight Simulator -- purchased from the Bruce Artwick Organization.

Powerpoint -- purchased from Forethought, Inc.

FrontPage -- purchased from Vermeer Technologies.

FoxPro -- part of Fox Software which was bought out by Microsoft.

HotMail -- company purchased by Microsoft.

OLE -- Microsoft settled a patent infringement suit with Wang Labs.

SQL Server -- based on code purchased from Sybase.

Visual Basic -- based on code purchased from Cooper Software.

Visual C++ -- based on the purchased Lattice C compiler.

Windows -- portions of the interface licensed from Apple Computer; multitasking technologies were from a company, Dynamical Systems, bought by Microsoft

Compare this to the genuine innovations that have come of the superb research labs in America: IBM Research, Bell Labs, Xerox Palo Alto, etc. No, Microsoft has created little that is novel. Technically, that is. Of course, tactic-wise and marketing-wise they are brilliant. They invented or at least perfected the black arts of FUD, vaporware and overhanging the market. And apparently of buying their way into technology. Somehow, however, they have managed to convince the great unwashed that they invented the windowing interface, even the Internet!

Has the consumer benefited? This is debatable. It is certainly clear that the price of computing has fallen rapidly, and that more people can ever can now afford to own and use powerful machines. However, as The Economist pointed out, these machines are horribly difficult to use -- if a normal household appliance doesn't work, consumers get angry about it; but we are 'pathetically grateful' if we install a new piece of software on a PC and it actually works!

The average PC is a terrible device that takes up enormous amounts of time and effort. In this context, there has been a truly superior alternative -- the Macintosh; but 'network effects' -- developers prefer, naturally, to write for the platform with more users has led to the Macintosh retaining only a small share of the market. Of course, Apple made a strategic mistake in not licensing their operating system widely, too.

As for taking money out of consumer's pockets, it is very clear that even though prices have come down, there is a vicious cycle of forced upgrades that we are put through with PCs. For instance, I have an ancient Mac, 1990 vintage, which still works reasonably well; but a PC I bought in 1993 is more or less unusable today; even one bought in 1998 is obsolete now.

Thus people have been forced to buy far more machines than they needed to, resulting in fat margins for Intel and Microsoft -- there has been a massive transfer of wealth to them from consumers and businesses. Furthermore, as two class action suits allege, Microsoft harmed the consumer by increasing its prices even while those of the hardware fell. Their net profits are an unbelievable 75% or so -- contrast this to the average successful company making 5% to 10%!

That brings us to item three -- Microsoft's allegedly predatory business practices. Let us look at the state of the business. Is Microsoft doing well? Yes, almost preternaturally well. In a way that smells of excessive profiteering at the expense of the aforementioned gullible public.

The Economist recently published an astonishing chart that showed that Microsoft's profits exceeded those of the next 500 software firms put together by a wide margin -- some $ 8 billion compared to some $ 3 hillion for all the others combined! This reminds of nothing more than the fact that the Chinese, in 1998, executed three times as many people as the rest of the world put together! This is not normal!

So it could be surmised that there is something slightly fishy about Microsoft's business practices. Not that they are necessarily doing anything illegal, but perhaps there is anti-competitive behavior.

There are a number of instances in which Microsoft has strong-armed others. The instances are many, legendary, and well documented. For instance, Microsoft tried to destroy STAC, a small San Diego company with disk doubling technology, even though it had patent protection. Similarly, now Real Networks claims unfair competition from Microsoft's products.

When a startup company named Go unveiled a promising pen-based operating system, Microsoft overhung the market by promising Pen-Windows. Worried about this, developers did not write for Go's system, causing the firm to go out of business. There was no Pen-Windows -- it was pure vaporware; the nearest equivalent was Windows CE, which came out seven or eight years later!

Microsoft 'persuaded' Intel and Apple to drop various software projects, when it appeared as though they might have some impact on the Windows monopoly. It bullied every personal computer maker, from Compaq to Dell to mighty IBM by threatening punitive measures.

Microsoft destroyed Lotus 1-2-3, which had a dominant position in spreadsheets, by hiding certain crucial functions in the Windows operating system; these functions were used by its own Excel spreadsheet to run much better and faster on Windows.

In fact, Microsoft also cross-subsidized its applications software with the profits from the operating system, which, strictly speaking, it should not be able to do. Similarly, it used its profits from the OS and Office to subsidize Internet Explorer, giving it away free. A Netscape could never compete against that, not having a bottomless source of profits like Microsoft.

Now these are just instances I remember off the top of my head with no research; of course the tactics Microsoft adopted to undermine Netscape's Navigator technology and Sun Microsystems' Java technology are quoted in detail by Judge Jackson.

Since beauty is in the eyes of the beholder, there is some merit in Microsoft's claim that they were only competing ruthlessly, and that they were on the right side of the law in each of these instances (although there are some questions about the ethics involved). But then, the 'robber barons' of American industry, such as John D Rockefeller of the monopoly Standard Oil, could have claimed the same thing -- and that empire did get regulated, as did AT&T.

As for claim number four, that the industry is moving too fast for a ponderous regulator to be able to understand it, this is true. Regulation is by nature slow. It is also true that as Microsoft has attempted to expand its hegemony from the operating system/applications space to the Internet space, it has begun to run into some stiff competition.

Indeed, in the 'post-PC world', as the just-concluded Comdex in Las Vegas called it, Microsoft is not exactly inducing fear. It is up against entrenched and powerful consumer electronics and telecommunications brands like Sony, Nokia, Ericsson, National Panasonic, etc; and its Windows CE offerings are being trounced by things like the PalmPilot from 3Com. But I wouldn't count Microsoft out yet -- they have demonstrated again and again that they will persist.

However, maybe, just maybe, there is some startup out there with a brilliant idea that could turn the whole thing around and render Microsoft's dominance meaningless -- assuming, that is, that Microsoft does not either buy up the firm or beat it to pulp with its billions.

In fact, even Microsoft's partners have begun looking at the post-PC scenario. Compaq announced its iPaq, an Internet-focused computer emulating the successful iMac from Apple; IBM plans to offer an Internet PC called the EON. Hewlett-Packard has announced plans for the e-PC, halfway between a PC and an Internet Appliance.

Item five: the government's role in possibly killing the IT industry through bureaucratic nonsense. This is an area where free-marketer Silicon Valley firms, who otherwise have no truck with Microsoft, start feeling a little queasy.

There are many technological uncertainties about the way the future of computing will evolve; however, it is also the case that Microsoft may have, according to Judge Jackson, tried to stifle innovation and evolution -- it is in the nature of a monopoly to wish to maintain the status quo. For, in areas where Microsoft has 'won' -- say word processors or spreadsheets -- there has been no innovation as there is no incentive.

Perhaps what a regulator might do is to just keep an eye on Microsoft to ensure they tread the straight and narrow. Of course, the 'structural remendies' that are under discussion now could result in the following scenarios:

The breakup of the company into an operating system firm, an internet firm, an application firm which are independent of each other with no cross-subsidies to each other.

The breakup of the company into several companies, each of which has rights to the Windows source code and which will compete in the marketplace.

The auctioning of Windows source code to multiple other companies to bring some competition into the marketplace.

The opening up of the Windows source code into the public domain so that there are no hidden interfaces that give Microsoft's internal developers a leg up on the other

There are other remedies being considered as well, but consider the precedent set by this activity -- the US government is essentially arrogating to itself the power to mould the IT industry in ways best known to itself. Whether they will use this power wisely is a gamble many in the industry are loath to take.

One of the prime reasons that the US government has kept away from Microsoft, apart from general Reagan-era aversion to anti-trust, is the idea that Microsoft is a 'national champion', bringing in plenty of money from the rest of the world. It was only when Microsoft attempted to extend its power to other areas -- most notably banking (through its Microsoft Money, online-banking and mortgage activities) and publishing (through Slate, MSN, and other content providers) -- that the Feds roused themselves.

So the question arises -- whose interests are the US government looking after? Certainly not those of the consumer in India, for example. I suspect it is the interests of big businesses in finance and media that have exercised the moral indignation of Department of Justice, US anti-trust chief Joel Klein and states' attorneys-general. So who do you think is more baleful -- the DoJ or Microsoft? Scylla and Charybdis, by prior experience.

At the end of the day, it is fairly clear that Microsoft has played rough, perhaps been a little naughty on occasion; the worry is whether the cure will be worse than the disease. But their claims to benevolence and charity, as well as their vanity about their innovativeness, are pure hogwash. If all this attention makes Microsoft more careful about watching its p's and q's -- like IBM, also under threat of dismemberment in the 1980s, did -- that would be refreshing.

However, given Microsoft's congenital penchant for total war, it is unlikely that a slap on the wrist will do. Some structural remedy not excluding a breakup, that would induce competition and innovation and also eliminate cross-subsidies, is probably called for: the least pernicious one, with the interests of the consumer firmly in mind.

Postscript: I received a number of letters regarding the column I wrote on my great uncle Dr Shankar. Most were positive, and wondered at how inspiring the life of an unsung hero, a not-so-ordinary man, could be. One or two, however, accused me of self-indulgence in talking about my family members. Maybe, but the point I was trying to get across is that there are rough diamonds in our backyards, both in our own history and culture and in the people that we see all around us. I personally regret greatly that I have not spent enough time with the elders of my family, people who could have taught me so much. I wish to suggest to all of you that you make time to listen to the old people you know -- it is a humbling and edifying experience.

Media picks and pans: I read recently that Anita Pratap, the grim former CNN bureau chief in Delhi, has married a Scandinavian diplomat. I used to watch this person with fascination -- her clearly fake American accent, her extreme prejudice against all things Indian, and her gimlet-eyed on-camera presence -- she was the epitome of the 'progressive' mediaperson. Or, to be charitable, maybe that was what CNN's editors required of her. Good luck, Arne or Olaf or whatever her new husband's name is.

On the other hand, I have been impressed by Star TV's Barkha Dutt especially during the Kargil coverage. A woman of obvious intelligence -- it is a pleasure to watch her intense, balanced and well-phrased reportage, and she isn't intent on putting India and Indians down at every opportunity. May your tribe increase, Barkha!

Rajeev Srinivasan

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