MS-DOJ Talks Falter: So What?

It sounded like an April’s Fool fake news statement.

I regret to announce the end of my efforts to medi­ate the Microsoft antitrust case

said Judge Pos­ner in a state­ment released on Sat­ur­day, April 1st.

But it wasn’t.

After 4 months of dis­cus­sions, any chance for a set­tle­ment between Microsoft and the US gov­ern­ment seems to have ended fruit­lessly. Many mag­a­zines, news­pa­pers and web sites have been point­ing out the fact that Judge Pos­ner did not thank the states for their work in his brief state­ment. As a result, many believe that the states’ demands were largely respon­si­ble for the break­down of the talks.

But the ques­tion remains as to what was the con­tent of those talks. While most of the 20 drafts that were put together by the DOJ and Microsoft were kept a secret, word has leaked out regard­ing the con­tent of some of those drafts. It includes:

• Uni­form pric­ing struc­tures that would dis­able Microsoft from offer­ing pref­er­en­tial rebates and cre­at­ing bun­dles for some partners.
• A pro­vi­sion for­bid­ding Microsoft from strik­ing exclu­sive con­tracts with other com­pa­nies (for exam­ple, as it did with AOL, giv­ing it an icon in Win­dows in exchange for pack­ag­ing IE)
• Full dis­clo­sure of all the API to all Microsoft soft­ware, giv­ing away what has long been believed to be a Microsoft advan­tage as it was sup­pos­edly allow­ing Microsoft inter­nal pro­gram­mers to develop soft­ware that bet­ter inte­grated with the Win­dows OS.
• Box man­u­fac­tur­ers would be given source code to Win­dows and allowed to mod­ify it at their will. They would be able to add and remove new fea­tures to it, such as, for exam­ple, chang­ing the web browser. Microsoft would not be respon­si­ble for sup­port­ing those mod­i­fied ver­sions of windows.

Mean­while, the 19 states involved in the nego­ti­a­tions would not go for any­thing less that a full break-up of Microsoft into sev­eral Baby Bills.

How­ever, when you look at it closely, the pro­posal of the 19 states may be a bit shortsighted.

By cre­at­ing a set of Baby Bills, we might end up with not one but sev­eral monop­o­lies: One in the OS space (Win­dows has over 90% pen­e­tra­tion in the con­sumer mar­ket), one in the appli­ca­tion space (Office has more than 90% mar­ket share in the office suite mar­ket on both the PC and the Mac), and poten­tially in the Inter­net space (Inter­net Explorer has now sup­planted Netscape Nav­i­ga­tor as the browser with the largest mar­ket share).

How­ever, while this case has become the com­puter equiv­a­lent of after­noon soap operas, with peo­ple track­ing its every move, what­ever hap­pens this week when Judge Jack­son presents a rul­ing that will most prob­a­bly be unfa­vor­able to Microsoft, may have lit­tle influ­ence on the com­puter industry.

First of all, Microsoft will most prob­a­bly appeal the rul­ing, going all the way to the supreme court and thus delay­ing its final impact for at least another year.

For starters, a lot of the bat­tle is around Microsoft Win­dows and its larger impli­ca­tions in terms of help­ing Microsoft con­trol the Inter­net. How­ever, the land­scape has dra­mat­i­cally changed since the DOJ and 20 states filed their case against Microsoft. The case was orig­i­nally kicked off by Netscape as a salvo against Microsoft in the browser bat­tle. Since then, Netscape has become a unit of the new behe­moth in the Inter­net indus­try: Amer­ica Online. AOL, which recently announced it would acquire Time-Warner, was play­ing both side of the fence. On the one hand, they are Netscape’s own­ers, and on the other, they are bundling IE as part of their client (of course, this allows them to also have an icon in Microsoft Win­dows, which has been in large part respon­si­ble for their suc­cess in cus­tomer growth).

At the time, Microsoft did have an infe­rior browser and was loos­ing in the mar­ket­place. How­ever, with the release of IE 4.0, and sub­se­quent release of their 5.0 client, they started to gain mar­ket shares. Netscape was not happy about that. On the one hand, Microsoft was going faster than they were in terms of releas­ing new prod­ucts. And, on the other hand, Microsoft was work­ing on devel­op­ing a ver­sion that would run bet­ter on four plat­forms: Win­dows, Mac­in­tosh, Solaris and HPUX. Mean­while, Netscape was try­ing to sup­port their browser on no less than 18 dif­fer­ent platforms.

The inter­est­ing thing was that Netscape was com­plain­ing that Microsoft was going to com­pete with them. Yet, they were mak­ing it clear that they were out to:

replace Win­dows

and when they lost went to the DOJ to com­plain about Microsoft mak­ing their browser avail­able for free even though they had adopted the same tac­tic long before Microsoft did.

Netscape’s fail­ure was in the mar­ket­place but since resent­ment of Microsoft’s suc­cess has always been a good thing to bet on, it played the legal card and got the pro­ceed­ing started.

Mean­while, Microsoft pushed more and more prod­ucts out but failed to cap­ture sig­nif­i­cant mar­ket shares in some crit­i­cal Inter­net areas.

First, it attacked the online ser­vice busi­ness. AOL became the top online ser­vice, beat­ing out Microsoft’s own MSN, even though MSN was bun­dled with Win­dows (this inter­est­ing lit­tle fact seems to show that bundling soft­ware with Win­dows is no guar­an­tee that it will win out in the end.)

Real­iz­ing that it was loos­ing on that end, Microsoft decided to recast MSN as a por­tal but that deci­sion was made too late and Yahoo! became the top search engine, fol­lowed by AOL’s own site.

On the server end, Microsoft is still trail­ing the free Apache server for the top posi­tion by a very large mar­gin (Apache has a 60% mar­ket share, while Microsoft’s IIS has a 20% one). It’s efforts to cast its back-office suite of tools as the Inter­net suite of choice seems to have gone about as badly, with Microsoft trail­ing Ora­cle in the data­base space. Fur­ther­more, some of Microsoft’s efforts to cap­i­tal­ize on their win­dows plat­form (remem­ber ActiveX any­one?) have been received with less than enthu­si­asm by the devel­op­ment com­mu­nity… and let’s not for­get Linux. While Microsoft was try­ing to make a big push against Solaris on the server end, the Linux crowd started going after the mid-size server mar­ket. As a result, Microsoft has not par­tic­i­pated in the growth that other server-end oper­at­ing sys­tems have seen in the past few years. Linux has taken most of that growth away from Microsoft, rep­re­sent­ing a major threat to Win­dows NT. Linux has now become such a threat to Microsoft that the com­pany is now break­ing its own rule of never men­tion­ing some other company’s soft­ware in presentations.

In new mar­kets, Microsoft has also seen some very strong com­pe­ti­tion. While it has been mod­er­ately suc­cess­ful in the con­ver­gence space with WebTV (a com­pany it bought for $420 mil­lion), the bat­tle is just start­ing and AOL will soon be able to bring the power of its 22 mil­lion strong user base to the party, giv­ing Microsoft’s some new headaches (WebTV has about 1 mil­lion users).

On the wire­less end, Microsoft’s attempt to push Windows-CE against the Pal­mOS has been rebuffed and Palm com­put­ing has been very smart in licens­ing its oper­at­ing sys­tem to cell phone ven­dors and other part­ners, cre­at­ing a new plat­form Microsoft has to battle.

Last but not least, Microsoft is now try­ing to enter the gam­ing con­sole mar­ket (with their X-box, promised for a Christ­mas 2001 release) and is thus enter­ing another mar­ket in which it has lit­tle or no mar­ket shares.

When you look at this, you may say, well, why would any­one care about Microsoft’s dom­i­nance. It seems to be wan­ing, right?

Well, yes and no. While the mar­ket is cur­rently show­ing a com­pany that’s fight­ing a war on mul­ti­ple fronts, it’s also a com­pany that has suc­cess­fully man­aged to buy itself a seat at the tele­com table (Microsoft now has invest­ments in AT&T, Com­cast, Nex­tel, and Qwest), as well as some other infra­struc­ture plays (Aka­mai, Con­cetric Net­works, Tut Systems).

What’s hap­pened really, over the last few years, is that Microsoft stopped being a pure soft­ware com­pany. Sure, it still sells soft­ware but its main busi­ness over the past few years has been as an invest­ment firm. When you look at it this way, its dom­i­nance may some­what make sense, much like Kleiner Perkins’ does.

As a result, I’m afraid a breakup could rep­re­sent a major prob­lem for our indus­try. For starters, look at the sug­ges­tion that’s been the most often floated: one com­pany doing win­dows, another doing appli­ca­tions, and another doing Inter­net stuff. If you go with that breakup, you still have a dom­i­nant player in the OS mar­ket, a dom­i­nant player in the appli­ca­tions mar­ket (remem­ber, this group would get MS Office) and a weak Inter­net company.

Most of Microsoft’s prob­lems have stemmed from the fact that it has grown too big for its own good. For starters, it is now in so many mar­kets that it is hard to fig­ure out whether it really does wield as much power as it used to. Sec­ond, it is such a big orga­ni­za­tion that I seri­ously doubt pro­gram­mers talk to each oth­ers as much as they should. How­ever, if you were to break it up as more than three com­pa­nies, you could get somewhere.

Let’s say we were to fol­low the logic of Microsoft as a VC firm. If we do so, it’s mar­ket cap is really not so huge, con­sid­er­ing the num­ber of com­pa­nies it holds. It is, after all, a VC with over 200 com­pa­nies in its portfolio.

Either way, the bat­tle will go on and some­times this week, a rul­ing will be issued but in the long run, I seri­ously doubt that any­thing that hap­pens this week will have any last­ing effect on the com­puter indus­try. Microsoft will win out or loose out in the mar­ket­place, regard­less of the out­come of this trial.

We’re liv­ing in too dynamic a mar­ket­place for it all to make sense. In the end, how­ever, we will all regret that case ever hap­pen­ing because it will set a prece­dent as to whether the gov­ern­ment can get involved into IT affairs. It may be the only last­ing effect we will all be forced to feel.

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