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GATES SPEAKS OUT (OR DOES HE?) AS JUDGES PONDER MICROSOFT'S FUTURE
(February 3rd 1995) Forget the OJ Simpson trial, here in the PowerPC
News office it is the US Justice Department versus Microsoft that is
keeping us glued to our terminals. US District Judge Stanley Sporkin
has threatened to re-open the case which most people thought closed -
much to the annoyance of the Justice Department. Meanwhile Microsoft
CEO Bill Gates' most recent column, syndicated by the New York Times,
looks like a veiled threat to re-locate Microsoft overseas if the
company is tampered with. 

By rights this is a case that should be over. Dead. Finished. For the
past five years the US government, in the shape of first the Federal
Trade Commission, and latterly the Department of Justice, has been
trying to decide whether Microsoft is abusing its dominant position
in an anti-competitive way.

You may remember last July, the case seemed settled. The joint,
Justice Department/European Commission, investigation concluded in
what was widely seen as a mild slap on the wrist for the company.
Microsoft was told to stop its practice of levying 'per-processor'
fees, whereby companies were forced to pay Microsoft a Windows
licence fee for every machine they shipped, even if only a few of
them were actually pre-loaded with the operating system. The ruling
also: outlawed minimum purchases - that could force hardware
manufacturers into buying more Microsoft products than required;
stopped Microsoft forbidding ISVs from simultaneously developing
applications for Microsoft and other operating systems (Microsoft
allegedly used NDAs for this purpose); and stopped Microsoft from
linking operating system sales to sales of its applications. 

Gates appeared ebullient about the result, telling journalists that
the resolution of the anti-trust case would have no material impact
on the coming year's revenues and that no internal forecasts had been
changed for Windows or DOS sales.

But then, last week, there was an unexpected hitch. The final consent
decree went before Judge Sporkin to be rubber stamped - but he
refused to stamp it. The judge had been presented with three
last-minute objections to the decree: one from the US Computer and
Communications Industry Association; one from a San Jose,
California-based law firm, called Wilson, Sonsini, Goodrich & Rosati
- acting on behalf of an anonymous group of IT companies; and one
from a small Massachusetts-based manufacturer, IDE. Wilson, Sonsini
et al's entire brief can be found on the Net at
http://www.ensemble.com/wsgr/ .

The complainants argue that the decree ignores many of the original
issues raised by the investigation. Where, they ask, is the requested
action to stop Microsoft's application developers getting
preferential access to information on operating system internals?
Where is action on the claim that Microsoft deliberately
pre-announces products to hurt its competitors? The Wilson Sonsini
brief summarises the allegedly unaddressed misdemeanours thus:
"undocumented calls; early disclosure of operating systems
information to Microsoft's own applications engineers; predatory
pre-announcements; predatory bundling and unbundling of operations
and applications functionality; restrictive licensing practices; and
the use of subsidised pricing to leverage into the applications
market using monopoly profits from operating systems." 

They want the consent decree to go much further, perhaps even as far
as splitting Microsoft into completely separate companies, one for
applications, one for operating systems.

The hearing resulted in the kind of court-room drama usually confined
to TV mini-series: Reuter's reporter quotes Sporkin as saying that he
did not "want to look like a fool in blindly approving something",
adding later: "I can't size up this company, I can't size up this
decree". 

The judge reserved particular vitriol for Microsoft attorney Richard
Urowsky. After discussing whether Microsoft has a policy of
deliberately pre-announcing software to deter competitors, Sporkin
accused Urowsky of misleading an earlier hearing: "You can stand on
your head, I cannot accept your word anymore. You have just lost your
credibility."

None of this went down well with Assistant Attorney General Anne
Bingaman, one of the Department of Justice architects of the consent
decree. Arguing that her team had cut the best deal they could, she
questioned Sporkin's right to take last minute complaints on board:
"Your honour, this is wrong, you know this is wrong under the law."
Faced with Sporkin's repeated questioning of the settlement, she
pointed out: "I'm the prosecutor - you're the judge." She says that
if the decree is rejected, the Department will be forced into another
court action that would last for years, and would jeopardise the
gains made this time around.

Exactly what leeway Sporkin has to amend the final decree is unclear.
Those behind its original formulation say he is restricted to a
relatively simple choice - accept it or reject it. The complainants'
lawyers, on the other hand, argue that the law gives him considerable
flexibility. He can, they say, take more testimony, examine more
documentary materials, appoint a court expert or take other such
action in the public interest. 

Wilson, Sonsini et al propose two courses of action:

1. That a selection of "key" Microsoft internal documents, reviewed
by the government, should be passed to the court for review. These
documents, they say, should "answer questions regarding Microsoft's
intent and use of various illegal practices".

2. The government should be required to submit affidavits from its
economic experts, giving a detailed analysis of how they think the OS
and application market will look in five years' time. The lawyers
point out the Justice Department's claim that the agreement in its
existing form will restore competition, choice and a level
playing-field. The lawyers, being lawyers, therefore suggest that if
the affidavits show economists believing that Microsoft will retain a
near monopoly in the PC OS world, in spite of the decree - well, that
proves that the decree is inadequate, and other actions should be
proposed, including actions such as the break-up of Microsoft.

What happens now is up to the Judge, who obviously feels he should be
more than a rubber stamp and is keen to exercise his role to the
full. No doubt the other big Justice Department investigation into
Microsoft's acquisition of Intuit will also be on his mind. The
Department has reportedly issued subpoenas against various companies
in an effort to determine whether the purchase of the
personal-finance software company would give Microsoft a stranglehold
on online banking and purchases. 

And where is Microsoft in all this? We asked the company if it had
any particular statements to make about the anti-trust decree and
Sporkin's concerns - the answer was no. The company says it stands by
the original July decision, adding, sotto voce, that it sees the
current dispute as being more between the Justice Department and the
Judge.

However Microsoft Kremlin watchers were struck by Bill Gates' regular
newspaper column, the contents of which, this week, could easily be
read as a protest against the way Microsoft has been treated and a
threat to take his business elsewhere.

The column, syndicated by the New York Times, and carried in the
International Herald Tribune and the UK's Guardian, among others, is
usually an inoffensive homily on some aspect of the computer
industry. On one level, this week's was no exception, an explanation
of how US intellectual property laws fostered the growth of the PC
software industry, but how this pre-eminence couldn't be presumed
upon.

On another level, the column could be interpreted quite differently.
Gates points out that the North American success in software isn't
god-given, that there are good programmers everywhere and that the PC
software business sprang up from small entrepreneurs willing to risk
everything. He continues: "Nor did it result from deliberate
government policies. There weren't special tax credits. There weren't
regulations aimed at managing competition or imposing standards. This
proved to be fortunate. Committees and regulators can't make
decisions as effectively as a truly competitive marketplace."

Gates sees the success of PC software companies as part of the
American dream: "Americans are gamblers. Venture capitalists lay down
millions of dollars on long-shots ... Americans also gamble with
their careers. Talented people quit secure jobs to pursue visions or
join tiny companies with big ideas." American culture celebrates
those who try hard, even when they fail, and "gutsy attitudes like
these helped ignite the market for personal computer software." 

Having laid out the benefits of the traditional, unregulated US free
market, he warns: "The advantage of being in the North American
market is fading. The global marketplace is replacing the US
marketplace as the one that really matters." Computer networks are
the key, he says, making it easy for companies anywhere in the world
to compete on an equal footing. 

It is no wonder if Gates feels irked by Microsoft's treatment - the
company played hard, and maybe a little bit dirty, but it did what
every good business should try to do - it capitalised on its
strengths, grew big, make lots of money and tried to beat the
competition. The trouble is that Microsoft did it too well in the
eyes of many and now its success may have become a liability to the
US software business. Gates neglects to mention one thing in his
column - America may love the entrepreneur, but it detests the
monopolist.
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