Thursday, June 26, 2008

For Bill Gates, antitrust fight was a personal crucible

June 26, 2008 (Computerworld) Ten years ago, Bill Gates was the new John D. Rockefeller. And from the U.S. government's perspective at the start of its antitrust trial against Microsoft in 1998, Gates was seen as being every bit as powerful as the old oilman was -- if not more so. The desktop operating system was seen as important to the new, tech-focused economy as oil had been to the old economy of the early 20th century.

With gas now averaging well above $4 a gallon and oil profits through the roof, it is difficult to believe that in 1998 the U.S. government and more than 20 states were focused on Microsoft's desktop operating system dominance. The case threatened Microsoft with a breakup, and would ultimately bring Gates, then serving as Microsoft's chairman and CEO, to the witness stand in defense of the company he is now about to leave (see more coverage on our "Bill Gates Moves On" page). It was a brutal case with enormous stakes. It was a crucible and it was personal.

The antitrust fight turned on many legal issues concerning Microsoft's anti-competitive practices. Part of Microsoft's defense was based on the idea that its behavior was constrained by emerging technologies. The company argued that it faced unknown knowns, as former Secretary of Defense Donald Rumsfeld might put it. Microsoft 10 years ago knew enough about the computer industry to know that game-changing threats were certain to arrive, it just didn't know their exact shape. Linux and Java and browsers were often cited as threats at the trial, but those were known threats; what Microsoft argued was that the unknown threats to come were just as real.

It was not an argument that Rockefeller's Standard Oil could have raised. It was not an argument the judge bought at the time. But history may still have more to say on whether the argument had merit.

In 1998, Google Inc. was just getting started, its seeming omnipresence still years away. Smartphones, which today are developing into their own competitive platform, weren't in use. Wireless networks were in their infancy. That left Microsoft as the proverbial 900-pound gorilla ostensibly in need of restraint.

Unlike the strain Windows faces today, Microsoft's OS was on top of the desktop world. That fact led to the antitrust fight that would roil Microsoft for years, a fight that was personified on the company's side by its leader.

In preparing for the case, the government had asked Gates to testify. He opted not to. So on Oct. 19, 1998, in U.S. District Court in Washington, Gates was accused by the government of lacking "intestinal fortitude" because of his decision. In lieu of an appearance, the government instead used videotaped deposition excerpts that showed Gates being evasive and argumentative, leading to courtroom chuckles over sometimes embarrassing comments.

Gates had not believed the tapes would be shown in court, and at a news conference soon after they were made public Gates went after David Boies, the government's lead trial attorney. "You have to understand that Mr. Boies made it clear...in the negotiations leading up to the case that he is really out to destroy Microsoft," Gates said.

The belief that the government was out to "destroy" Microsoft was certainly the company's perspective. Microsoft officials thought the government was seeking a corporate break-up. Gates' feistiness also underscored a different worldview -- that the company saw itself competing in a market that could change overnight. Gates' now famous 1995 Internet Tidal Wave memo (download PDF) illustrated his view. "Browsing the Web, you find almost no Microsoft file formats. After 10 hours of browsing, I had not seen a single Word DOC, AVI file...."

One of the things Microsoft hoped to accomplish in this case was convincing the government that the tech industry was unlike any other. The company hired Richard Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology (MIT), to help make its case. A big part of his argument was that the real threats hadn't yet arrived. It was fear of these unknown threats that served to constraint Microsoft's apparent power.

Wrote Schmalensee in his direct testimony : "Much of Microsoft's future competition is unknown. It was not known in 1994 that Netscape, Java and Linux would become competitive threats to Microsoft. It is not known today who will become competitive threats to Microsoft in 2002."

Boies countered Schmalensee with MIT professor Franklin Fisher, who dismissed that warning about future threats. The notion that "a wolf might come out of the forest" to challenge Microsoft wasn't serious analysis, he said. The issue, the government argued, was about the monopoly power the company had at the time.

Gates tried to explain the threat in his deposition with Boies (download PDF).

Boise: When people used the word with you "commoditize" as in the statement that Netscape was threatening or endeavoring to commoditize the operating system, what did you understand commoditize to mean?

Gates: That they were creating a product that would either reduce the value or eliminate demand for the Windows operating system if they continued to improve it and we didn't keep improving our product.

The argument did not hold -- at least as far as the judge was concerned. In 2000, U.S. District Court Judge Thomas Penfield Jackson order that Microsoft be broken up, Standard Oil-style (read the decision). A year later, in 2001 the U.S.government -- in the interest of moving the case along -- dropped that remedy and announced a settlement under which Microsoft would agree to change to some of its business practices.

Before that agreement was finalized in court Gates, after refusing to appear years earlier, took the stand. In 2002, one of the points he raised concerned the future.

"Ten years is a very long time in the software industry," he wrote (download PDF). "Ten years ago, Windows was just beginning to become broadly successful, even as many ISVs focused on writing applications for MS-DOS and IBM's OS/2. Ten years before that the PC industry barely existed. Given the constantly accelerating pace of innovation, I expect we will see more changes in the computing landscape in the next 10 years than in any prior 10-year period."

Six years later, Windows -- still dominant -- has run into trouble; Microsoft has sought, so far unsuccessfully, to scoop up an Internet search company as it looks to better fit in with a new age; Google looms as an ever-larger threat. And Gates, his company intact, is moving on to the world of philanthropy, looking less like Rockefeller and more like another titan of an earlier time, Andrew Carnegie.

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