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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