Bill Gates would have preferred to address the American Association of School Administrators convention, but the most powerful man in the computing world instead found himself defending his business practices before the Senate Judiciary Committee in a battle of rhetoric that could have lasting implications for your schools.
Gates, CEO of Microsoft Corp., appeared before the committee on March 3 along with two of his fiercest rivalsÐJim Barksdale of Netscape and Scott McNealy of Sun Microsystems. The industry leaders were invited to Washington by Sen. Orrin Hatch, R-Utah, chairman of the Judiciary Committee and an outspoken critic of what the senator has termed Microsoft’s “predatory pricing practices.”
Also invited to testify were Michael Dell of Dell Computers, Doug Bergum of Great Plains Software, and Stewart Alsop, a venture capitalist and former market analyst.
At issue is whether Microsoft has used its leverage as the dominant player in the operating system (OS) market to extend its rule into other areas, such as web browsers and office management software. The Senate probe is running in tandem with a lengthy investigation of Microsoft by the Department of Justice (DOJ), which has charged the company with violating antitrust laws by bundling its web browser, Internet Explorer (IE), with its Windows OS.
According to Peter Grunwald, president of the market research firm Grunwald Associates, the outcome of Microsoft’s battles could have a huge impact on your schools. “The machinations on the Hill, and perhaps even more importantly, any antitrust rulings made by [DOJ] are important to educators because they will affect the kinds of software and content choices that schools will have down the road,” Grunwald said.
“A monopolist has to play by different rules”
In prepared statements at the outset of the hearing, both Barksdale and McNealy argued that Microsoft, which enjoys better than a 90 percent share of the OS market, must be held to a different standard.
“There is nothing wrong with being a monopoly,” said Barksdale. “But a monopolist has to play by different rules.”
Gates vigorously disputed the claim his company is a monopoly, arguing that Microsoft faces stiff and continuous competition. Given the volatile nature of the computer industry, Gates said, the hold his company has on the market share is always tenuous. “The products that Microsoft makes have very short lifespans,” Gates told the committee.
“Can any Microsoft product endure every competition? The answer is no.”
Gates expressed his concern that any regulation of Microsoft would have a negative impact not only on his company but on the industry as a whole. “This is a market where no one can restrict output,” he said. Gates pointed out that the computer industry relies heavily upon ingenuity and creativity for its growthÐqualities that should not be stifled for fear of punishment, he said.
But McNealy disagreed. “People argue that software is different, but it’s no different than the railroad or telecommunications industries,” he said.
McNealy said an operating system is like the official language of the computing world. He argued that Microsoft’s Windows is so entrenched as the dominant OS that for computer manufacturers to embrace a new platform would be like the United States switching its official language from English to Dutch.
Antitrust experts said the law holds monopolies to a higher standard than their smaller competitors. While there is nothing inherently wrong with having monopoly power, experts said, the courts have ruled that using such power to maintain one’s dominance or to extend it into other markets is wrong.
One of the ways the DOJ charges Microsoft uses its OS leverage to extend its dominance into other markets is by forcing computer manufacturers who install Windows to install Internet Explorer as well. Called “bundling,” the practice was challenged by the DOJ. Without acknowledging wrongdoing, Microsoft agreed to stop bundling.
Despite Microsoft’s agreement, the DOJ alleges Microsoft has continued to enter into exclusionary agreements with other companiesÐa practice its competitors charge is unfair.
Hatch challenged Dell’s assertion before the committee that his company doesn’t have such an exclusionary agreement with Microsoft. Hatch cited examples of calls his staff made to five Dell sales representatives in which none of the five offered an alternative browser to IE.
“Despite Netscape’s predominance in the browser market, you push [IE],” Hatch said. “How do you know what your customers want if you don’t give them a choice?”
Another senator said his staff had tried a similar experiment, calling Dell sales reps and asking whether they could get a Dell computer custom-built with a Windows OS and a Netscape browser. All of the sales reps said no, they couldn’t do that. When asked why not, one replied, “Because Microsoft won’t allow us to.”
In response, Dell said his company isn’t obligated to offer things that are readily available on the internet. Netscape Navigator can be downloaded for free from Netscape’s web site, he said. When asked why it wouldn’t be good business practice to offer Netscape to his customers, Dell replied, “We do offer it to some of our larger customers who demand it.”
Barksdale told the committee, “We aren’t in a position to ask for exclusive licenses, because we’re subject to market forces. Normally, if you ask a company for an exclusive license, they’ll tell you to go take a walk.” But Microsoft’s position in the market allows it to do this, he said. And companies are afraid to say no for fear of losing their licensing agreements with the software giant.
“We’re going to lose our choice as consumers”
McNealy warned the committee of the danger to consumers if Microsoft’s business practices aren’t held in check. “Innovation must be allowed to happen,” he said. As long as Microsoft flexes its muscles to keep smaller companies from competing on a level playing field, McNealy said, “we’re going to lose our choice as consumers.”
One senator expressed concern that as Microsoft’s power continues to increase, the company’s prices keep rising. “If your industry were much more competitive, your prices would be lower,” he challenged Gates. The senator pointed to Microsoft’s profit marginÐat 24 percent of the company’s sales, it’s astronomically high for the computer and software industryÐas evidence that customers are losing in the war with Microsoft as well.
But not all the senators were of the same opinion. Sen. Jeff Sessions, R-Ala., questioned whether the federal government should take sides in a lawsuit. Sessions cited the Justice Department’s antitrust case against IBM in the early 1980s which, after costing the U.S. millions of dollars in federal money and IBM its stronghold on the computer market, was ultimately dismissed.
One thing that everyone who testified agreed upon is that intrusive government regulation is not the answer. “I don’t think we need any new laws,” McNealy said, “just enforcement of the existing laws.”
McNealy called upon the government to scrutinize the practices of Microsoft. “We can use the help of the government to enforce the laws of the land,” he said.
Just what will come of the Senate hearing, if anything, remains to be seen. What is clear: Microsoft is in for a long stint of intense government scrutiny.
“I believe that Microsoft is in position to become the sole provider of operating systems within the next 10 or 20 years,” Alsop predicted. Yet, he added, it could be “potentially disastrous” for the government to regulate the computer industry. “The question remains: ‘What can we do about the problem of fair competition within the existing system of economics?'” Alsop said.
Meanwhile, DOJ’s probe of Microsoft is intensifying as well. DOJ has subpoenaed internet service providers America Online, Sprint, EarthLink, and MCI to investigate whether Microsoft’s contracts with the internet service providers are exclusionary in nature. And at least 11 state attorneys general are contemplating legal action against Microsoft as well.