Mighty Microsoft Corp., the world's No. 1 software maker, may have big trouble ahead. BUSINESS WEEK has learned that the Federal Trade Commission is close to completing a two-year probe of the company's business practices. According to a well-placed source with detailed knowledge of the case, staff attorneys in the FTC's Bureau of Competition are near to recommending that the FTC bring action against Microsoft. Their recommendation could come as early as October but almost certainly no later than yearend. Top-level software industry executives, who have been interviewed extensively by the FTC, say they have been led to believe that the agency has nearly completed its probe.
The government's case against Microsoft, the source says, is based partly on the software giant's massive market power. Specifically, the feds have found fault with Microsoft's bare-knuckle competitive tactics, which they believe are examples of so-called "exclusionary behavior." That means the FTC staff thinks it has evidence showing Microsoft has taken actions designed to damage competitors, without any other apparent benefit to Microsoft or consumers. "There's nothing wrong with wanting to see your rivals dead or dying," says the source. "That's competition. But you're supposed to do it by fair means, not foul."
If the FTC staff lawyers cry foul, it will still be up to the five commissioners of the FTC to decide whether to launch a case. Although it would be rare for them to reject a staff recommendation, the commissioners could decline to proceed. If they do go ahead, Microsoft would have the option of fighting the case or negotiating a consent decree in which it would likely have to promise to refrain from anticompetitive tactics. Some of those who know Microsoft Chairman William H. Gates III believe he's likely to fight. Says one software rival: "Gates thinks he can beat the government."
INCREDULOUS. Microsoft officials say they have yet to be notified of any impending action by the FTC. The FTC has yet even to acknowledge publicly that it is investigating the company, although Microsoft confirmed in March, 1991, that it was the target of a probe. Gates says that neither he nor any other Microsoft executive has even been interviewed by the FTC, although the company has supplied the feds with mountains of documents. When told of the FTC's pending action, Gates was incredulous, steadfastly denying any wrongdoing. Gates says he's only remotely concerned about a possible case. "Am I worried?" he says. "Do I worry about somebody walking up and shooting me in the head? It's a possibility. This is a government agency that's very powerful."
Microsoft's chairman, meanwhile, doesn't appear to have many powerful government connections of his own. Gates may be the country's richest man, with $7 billion in Microsoft stock. And President Bush did honor him with the National Medal of Technology at a White House Rose Garden ceremony in June. But Gates has yet to use his money to become a political force. According to Federal Election Commission records, Gates has made political contributions of just $3,500 since January, 1991. Most of that money went to Democratic congressmen.
Action by the FTC would be a black eye for one of the computer industry's titans. As the supplier of MS-DOS and Windows, the key operating-system programs for IBM-compatible personal computers, Microsoft drives much of the industry's agenda. The 17-year-old company is now about the size of its next four competitors--Lotus, Novell, WordPerfect, and Borland--combined. In its fiscal year ended in June, the company posted earnings of $708 million, up 53% from the previous year, on $2.76 billion in sales, a 50% increase.
BITTER MOUSE TRAP. Such success, coupled with Microsoft's aggressive stance, has made it a magnet for rivals' complaints. Competitors believe that Microsoft has an unfair advantage because it sells both operating systems and applications. That means its operating system experts can give its developers of word processing, spreadsheet, and other programs inside knowledge and advice. "We know that Microsoft takes full advantage of the fact that it owns Windows," says Philippe Kahn, chairman of Borland International Inc. Microsoft now controls more than 50% of the fast-growing, $1.3 billion market for Windows applications in North America.
If the FTC brings an exclusionary practice case against Microsoft, it would be building on a 1985 Supreme Court ruling, written by Justice John Paul Stevens. In Aspen Skiing Co. vs. Aspen Highlands Skiing Corp., the court began defining the law on exclusionary practices. Aspen Skiing, which owned three of four ski lifts on the Colorado mountain, excluded its smaller competitor from a package of lift tickets it offered skiers. As a result, the company was found guilty of using its market power to engage in anticompetitive behavior that hurt its rival while not benefiting consumers.
It's still unclear which of Microsoft's practices could be viewed as violating the exclusionary practice law. A potential example might involve Microsoft's dealing with Logitech Inc., a Fremont (Calif.) maker of "mouse" pointing devices. Microsoft and Logitech are the market-share leaders in the $500 million business. Logitech has been objecting to Microsoft's tactics since 1989, when Logitech President Pierluigi Zappacosta wrote a letter to Microsoft's then-President Jon A. Shirley alleging that Microsoft salespeople were bad-mouthing Logitech's products.
Since then, Logitech has lodged other complaints with Microsoft. Soon after Microsoft began shipping Windows 3.0, for instance, Logitech signed a deal to sell the new program with its own mouse as a "bundled" product. But in June, Microsoft abruptly terminated the pact. The reason: Microsoft says it now makes such licensing deals only with makers of PCs and other "substantial" hardware, not mice. "These are the perfect rules to exclude us," says Zappacosta. "It's impossible for us to have a competitive bundle on the market now." Microsoft's Executive Vice-President Steve A. Ballmer says he changed the licensing policy because Microsoft was losing money on deals involving small hardware products.
Then there's Microsoft's relationship with software house Adobe Systems Inc., which makes software typefaces. Adobe believes that Microsoft's Windows package was designed so that Microsoft's brand of typefaces prints on a laser printer at twice the speed of Adobe's. It complained to Microsoft, without result. Eventually Adobe cleared the hurdle but says it lost sales to Microsoft. Says Cameron Myhrvold, Microsoft's director of developer relations: "There is nothing Microsoft is doing that holds back Adobe."
Antitrust experts say it is extremely difficult to prove that a company has engaged in exclusionary practices, since it's tough to show that the company acted for no reason other than to crush a competitor. What makes such a case particularly challenging, says Harry First, a professor of law at New York University, is that it's easy for a company to come up with a plausible justification after the fact. "These are hard cases to win," he says. That means if the FTC is set on forcing Microsoft to change its ways, its evidence better be rock-hard.