Microsoft's All Out Counterattack

It's pulling out the stops to sway public opinion and convince politicians that breakup is bad business

On Apr. 28, as the Justice Dept. was proposing that Microsoft Corp. be split in two, Jack Krumholtz was ready to pounce. While the public reply would come from the Redmond (Wash.) office, Microsoft's chief lobbyist calmly prepared a counterattack that seems aimed at a far more exclusive audience: members of Congress, federal judges, and a future President. His first goal was to meet with members of the House and Senate Judiciary Committees, which oversee antitrust issues and the Justice Dept. "Our goal is to get our message out and stop letting our competitors define us," says Krumholtz.

"Getting our message out" is Washington-speak for convincing elected officials that breaking up the Behemoth of Redmond could be harmful to their careers. Krumholtz, 38, hardly looks the part of the back-slapping influence-peddler. In fact, he could easily pass as a code-writer from the home office. He and his colleagues dress casually--no Gucci loafers in sight. And they inhabit a modern, triangle-shaped building on Dupont Circle, rather than a glass-and-steel box on K Street with the rest of the high-powered lobbying crowd.

Still, Krumholtz is no rube, and he's playing a high-stakes game that has already turned nasty. With an in-house staff of 14 and dozens of top lobbyists, lawyers, pollsters, and image-molders on retainer, Krumholtz is attempting what Microsoft's legal team so far has been unable to do: convince official Washington that Justice's attempt to split the company up is misguided.

PUMPING OUT. For the past two years, Krumholtz and his colleagues in Redmond have been laying the groundwork by openly doling out millions in contributions to lawmakers in both parties. What has been less apparent is a strategy that includes funding think tanks to pump out pro-Microsoft tomes--and withdrawing largesse from any group that strays from the party line. The company also runs a grassroots letter-writing campaign in all 50 states.

In Krumholtz' stable are advisers with ties to the campaigns of both Texas Governor George W. Bush and Vice-President Al Gore. He has retained law firms well versed in antitrust to do work unrelated to the Justice case--precluding them from advising Microsoft rivals. One recent hire: his former law firm and lobbying powerhouse Verner, Liipfert, Bernhard, McPherson & Hand. And he has hired pollsters to test public opinion and sway media minds.

Even seasoned Washington hands say they have never seen anything quite as flamboyant as the Microsoft effort. It's all the more surprising, considering that none of this existed five years ago, when Justice first began its antitrust assault. Then, Microsoft's command post amounted to little more than "Jack and his Jeep," in the words of one fellow lobbyist--the Jeep being almost as important as Jack, since it served as the downtown office his bosses didn't see fit to furnish. "We were late to the party," Krumholtz says.

These days, Microsoft money flows like champagne at a wedding. Krumholtz doled out $4.6 million last year to lobby Congress--and millions more on publicity and polling. Political gifts in the 1999-2000 election cycle total $1.5 million so far, with more to come (table, page 106). The company contributed an additional $1 million to help underwrite the two political conventions this summer. Then there are the national ad campaigns featuring warm and fuzzy Bill Gates and cuddly Steve Ballmer, and the charitable donations made by both Microsoft and Gates's foundation--including a timely gift of $10 million for a U.S. Capitol visitor's center. It adds up to instant impact.

Or does it? So far, Microsoft has wound up with only adverse rulings from Judge Thomas Penfield Jackson and bad publicity over ham-handed moves. Pushing for cuts in the Antitrust Div.'s budget last year was viewed as a fiasco. And hiring a friend of Iowa Attorney General Tom Miller--one of the leaders of the state AGs who are working against Microsoft--to dissuade him from pursuing the case only increased Miller's resolve. Says one K Streeter familiar with Microsoft's lobbying: "It's silly. It's a waste of money. [The case] is in an area that's not susceptible to this."

But given time, some of Krumholtz' efforts might bear fruit. Observes Wright H. Andrews Jr., a past president of the American League of Lobbyists: "It's not surprising [that they're doing so much]. The only surprising thing is that it took them so long."

Much of Krumholtz' work seems focused on the incoming Administration. The next crop of trustbusters probably won't opt out of the case entirely. "But," says former Federal Trade Commission Chairman James C. Miller III, "they could meet with the judge and say: `We've reviewed the evidence and believe an appropriate remedy is to do little or nothing."' Alternatively, they could push for a settlement on terms Microsoft could live with, he adds.

To work this angle, Microsoft has developed contacts with two of the presumptive Presidential nominees. Lobbyist Thomas J. Downey, a former Democratic representative from New York and a Gore confidant, has been getting Microsoft money since 1995. Media advisers Carter Eskew and Mark Penn also have ties to Gore and Microsoft. Eskew was on Microsoft's payroll until he joined the Gore campaign last fall. Penn was with Gore until last fall and now is a Microsoft consultant.

To get close to Bush, Microsoft has hired former Republican National Committee Chairman Haley Barbour and former Christian Coalition director Ralph Reed. In fact, Reed has already admitted to a bit of excessive enthusiasm: On Apr. 11, he apologized for encouraging fellow conservatives to contact Bush on Microsoft's behalf.

More immediately, the company is trying to mold public opinion. Shortly after Jackson's Apr. 3 ruling that Microsoft had stifled innovation, it rolled out TV ads featuring Gates talking about Microsoft's innovations. Once Justice proposed a breakup, Ballmer hit the airwaves. And both appeared in full-page newspaper ads on May 1.

Microsoft is also commissioning polls. During the Iowa caucus and New Hampshire primary, it helped underwrite polls that concluded that the public has a weak appetite for the case, then faxed the results to reporters. The aim: to thrust the case into the spotlight and get the attention of the campaigns. Sometimes, Microsoft's handiwork is disguised. As the 19 state AGs involved in the case were deliberating throughout the spring on what remedy to seek, an obscure trade group called Americans for Technology Leadership (ATL) weighed in with a poll. ATL concluded that the public believes state AGs should devote their energy to causes other than Microsoft. What is ATL? Turns out, it's a largely Microsoft-funded group.

RED CARPET. And to get its message to elected leaders, Microsoft has almost overnight become one of the biggest players in the campaign contributions game. It is now the ninth-largest corporate giver of unregulated "soft money" that goes to political parties. Such contributions have been tripling with each election cycle, and this is clearly getting the Hill's attention. Witness the reception fit for a foreign dignitary that Gates received when he visited congressional leaders on Apr. 5, just two days after his company was judged a monopoly.

And lawmakers charged with raising money for their parties seem to have an unusual interest in the fortunes of Microsoft. Virginia Representative Thomas M. Davis III, chairman of the Republican National Congressional Committee, is one of Assistant Attorney General Joel I. Klein's harshest critics. New Jersey Senator Robert G. Torricelli, chairman of the Democratic Senatorial Campaign Committee, has offered his services to help settle the case.

Even charity can be an effective tool. For example, the day before Justice filed its breakup proposal, Microsoft picked up an unlikely ally in Representative James E. Clyburn (D-S.C.), who represents one of the least technology-rich districts in the country. But Clyburn chairs the Congressional Black Caucus, and Microsoft--and Gates personally--have been generous contributors to African American causes. Gates has pledged $1 billion for minority scholarships, to be administered by the United Negro College Fund. Microsoft has also given $50 million in software to the fund.

Another Microsoft tactic is to spread hefty amounts of legal work--much of it unrelated to the case--to major firms around town. So an army of lawyers is ethically constrained from working for Microsoft's competitors. The Progress & Freedom Foundation, a business-funded conservative think tank that supports a breakup, found this out when it tried to hire a lawyer from Pillsbury Madison & Sutro. The firm begged off because it was doing other work for Microsoft. "They've got the whole town conflicted out," muses one attorney. "They've sucked out all the oxygen."

Microsoft plays a similar game with think tanks and advocacy groups. It secretly funds those that do its public-relations work and pulls funding from those that dare question its positions.

It stopped donating to the respected conservative think tank American Enterprise Institute, even though the AEI has no official position on the case and most of its antitrust and technology experts are pro-Microsoft. But the institute happens to be home to Robert H. Bork, the legal scholar and former appellate judge. Bork, known for his minimalist views on antitrust enforcement, shocked the company when he took the other side. Microsoft has also funded a newspaper ad campaign of conservative academics under the auspices of the Independent Institute and underwrote the cost of publishing the sympathetic book Winners, Losers & Microsoft.

Microsoft's lobbying is not always done with finesse. Its hiring of former Iowa House Speaker Donald D. Avenson to lobby Iowa Attorney General Miller, and its polling directed at the 19 state AGs, clearly did no good. Miller remains a ringleader of the cause and 17 of the 19 AGs favor immediate breakup. But its 1999 efforts to block the Clinton Administration's 16% budget increase for Klein's division was perhaps the biggest PR fiasco. "I've never seen an organization so incompetent," says Thomas W. Hazlett, a resident scholar at the AEI, who is pro-Microsoft. "You'd have to plan it to come out this poorly."

Krumholtz argues that he's not doing anything that other companies haven't done. He also says his effort is simply a response to the lobbying by competitors. But Microsoft has something its rivals and critics don't have: an apparently bottomless store of money to spread all around town.

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