High Tech Hardball: Does Everyone Do It?

Sure, it's dog-eat-dog in the Valley, but Microsoft is the 800-lb. pit bull

As the Justice Dept. and Microsoft Corp. lay out their arguments in a U.S. District Court in Washington D.C., it seems that the outcome of this historic antitrust suit may come down to a fairly simple question: Is Microsoft's behavior, as Justice litigator David Boies insisted in his opening argument on Oct. 19, that of a predator who uses illegal means to stifle competition? Or does Microsoft merely use the same bag of tricks that others do in its cutthroat, fast-moving industry? That's the essence of the defense that John L. Warden, Microsoft's lead trial attorney, outlined the next day.

If Microsoft convinces Judge Thomas Penfield Jackson that its version of reality is right, this antitrust case could set a new legal standard for the high-tech industry, one that would allow its bigger players more leeway than those in other industries. If the government view prevails, Microsoft could emerge as a vastly different company.

To Justice and Microsoft's critics, the answer is clear. This is not an industry problem but rather bullying by a monopolist. With more than 90% of personal computers carrying the Windows operating system, Microsoft had influence over other companies and has used it to head off competition from potential rivals--most notably browser pioneer Netscape Communications Corp. Microsoft, Justice claims, was even able to push around giants such as Apple Computer, Compaq, and Intel.

SHARP ELBOWS. That portrait rings true for many in the industry. Oracle Corp. CEO Laurence J. Ellison has accused Microsoft of pressuring former Digital Equipment Corp. CEO Robert B. Palmer to stop producing a network computer that would have competed with Windows-based PCs. "Anybody who can bully [Intel Corp. Chairman] Andy Grove or Bob Palmer has unusual power," says Ellison.

Clearly, Microsoft isn't the only player with sharp elbows in the computer industry. Indeed, on the first day of cross-examination, Warden showed how ruthless Ellison can be--at least in terms of rhetoric. He asked Netscape CEO James L. Barksdale where he first encountered the term "cut off their air supply," which has emerged as an ominous-sounding threat against Netscape in a Microsoft E-mail. The answer: From Oracle, which promised to administer that treatment to rival Informix.

And you don't have to look far to find companies doing all sorts of Microsoftian things. Bundling--the tactic of forcing customers to buy a new product along with an older one? Look at Sun Microsystems: It recently added its own HotJava browser to its operating system--and integrated it so thoroughly that the browser must be used to install the operating system. Meanwhile, IBM virtually gives away Lotus Notes with its hardware, says Rob Enderle, an analyst with Giga Information Group.

The government also accuses Microsoft of pressuring customers and rivals into supporting a broad array of Microsoft technology. Microsoft insists that this is simply a sensible way of cooperating and helping create a world of machines that can work well together. Indeed, it notes, the industry has actually developed a jargony name for it--"coopetition." Furthermore, Microsoft notes that four of its competitors--Sun, Oracle, Netscape, and IBM--are jointly funding research on Sun's Java programming language, which is a threat to Windows. Says Microsoft spokesman Mark Murray: "That's the way of the world in the computer industry."

But it's not that simple. Justice will argue--and this is where the scales could tip--that what is okay for most competitors to do is illegal when a monopoly does it. Ellison may threaten to cut off somebody's air supply, but only a player as powerful as a Microsoft can deliver on the threat, Justice argues. "Monopolies have to be held to a different standard because they have monopoly power," antitrust chief Joel I. Klein told a gathering of computer industry leaders on Oct. 20. The Supreme Court agrees, ruling that conduct that could be benign when engaged in by a competitor even with large market share may be illegal when engaged in by a monopolist.

Certainly, Microsoft rivals feel that Windows has given the company a commanding monopoly that gives it awesome power. Sun CEO Scott G. McNealy points out how Compaq Computer caved in when Microsoft forbade it to remove the Microsoft Internet Explorer icon from opening screens on Windows computers. "When Microsoft threatens to terminate a PC maker's Windows license, what alternative does it have?" he asks. "As big and resource-rich a company as Compaq obviously thought they had none." Justice will trot out such examples to convince Jackson that Microsoft is, in fact, a monopoly that has abused its extraordinary power to thwart competiton.

Microsoft will argue that, despite its high share of the PC market, it is not a monopolist. The industry, it insists, is too fast-changing and has too few barriers to sustain a monopoly. Microsoft attorney Warden told the court that traditional barriers--like billion-dollar buildings--don't exist, for example. All a potential challenger needs is brains, some startup capital, and a computer, he says. And he noted that Microsoft would not be spending $3 billion a year in research if it could sit back on its monopolist laurels. "This is no comfortable or quiet monopolist backwater," he declared.

Which view will prevail? Frederick R. Warren-Boulton, an economist who will be a government witness, said in a document submitted to the court that barriers are actually fairly high and that users are, in effect, "locked into" Windows because they can only opt out by paying enormous costs. For PC makers, there are few, if any, options.

In the coming weeks, the government will try to prove that the leverage of the Windows monopoly gave Microsoft unparalleled power. "We don't all do business like Microsoft for the simple reason that our customers won't let us," says Sun's McNealy. But they might if they could.