Lawmakers: Microsoft Has Been More Responsible
by Andrew Noyes

     Five years ago, Microsoft settled its antitrust case with the Justice Department. Since then, the company has won favor with some lawmakers who say the company has faithfully implemented the terms of its consent decree and is acting more responsibly in the software marketplace.
     While the high-tech giant maintains its dominance in the market for computer-operating systems, Microsoft "appears to be cognizant of its obligations to adhere to the mandates of antitrust law," said Wisconsin Democrat Herb Kohl, chairman of the Senate Judiciary Antitrust Subcommittee.
     Microsoft is "more sensitive to concerns of industry and government regulators" and is more sophisticated about "how their competitors use regulation against them," added Democratic Rep. Jay Inslee, whose Washington state district is home to the company.
     While the antitrust case is important, the fact that the company has grown and matured in the last decade "probably has had an even greater impact," he added. Microsoft has shown the ability to "adapt and evolve with remarkable success," Inslee said.
     Part of the reason is that Microsoft "loves to compete" and can "change on a dime" to take advantage of a new opportunity, he said. "They are keenly aware that if someone builds a better mousetrap, their dominant position will be threatened."
     From Kohl's perspective, the most significant step Microsoft has taken was unveiling a set of guiding principles for developing its Windows system. That framework "can ensure a vibrant and competitive computer software market for years to come," he said.
     In a July 2006 announcement, the company pledged to let personal computer manufacturers and consumers add any software they wish to run on Windows and promised not to retaliate against any PC makers that support non-Microsoft software.
     Kohl, who recently announced his opposition to the proposed $14 billion merger of satellite radio providers Sirius and XM, said each antitrust case that comes before his panel is evaluated on its own merits, but the Microsoft lesson is a meaningful backdrop.
     Kohl, who headed his family's successful department store chain before it was sold in 1979, said the Microsoft case showed the criticality of guarding antitrust laws from "those who wish to water them down by carving out exemptions or creating 'new rules' for the so-called 'new economy.'" Even in the innovation-driven age, he said, "antitrust is the best tool ever devised to ensure that markets remain competitive."
     Today, Internet-based applications are "much more important" than a decade ago, when fears about a Microsoft power grab began, Kohl said. In the online space, Microsoft is a large player among several others, including Google, Yahoo and America Online.
     At least one of those rivals could be the next big antitrust target, especially abroad, Inslee said. A recent ruling against Microsoft by a European Union court made clear that "any company with more than 30 percent market share" could be scrutinized.
     Inslee said Google has dominance in search engines; Apple fits the bill in the sphere of digital music players; and IBM has control in mainframe computing. Plus Intel, Rambus and Qualcomm already are being investigated by the European Union, he said.
     While Kohl would not comment specifically on Microsoft's international experience, he said global antitrust enforcement is "a very important topic. ... Companies must comply with burdensome and expensive filing requirements in dozens of different nations."
     In a perfect world, there would be harmony between the United States and leading foreign regulators, he said. That way, U.S. firms would know "if a merger or acquisition passed muster here, it will pass muster at the [European Commission] and vice versa."

Foreign Regulators Take Tougher Line On Microsoft
by Andrew Noyes

     Microsoft's regulatory fortunes in the United States appear to have taken a turn for the better of late, but the same is not true elsewhere in the world.
     Microsoft was dealt a major blow in September, when the European Union court ruled that the firm had to disclose components of its intellectual property to rivals. The EU Court of First Instance upheld a $613 million fine and dismissed Microsoft's appeal of an antitrust order that the company share communications code and sell a version of its popular Windows computer-operating system without its Media Player.
     The decision was the most recent development in a string of overseas regulatory actions taking aim at Microsoft.
     The case began with a 1998 complaint by Microsoft rival Sun Microsystems and culminated in a 2004 decision by the European Commission, the EU's regulatory arm. Many of the claims at issue were reviewed and resolved by the Justice Department in its 2002 consent decree, Microsoft said.
     Last October, the company withdrew two pending appeals it had before the court. Its European general counsel, Erich Andersen, issued a statement saying it was "important at this stage to focus all of our energies on complying with our legal obligations and strengthening our constructive relationship with the European Commission."
     Building that relationship might be easier said than done, Pennsylvania State University law professor John Lopatka said. Foreign antitrust officials tend to be more hostile to dominant firms than U.S. antitrust authorities and courts, he said.
     The U.S. antitrust attitude is that dominant players must act in a way that injures consumers in order to violate the law, said Lopatka, who co-authored a 2007 book on Microsoft's antitrust battle. Foreign governments "seem to focus on actions that injure competitors, even when there is little evidence that consumers are ultimately harmed."
     That mindset, which he said is epitomized by the European Union, "does not bode well for any dominant firm, whether based in the U.S. or elsewhere. The difference in attitude is basic and entrenched, and I'm not optimistic that it will disappear anytime soon."
     Steven McGeady, a former Intel executive and witness in the U.S. Microsoft antitrust trial, had a different take on the topic. He said EU authorities "are likely to take their $1.4 [billion], declare victory and largely leave the playing field."
     But University of Baltimore law professor Robert Lande, a commentator on Microsoft's legal woes, said he is "highly skeptical" that the company has completely caved to the EU's demands and will provide all the necessary data for making its products work with those of rivals.
     "The only thing we know for certain is that they will not appeal the Court of First Instance decision -- probably because they calculated their chances of victory were negligible," he said. "Ask me again in a year if the leopard actually changed its spots."
     Massachusetts Institute of Technology professor Richard Schmalensee, who testified on behalf of Microsoft in the U.S. trial, believes that major American technology firms will be subject to more cases in the European Union and elsewhere -- notably South Korea.
     The Korea Fair Trade Commission ruled in 2005 that Microsoft must unbundle certain offerings, including its Media Player and MSN Messenger, and fined the company more than $30 million. Microsoft unsuccessfully appealed the decision.
     "Some of this is protectionism, but more of it is that outside the U.S., more stress is placed on protecting competitors as a means of protecting competition," Schmalensee said.
     "Dominant players tend to emerge from time to time in technology-based industries even though that dominance is often short-lived," he said. "Non-dominant players often fail -- and thus claim to need protection."

Google, Apple, Intel: The Next Competition Targets?
by Andrew Noyes

     The Internet behemoth Google, the computer and software manufacturer Apple, and Intel, the world's largest semiconductor company, risk becoming the next major American antitrust targets in the wake of the epic Microsoft mayhem, experts told Technology Daily.
     John Lopatka and William Page, authors of "The Microsoft Case," a 2007 book about the consumer welfare implications of the Microsoft litigation, said Google in particular is being watched carefully by regulators in the United States and abroad.
     The Mountain View, Calif.-based firm recently has been under review by the U.S. FTC and European Commission for its pending acquisition of the online advertising business DoubleClick. The FTC recently cleared the estimated $3.1 billion deal. The Australian government also studied the merger and decided not to block it.
     Google spokesman Adam Kovacevich said his company "puts our users first in everything we do." If they become uncomfortable with how the business operates, he said, "they are only one click away from switching to a competitor's services."
     "Rich competition in Web search, online advertising and applications keeps us focused on innovating to benefit users," Kovacevich said. Recent Nielsen ratings show that Google ranks first among Internet brands and accounted for more than half of the total number of U.S. search queries in September.
     "Certainly any emerging leader in the high-tech world has a bull's-eye on its back," Lopatka said. "Firms that can be characterized as monopolists are more vulnerable to attack than are small firms."
     Intel's dominance in the microprocessor market already has led to a flurry of antitrust actions, including multiple FTC probes and civil suits by competing technology firms. Lopatka called the challenges "predictable" given the company's imposing stature.
     In the late 1990s, the FTC investigated Intel, alleging that it had illegally refused to deal with several computer makers. Intel claimed that complaints to the agency by Compaq, Intergraph and DEC stemmed from intellectual property disputes.
     "In none of these cases did Intel deny anyone a supply of microprocessors or any other product. Intel's actions did not and could not harm competition in any relevant market," the company said. The FTC case was settled in March 1999, right before it was set for an administrative hearing.
     Intel's difficulties continued on Thursday when New York Attorney General Andrew Cuomo announced that he is investigating the company. A spokesman told the AP that subpoenas seek information on whether Intel coerced customers to exclude Advanced Micro Devices, from the market for a specific computer processing unit.
     Page also noted that Microsoft's woes are not over. The remedial phases of the U.S. and European Commission cases will continue for years, and the commission case imposes some obligations that will persist until Microsoft is no longer a dominant power.
     "Every firm with a dominant market share is apparently at risk under European antitrust standards," he said. The FTC recently declined to challenge Intel's licensing practices, but the Europeans still might do so.
     Massachusetts Institute of Technology antitrust expert Richard Schmalensee, who testified in favor of Microsoft during its trial, added that in Europe, the list of potential antitrust targets in the tech arena is long and the grounds are varied.
     "The Europeans take competitor complaints much more seriously than the U.S. agencies," he said. "In the U.S., market dominance alone is not grounds for prosecution; the agencies will move if they see conduct by a leading firm that goes beyond competition on the merits and tends to reinforce dominance."
     The European Union Court of First Instance's September dismissal of Microsoft's appeal of an antitrust order signaled that any company with more than 30 percent market share can be scrutinized, added Slade Gorton, a former Republican senator from Washington and Microsoft supporter.
     Intel, the chip maker Rambus and the cellular phone technology creator Qualcomm already are under scrutiny by the European Union, and the threshold for antitrust probes has been substantially lowered, he said, predicting that "there will be many more targets."
     Apple and Google are most vulnerable, said Gorton, who lost his Senate seat in 2000 to Democrat Maria Cantwell.
     "Apple has super-dominance in digital music players. Google has super-dominance in search," he said. IBM, which enjoys "super-dominance in mainframe computing ... has been through this before but still will be subject to the new rules," he said.
     Howard University law professor Andrew Gavil said companies like Microsoft "bring attention to themselves by their position and conduct," and there are few that "possess truly impressive and durable monopoly power that affect millions of consumers."
     Although Google's success has been impressive, Gavil said he is not sure that it "really enjoys the same kind of market conditions that permit Intel and Microsoft to exercise and potentially abuse market power."
     Former Intel executive Steven McGeady, who testified against Microsoft, also said Google has a long way to go before it "draws the kind of fire that Microsoft drew." The company is starting to "burn away much of their considerable goodwill ... but they have quite a bit left," he said.

Microsoft Is Facing New Challenges Since Settlement
by Andrew Noyes

     Microsoft's competitive situation has changed substantially in the years since the company settled its antitrust case with the U.S. and state governments in 2001, and the increasingly fast, cheap and accessible Internet has been a key factor.
     When the U.S. government's initial complaint was filed in the late 1990s, computer users relied heavily on desktop applications to write documents, store files, tally statistics, keep schedules and play games. All of that is now widely available online.
     John Lopatka and William Page, the authors of a recently published book on the Microsoft case, agree that the Internet has become a viable platform for delivering what was once only available on a hard drive.
     "Microsoft surely understands the need to be active in what's happening on the Web, and it will undoubtedly compete in that area," said Lopatka, a law professor at Pennsylvania State University.
     Google's free, Web-based word-processing application particularly threatens Microsoft's position as the dominant platform, said Page, who teaches at the University of Florida. Google Docs and similar programs are "accessible to anyone with a browser that complies with industry standards, regardless of the operating system," he said.
     "If a substantial share of applications were to move to the Web, the 'applications barrier to entry' that was so important to the government's case would be diminished," Page said. "That won't happen soon, however."
     Making firm predictions about the future of the software and computer industry is foolish, Lopatka said. "But the Internet, because it is based on open standards, is not conducive to the emergence of any single, dominant firm," he said.
     Howard University law professor Andrew Gavil offered a different view, saying that while movement to work-group servers and Web services has been important, the desktop "remains the critical conduit through which users access those servers and the Internet."
     "While change may eventually come that will be significant enough to erode Microsoft's market position, that change will be slow to occur and today Microsoft continues to use its desktop monopoly and interoperability as a one-two punch to provide it a significant advantage," he said.
     Steven McGeady, a former Intel executive who testified at the trial against Microsoft, said he does not yet view Google as a key online competitor because its offerings are "front of screen," rather than based on an operating system.
     "What may make Google more important is if they make good on promises and deliver a complete Web-hosted office suite to compete with Microsoft Office," he said. McGeady added that while Google may be "the biggest and richest in that space, they are only the first of many."
     One way he believes the environment has clearly changed is in "the anecdotal dreams and wishes of the average entrepreneur" who once aspired to create something groundbreaking and get bought by Microsoft. "Now everyone wants to make a splash and have Google buy them," he said.
     Microsoft defender and former Sen. Slade Gorton, R-Wash., added that the company has consistently said "if someone builds a better mousetrap, its dominant position would be threatened."
     "Reflecting on Google, Apple and Linux, Microsoft was right that the software industry was always highly competitive and remains so today," he said.

The Microsoft Trial: Looking Back 10 Years Later
by Andrew Noyes

     Ten years ago, Bill Clinton was in the White House; Silicon Valley's dot-com boom was in full swing; and the Department of Justice was preparing to launch what would become an epic antitrust battle against Bill Gates' brainchild.
     The department filed a complaint in the U.S. District Court for the District of Columbia against Microsoft for violating an earlier settlement that forbade the Redmond, Wash.-based company from using its dominance in the market for computer-operating systems to smother competition. Government attorneys argued that Microsoft wrongfully demanded that computer makers bundle its Internet Explorer Web browser with their hardware in order to get a Windows license.
     Microsoft eventually agreed to let manufacturers install Windows 95 without an Internet Explorer icon. But an appeals court later determined that the arrangement should not hamper the rollout of an updated version of the system known as Windows 98.
     Then in May 1998, the Justice Department and a collection of state attorneys general slapped Microsoft with the biggest antitrust action the firm had seen, alleging that the company had repeatedly exploited its market power to stymie competition.
     The first day of the landmark trial was Oct. 19, and it was chilly. The doors of the courthouse did not open until 9 a.m. and lawyers, lobbyists and other interested parties waited in a long line outside the Constitution Avenue complex. Jonathan Zuck, president of the Association for Competitive Technology, came early that morning with coffee carts. He passed out piping hot java in cups that read "here's hoping DOJ wakes up and smells the coffee."
     That is how Zuck, whose trade group is backed by Microsoft and was launched around the time the antitrust actions started, introduced himself to the sea of policy and legal titans that he would encounter for months and years to come.
     "Over time, they began to let people wait in a line inside and everyone got to know each other," Zuck recalls. "You formed real relationships in the hallway" with friends, foes and members of the media alike, he said.
     Each morning, a pack of dark-suited characters -- the legal teams from each side -- strode down the long corridor, past onlookers, and into the courtroom, Zuck recalled. "It was like a scene from 'Reservoir Dogs,'" the 1992 Quentin Tarantino film about a group of sharply dressed criminals.
     During the course of the trial, Zuck was schooled in legalese and "learned a lot more about antitrust law than any software programmer has ever been interested in learning. ... I also learned if you spend a lot of time in Washington wishing ill will on competitors, you very well might be creating an environment that you regret later on."
     The other big takeaway for Zuck was that "if you build something better, people will buy it, and all of these artificial constraints and apparent barriers to entry and theories we have really fail in comparison to building a better mousetrap."
     Back then, "the world was waiting for real competition," he said. That was achieved when Dell, IBM, Hewlett-Packard and others began investing in the Linux. "Serious companies got serious about making it into a serious operating system," he said.
     That resulted in the steady growth of the open-source Linux, whose underlying code can be freely modified, used and redistributed by anyone who adheres to the licensing terms. Today, Linux is practically "Windows-esque," Zuck said.
     Former Intel executive Steven McGeady, who testified against Microsoft in the trial, said Linux "is not competitively important" in the desktop operating-system market, but the impact of Mozilla's Firefox browser is "extremely important." So are Linux and LAMP (Linux, Apache, MySQL and PHP) on the server side, he added.
     Firefox does not deprive Microsoft of much revenue but makes standards-setting harder, McGeady said. Linux penetration costs Microsoft money in the server sector and is the driver for "typical ways of doing business," he said. Further, LAMP systems are "driving the Web 2.0 transition," which is not good for Microsoft's strategic position, he said.
     McGeady said he believes that Microsoft has not truly changed its behavior since the trial. "If the whole thing had an affect, it was probably to hasten [Gates'] departure from day-to-day management." Gates will leave this summer to spend more time on philanthropic endeavors.

A Q&A With Microsoft's David Heiner
     When Microsoft's associate general counsel, David Heiner, went to work for the high-tech company in 1994, he was the firm's first in-house antitrust lawyer. He was hired at a time of tremendous growth, and as Bill Gates' company matured, more legal firepower was needed to defend itself in the marketplace.
     Today, Heiner has a group of 30 staffers that specialize in antitrust issues and an additional 30 that focus on litigation. Microsoft has a pair of antitrust lawyers in Brussels, Belgium, and soon will have a presence in Asia. Heiner sat down with Technology Daily recently to discuss how times have changed for his employer.

TD: What is the biggest change that Microsoft has faced in the last decade?

DH: The big change really is the advent of software applications being delivered as services over the Internet. At the time of the [Microsoft antitrust] trial, the emphasis was on applications that were written to run on the local PC and written to interfaces made available by Windows. Since then, the computing platform has evolved and developers' interest today is increasingly around writing applications for the Web.

TD: How has that process played out? What are the new platforms?

DH: Developers do that using functionality in Windows, Linux, Mac and other functionalities like Adobe Flash, PDF, and with Internet standards and protocols of various kinds. A new platform is emerging, and Google is making that point. Internet applications are accessible from any browser on any operating system.
That's a significant new form of competition for Microsoft and very much along lines of what the government was hoping to achieve by the consent decree. The net effect of all this is the phrase "applications barrier to entry" (a phrase used in the case) is eroding.

TD: How has "open source" software been a factor in the years since the U.S. government's antitrust case against Microsoft?

DH: It existed in those days, but it has grown a great deal since then. In server-side software, Linux is basically the number two operating system after Windows, so it has been very successful. Firefox is out there in a big way. Open Office in various versions is competing with Microsoft Office. We increasingly see that everything Microsoft develops that we seek to license for a fee, there's a group out there offering something similar for free. That is a very intense form of competition.

TD: What has been the impact of advertising-based business models?

DH: Google is a prime example. For 25 years, the business model for Microsoft was to get developers to develop a program and license it to customers for a one-time fee. Increasingly you see all these services being delivered over the Net -- word-processing, storage, mail, spreadsheets -- and the point is to attract eyeballs to sites and to monetize with ads.
We're getting into that business but every time you have a major business model shift, whoever the incumbent firm is, they're at risk. So we are coming to work every day looking to navigate our way in this new world.

TD: What was the key lesson that Microsoft learned in the antitrust imbroglio?

DH: The main lesson we learned was that we need to do a much better job reaching out to and working with other firms in the industry and government enforcement officials. That's what we've been trying to do for the past five to six years. You see that in the range of settlements we've been able to work out with other firms, and we have good working relationships with many of those companies and government agencies.

Microsoft's Philanthropic Record Has Won Praise
by Andrew Noyes

     Microsoft's lengthy legal battle with the U.S. government might have tarnished the high-tech company's reputation in the court of public opinion, but the Redmond, Wash.-based behemoth has garnered international praise for its philanthropic record.
     The firm's 25-year-old community affairs division is one of the largest among all U.S. industries and has distributed more than $2.9 billion in cash, services and software to nonprofits around the world. In fiscal 2007 alone, more than $68 million in cash and $331 million in software was donated.
     Contributions of cash and software from employees plus Microsoft matching contributions during an October giving campaign totaled more than $72 million -- a company record. About 25,000 nonprofits -- from food banks and homeless shelters to youth programs and health clinics -- benefited from the effort.
     Former President Bill Clinton praised the workers at a ceremony, calling their generosity "a good thing." CEO Steve Ballmer added that charity is part of the company's mission "to enable people and businesses throughout the world to realize their full potential."
     Microsoft's recent domestic aid included $11 million in cash and software for Hurricane Katrina relief. The company also helped the American Red Cross develop technology to standardize sharing of vital information about people's welfare after a disaster.
     Globally, the firm has partnered with the United Nations since 1999 to provide undeserved populations access to technology, training and other services. Microsoft attorneys also volunteer their legal services to refugees facing U.S. immigration courts.
     The corporate and employee giving is separate from donations made by the foundation that Microsoft founder Bill Gates and his wife, Melinda, launched in 2000. The $37.6 billion organization has made $14.4 billion in grant commitments to education, healthcare and technology projects since its inception.
     Gates' bigheartedness makes him "much less concerned that he got money that otherwise might have gone to Larry Ellison," said Jonathan Zuck, who heads the Association for Competitive Technology. Ellison is founder and CEO of rival software vendor Oracle. Both Microsoft and Oracle are ACT members.
     "The same level of ingenuity and persistence and creativity that went into building Microsoft can be directed at smallpox and things like that" because of the philanthropy, Zuck said.
     John Lopatka, who co-wrote a 2007 book about the consumer welfare impact of the Microsoft litigation, said the company has "worked hard to appear less arrogant," but many still believe it can do no right. He said the perception comes from "a legacy of animosity toward Microsoft," and "long-held convictions die hard."
     "The Microsoft Case" co-author William Page agreed that the firm has made "real changes in its behavior and its approach to antitrust compliance." For example, all of its contracts and design decisions are reviewed by antitrust lawyers and employees get extensive antitrust training, he said.
     Microsoft defender and former Sen. Slade Gorton, R-Wash., said the company's domestic image "has always been positive -- even during the DOJ case." But "it has a tougher time in Europe where the governments and consumers are far more skeptical of large, U.S.-based corporations."
     Former Intel executive Steven McGeady, who testified against Microsoft during the antitrust trial, disagrees. "I'm not sure what they have done [to repair their image], but whatever it is hasn't been very effective," he said.
     The firm has, however, been successful at "keeping their head low," he said. "They haven't visibly smashed the life out of any attractive startups; they haven't been snarlingly throwing their weight around in emerging markets; and many of their efforts in new markets have met with limited success."
     University of North Carolina professor Andrew Chin, an expert on the Microsoft case, said he thinks that public outreach efforts and philanthropy probably improved the company's image, "but this has had no discernable effect on the level of antitrust scrutiny" in recent years.