Microsoft Under Siege

Microsoft Under Siege

The man is clearly frightened. Insisting on anonymity, he lowers his voice and lets loose a stream of criticism. As one of Canada's largest sellers of desktop computers, he rails against the "massive power" of Microsoft Corp., producer of the Windows operating system that runs 90 per cent of the world's personal computers. "They totally control the market - totally," he says. The Seattle-based software giant, he fumes, is charging smaller PC makers almost twice as much for the latest upgrade of its operating system, Windows 98, as their much larger U.S. rivals. And for the first time, he claims, computer manufacturers are being forced to pay for bulk orders of Windows up front, rather than turning over a royalty for every PC sold. Still, "there's no way a Canadian company would dare complain," he says. "They're too afraid. It's like telling on a bully when you go by his house every day."

Such griping is as much a part of the $1-trillion computer industry as keyboards and microchips. For years, computer makers and rival software developers have both demonized and idolized the Microsoft miracle, heaping praise and profanity on its billionaire founder, Bill Gates. So when U.S. authorities launched an antitrust assault on the computer colossus last week, a clear but subdued chorus of cheers was audible throughout the high-tech world. It may take years before consumers see any fallout from the battle, but, in the meantime, Microsoft's corporate customers and rivals will be watching closely, anxious to find out if the biggest guy on the block will get his comeuppance.

The case already represents the most serious blow to Microsoft since its inception in 1975. In court documents filed last week, U.S. officials accused the company of adding free features to Windows in a bid to gain control of the market for software such as Internet browsers, which are used to view information on the World Wide Web. The two lawsuits - one launched by the U.S. justice department, the other by attorneys general for 20 states - also target other tactics Microsoft allegedly uses to dominate the market. Late in the week, federal Judge Thomas Penfield Jackson combined the lawsuits into one and scheduled the trial for Sept. 8. He ordered Microsoft to respond to the charges by July 28, rejecting the seven-month delay the company had sought. In perhaps the most startling allegation, the federal government charged that Microsoft attempted to induce rival Netscape Communications Corp. of Mountain View, Calif., to divide the Internet browser market. Microsoft denied that allegation and vowed to fight all the charges. "We believe that the allegations in these lawsuits are without merit," Gates said in full-page advertisements in major U.S. newspapers. "And the litigation, if it were to succeed, would hurt consumers and high-tech companies everywhere."

The biggest loser could be Microsoft itself. Although the company said it expects to launch Windows 98 on June 25 as planned, the justice department is seeking an injunction that would force Microsoft to separate its browser, Internet Explorer, from it and all future versions of Windows. Alternatively, Microsoft might be forced to bundle its archrival's product, Netscape Navigator, with every copy of Windows - a step Gates likened to including three cans of Pepsi with every six-pack of Coke.

A government victory in the lawsuit would force Microsoft to eliminate pricing schemes that allegedly force computer makers to take the company's other products along with Windows. Gone, too, would be contracts that regulators say prevent some Internet-access providers from promoting competing software. Microsoft could also lose some of its control over the Windows start-up screen, giving computer makers the right to customize the screen or replace it with their own. In the worst-case scenario for Microsoft, victorious regulators could conceivably push to break up the software giant into competing units, although that prospect seems remote.

So far, Canada is staying clear of the commotion. Unlike its U.S. counterpart, the federal Competition Bureau typically keeps its investigations under wraps unless and until they result in formal action. International Trade Minister Sergio Marchi said the government has not discussed the issue, although "we've obviously got our eye on it."

Canadian companies watch the battle with mixed emotions. Ottawa-based Corel Corp., whose WordPerfect office software runs a distant second to Microsoft's products in market share, applauded efforts by Washington and the states to promote fair competition. "A monopolist should not be allowed to leverage its way to dominance in a related market," said Paul Skillen, general manager of Corel's Orem, Utah-based WordPerfect division. "This is not about sour grapes. It is about ensuring that high-technology companies have the opportunity to compete fairly."

Ironically, Canadian software makers - including Corel - owe much of their success to Windows' status as the de facto standard for operating systems. In the late 1980s, software developers were forced to design products for several competing operating systems from such companies as IBM and Digital Research. That added greatly to their costs and made it impossible to predict which products would prove most popular with consumers.

Industry veteran Mark Skapinker freely admits the debt he owes Gates. In the early 1990s, Skapinker's Toronto-based firm, Delrina Corp., struck it rich on the strength of its Windows-based WinFax faxing software. Hobbling Microsoft could come back to haunt developers, he says. "When we make software today," says Skapinker, now the CEO of Balisoft Technologies Inc., Toronto-based designer of Internet software for Windows, "the number of users out there is greater than it ever was because Microsoft has created such a huge marketplace."

But Microsoft's size is a double-edged sword. The company's heft blinds it to the concerns of smaller players, says Mark Durst, president of Markham, Ont.-based PC maker Patriot Computer Corp. Durst says he has already spent $1 million on a marketing campaign for computers that incorporate Windows 98 - money that could be wasted if regulators force changes or delay the release. He questions why Microsoft did not work harder to reach a settlement. "They don't realize it's not just them taking the risk. It's us, too."

Small software producers are particularly vulnerable to Gates's competitive drive. As one of the world's most profitable companies - its cash reserves now exceed $14 billion - Microsoft can easily afford to buy up-and-coming competitors. Successful software start-ups also face the threat that Microsoft will decide to take them on. Delrina Corp., now owned by California-based Symantec Corp., suffered that fate in 1995 when Microsoft added faxing capability to Windows. Sales of WinFax subsequently plummeted. Microsoft's critics characterize the practice as a form of predatory pricing.

Gates calls it innovation, and argues that customers demand the convenience that new features provide. The company points out that its competitors, including Netscape, are not above offering free software to gain market share. As for complaints about its pricing policies, Microsoft says that, like many other companies, it charges high-volume buyers less, but sales agreement details are confidential. When all is said and done, says Gates, a company's right to design products as it sees fit must remain sacred. A U.S. Appeals Court seemed to back that stand last month when it ruled that a lower court's order requiring Microsoft to offer Internet Explorer separately from Windows 95 did not apply to Windows 98. Judges and juries should not be put "in the unwelcome position of designing computers," the court said. The decision almost certainly emboldened Microsoft to go head-to-head with the government in its current battle.

That could prove a costly mistake. Some industry watchers say Microsoft has underestimated the power of its opponent and the degree to which a protracted battle would sap the resources of the software juggernaut. The U.S. government's struggle with AT & T in the 1970s eventually shattered the telecommunications giant into seven separate companies. A 13-year antitrust battle with IBM fizzled in the early 1980s, but not before Big Blue - anxious to avoid the wrath of regulators - agreed to publish technical specifications that helped spawn the creation of rivals such as Compaq Computer Corp. of Houston. If Microsoft is not careful, it could pay a similarly high price. As the case proceeds, many of its rivals and business partners will be looking on, discreetly applauding the giant's misfortune.

WHAT'S NEW WITH WINDOWS:

The latest version of Microsoft's popular operating system, Windows 98, offers several new features.

Channel bar: A menu of popular Web sites. Responding to complaints that the feature restricts choice, Microsoft will allow PC makers to hide the bar on some versions of Windows 98.

Improved efficiency: Compared with Windows 95, the new software allows frequently used files to be opened faster, and speeds up programs by avoiding wasted memory.

Explorer: Version 4.0 of the Internet-browsing software is built into the operating system, allowing users to view files on their hard disks as well as Web pages.

Maclean's June 1, 1998