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1993-01-13
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The Software Industry - MICROSOFT'S WEB OF FEAR 1 of 3
The Economist, Jan 9-15, 1993 Page 58
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| America's Federal Trade Commission is considering action against|
|Microsoft for alleged anti-competitive practices. The emergence of|
|networking technology may do a better job of curbing the firm's power|
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In the 1970s, Bill Gates, co-founder and chairman of Microsoft, liked
to boast that he wanted to monopolise the software industry. About
$100,000 bought him the kudos he sought. That was what Microsoft paid
23 years ago for the rights to QDOS, a computer operating system
invented by Seattle Computer Products. The initials stood for Quick and
Dirty Operating System, an acronym which was swiftly replaced with MS-
DOS, or Microsoft Disk Operating System. Mr Gates then persuaded IBM to
use it for its forthcoming personal computer. Today MS-DOS and
Microsoft Windows, its DOS-based successor, have almost 90% of the
market for personal-computer operating software.
Over the past three years Microsoft's revenues have grown by more
than 50% a year, three times the rate of growth enjoyed by America's
other software firms. Such success has brought Microsoft's market
capitalisation, at $23.4 billion, within an ace of IBM's much-
diminished $28.6 billion. This has not only made 37-year-old Mr Gates
America's richest man; it has also made him enemies. As a result, Mr
Gates's long-held ambition to become the IBM of software is being
fulfilled in more ways than one: like IBM in the late 1960s, Microsoft
has become a target for America's antitrust regulators.
Envious of its dominance, Microsoft's rivals have long complained
that the company has used anti-competitive practices to win market
share. In 1990 such allegations caught the eye of America's Federal
Trade Commission (FTC), whose lawyers have been probing Microsoft,
based in Redmond, Washington state, ever since. In December 1992
Britain's Office of Fair Trading said it, too, was taking an "informal"
look at the company's business practices. And some of Microsoft's
rivals say they are considering whether to take the firm to court.
The FTC is saying nothing about its investigation. But sources in
Washington, DC, suggest that its lawyers have filed at least two
preliminary reports with the regulator's five commissioners, centering
on the way Microsoft licenses MS-DOS (which tells a computer's circuits
how to operate as a computer) to PC makers. The commissioners now have
to consider what action - if any - to take against the software giant.
Microsoft offers big discounts to personal-computer makers who agree
to pay for a copy of MS-DOS or Windows for every PC they sell -
regardless of whether each computer is to be sold with a Microsoft
operating system already loaded. PC makers like this arrangement
because it cuts the cost of buying operating-system software by as much
as two-thirds - critical in a market that last year saw the average
price of a PC fall by half. But software firms like Novell, based in
Provo, Utah, reckon Microsoft's cut-price deals dissuade PC makers from
considering other operating-system software (such as Novell's DR-DOS),
because they have already paid for a copy of MS-DOS. That, reckons
Novell, is anti-competitive behaviour.
- - - - - - - - - - - - - - continued - - - - - - - - - - - - - - -
The Software Industry - MICROSOFT'S WEB OF FEAR 2 of 3
Makers of applications software (the programs that tell a computer
how to work, say, as a word processor or spreadsheet) reckon Microsoft
indulges in other sharpish practices. Making the operating software
used in most PCs, they claim, gives the firm an unfair advantage when
it comes to developing application software - especially if, as they
allege, Microsoft held back some of the computer code that other
software firms (like Lotus, Borland and WordPerfect) need to develop
applications for Windows-based PCs. All this, say its accusers, has
helped Microsoft to snare almost two-thirds of the market for Windows-
based applications.
Talk of the FTC seeking to break up Microsoft into "Baby Bills" can
be discounted; fearful of crippling one of America's most successful
exporters, the commission is at this stage likely to do little more
than try to alter the way Microsoft sells MS-DOS to PC makers. Mr
Gates admits the FTC is concerned about Microsoft's MS-DOS products,
and concedes that the commission may want his company to make some
changes in the way it does business.
The FTC may seek a preliminary court injunction to bring about such
changes. But Mr Gates's words suggest a deal is in the offing. After
all, anti-competitive practices are notoriously difficult to prove in
the courts, as America's Justice Department found when it launched an
antitrust action against IBM in 1969. Thirteen years later all charges
were dropped.
-----Tangled by the network-----
The Justice Department dropped its case against IBM partly because
the computer industry had changed beyond recognition and Big Blue's
grip was, by the early 1980s, starting to weaken. In the 1990s even
more radical change in the computer business may make drawn-out
antitrust action superfluous in the case of Microsoft as well.
IBM was first scuppered by declining sales of its mainframe
computers, as customers swapped them for smaller machines; in the 1990s
Big Blue is also being hit by its failure to cut prices fast enough in
the PC market. Now the industry is changing again. Firms are eager to
link their PCs into company-wide networks, replacing both mainframes
and minicomputers. To do that, they need powerful new operating
software specially designed for use in networks.
Present leader of the network pack is Novell, whose NetWare software
dominates the market. To consolidate that lead, Novell announced in
December that it was buying Unix System Laboratories (USL) from
American Telephone & Telegraph (AT&T) and 11 minority shareholders, for
around $350m. Developed by AT&T a quarter century ago, Unix is a
powerful operating-system software already used on a quarter of the
world's mainframe and minicomputers; it is also widely used on the sort
of high-powered PC "workstations" that will form the basis of many
networks in the 1990s.
In the view of Roel Pieper, president of USL, "the two best
technologies for open systems and interoperability are coming together
within one company." The snag is that numerous versions of Unix have
emerged over the years, many of them incompatible. But if Novell can
nurture a standard version for use on PC networks, and integrate that
with NetWare, it could be on to a winner.
- - - - - - - - - - - - - - continued - - - - - - - - - - - - - - -
The Software Industry - MICROSOFT'S WEB OF FEAR 3 of 3
At present, Unix is used on just 3% of personal computers. In a world
of networked PCs, however, things could look different. Some analysts
reckon that, if Novell gets its Unix and NetWare mix right, the firm
could snare a third of the market for networked PC operating systems by
the late 1990s. Add in a handful of other competitors - such as Sun
Microsystems, and IBM and Apple's operating-software joint venture -
and Microsoft could find itself with less than half of the market in
operating systems for the next generation of PCs.
Could. But Microsoft is not standing still. It has already launched
Windows for Workgroups, aimed at users of small networks; its new
Access database software is aimed at network user; and mid-1993 will
see the introduction of Windows NT (for New Technology), Microsoft's
first full-blown operating system for sophisticated networking. "Nobody
can sit there and be entrenched," muses Mr Gates. "It is very, very
competitive."
Windows NT is aimed squarely at Novell - one reason why, on January
6th, Novell launched Personal Netware, aimed at Windows networkers. Mr
Gates reckons that most of today's Windows users will switch to Windows
NT as their individual PCs are increasingly linked into networks. If he
is right, Microsoft may indeed continue to dominate the market for
operating-systems software in the networking age.
The jury, however, is still out, because Windows NT has yet to be
released. Microsoft has found the software both difficult and costly to
develop - which is partly why, in the quarter to September 1992, the
firm's R&D spending was 42% up on the same period of 1991; it is also
why Windows NT is being released at least six months later than
planned. The firm has also hit problems with Access which, according to
InfoWorld, an industry journal, has been released complete with several
troublesome bugs. Microsoft, it seems, can make mistakes too.
Whatever action - if any - the FTC takes, it will be unable to
reverse Microsoft's near-monopoly of personal-computer operating
systems - MSDOS and Windows are the industry standards of today's
generation of PCs. The next generation, however, may see the softening
of Microsoft. Which would leave the FTC, like the Justice Department
before it, riding a breaking wave.
------------------------------The End--------------------------------