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The people versus Bill Gates:

Microsoft under siege

By Richard Morochove

First published March 26, 1998

I'll never forget the first time I met Bill Gates. It was a long time ago, in the mid-eighties, the pre-Cambrian days of personal computing.

Then, PC users looked through windows, they didn't click on them. Bill was still working on his first hundred million.

Floor to ceiling windows in the hotel suite overlooked the glittering neon that lit up the nighttime Las Vegas strip. Columnist John Dvorak helped out at the bar, handing out bottles of beer so no throat would go parched at his famed annual Fall COMDEX party.

You could barely hear yourself think. The air filled with the voices of a hundred computer journalists. But only one was speaking to Gates.

In a far corner a geek with tousled hair and a rumpled jacket listened intently to a woman whose concept of haute couture appeared inspired by fashions lingering on the discount rack at Goodwill.

"How did that bag lady get in here," I asked my companion, an editor for a computer trade weekly?

"Bag lady? That's Esther Dyson," he exclaimed!

Editor of an influential industry newsletter, Dyson was, and still is, famed for her insight on the directions of computer technology. Even then, she knew Gates had the business understanding most geeks lack.

I looked closer. Waving his arm to make a point, the pale-faced Gates looked like he tanned by the light of a computer monitor. Perched precariously on his nose, the bridge of his glasses was tightly wrapped with tape. I wondered how he could see through the greasy lenses.

The following day I saw Gates on the COMDEX show floor, strolling the aisles alone, viewing the exhibits like any other delegate. He was just one of thousands of bright young computer techies at the show.

At that time VisiCorp was a software industry leader. It's now long-gone. Lotus Development had recently introduced a hot new spreadsheet and 1-2-3 would quickly propel the new company to the top of the software hill.

Microsoft, on the other hand, was a mid-sized developer that toiled in the software backwaters. It cranked out boring operating systems like DOS and its own flavour of Unix, along with computer languages like BASIC.

No one considered Gates or his company a threat worth worrying about in software applications. Microsoft's Multiplan spreadsheet was agonizingly slow in its recalculations. The mediocre product lagged behind VisiCalc, 1-2-3 and SuperCalc in software sales.

Only in the nascent Macintosh market was Microsoft a contender, partly because there was little competition. Few software developers were willing to bet on the survival of the radically different computer from Apple. A spreadsheet called Microsoft Excel was a star, but it blazed in a night with few constellations.

A dozen years and forty billion dollars later, Gates held his own party at last year's Fall COMDEX, in a hotel ballroom packed with hundreds of invited guests, including journalists and Microsoft executives.

The impeccably dressed Gates was the eye of the hurricane, surrounded by a storm of journalists firing off question after question. Camera flashes lit the room like bolts of lightening as photographers elbowed each other to get a better view of the world's wealthiest man.

Gates has shown a remarkable ability to makeover his image to suit his needs and the public. In that way, he's the Madonna of the computer business. A computer geek in his early years, he was transformed, with help from his media advisors, into a preppy computer entreprenuer soon after Microsoft became a public company. In the recent Senate hearings in Washington, D.C., he appeared almost statesmanlike in his presentation to the senators, keeping his arrogant demeanour well in check.

Today there's a bit of Microsoft in virtually every personal computer. More than nine of ten computers sold are loaded with Microsoft's Windows operating system. And even where Microsoft doesn't supply the operating system, as with Apple's Macintosh, the software developer holds a commanding position. Microsoft is the dominant supplier of Macintosh applications. MS Internet Explorer is now the standard Web browser for the Mac.

Bill Gates is no longer the innocuous geek in a secluded corner of the room. He's under a spotlight at centre stage. Some say he's the puppet master pulling the strings of the computer industry. He is both respected and feared.

Microsoft's revenues were $11.4 billion (U.S.) last year. This year it will probably surpass IBM and become the world's largest seller of software.

Gates' company is highly profitable. Investors love Microsoft so much, they have bid up the shares to value it at more than $200 billion (U.S.), second only to General Electric. Microsoft is worth more than all the big three automotive makers combined.

Have Bill Gates and the company he controls become too powerful? Is Microsoft a force for software innovation or does it now stifle competition with its dominance? There's no doubt that some U.S. federal officials believe Microsoft is anti-competitive.

Increasingly Microsoft is bumping up against legislative limits to growth. Several years ago its proposed acquisition of Intuit, the maker of popular financial software such as Quicken, was blocked since the takeover was considered anti-competitive.

Later, under pressure from the U.S. Department of Justice, Microsoft agreed to remove anti-competitive provisions in contracts that licensed MS Windows to computer manufacturers.

More recently, Microsoft has come under renewed attack from the Justice Department. Microsoft was required to separate its Internet Explorer Web browser from Windows 95. Microsoft had argued that Internet Explorer was an integral part of Windows and could not be separated. Yet the company makes a version of Explorer for the Macintosh and that, obviously, isn't part of Windows. It's a separate software market.

Due to the actions of the Justice Department, Microsoft can no longer force computer makers to distribute Internet Explorer by piggybacking it atop Windows 95. PC makers have a choice.

Netscape Communications, maker of a competing browser (Navigator/Communicator), found it difficult to sell what Microsoft gave away for free. Netscape lost market share and recently decided to stop charging for its browser software, in order to compete with Microsoft's freebie.

When Microsoft gives away a program like Explorer, is it offering computer users a great value? Or is it using its effective monopoly in PC operating systems to gain unfair advantage in another part of the software business?

In a brief on competition in the software industry, prepared by Microsoft in January, the company argues that it isn't a monopoly since it accounts for only 5 per cent of the $253 billion dollar (U.S.) annual revenues in the computer software business.

There are many competing operating systems, Microsoft says, from IBM's OS/2 to Apple's Macintosh OS, to various versions of Unix and proprietary operating systems used by mid-range and mainframe computers. According to Microsoft, it accounts for just 13 per cent of worldwide operating system revenues when you look at all types of computers, not just PCs.

So if you don't like Windows, go ahead and buy the competing OS/390 operating system running on an IBM mainframe. This comes uncomfortably close to sentiments expressed hundreds of years ago by Marie Antoinette. If the peasants have no bread, let them eat cake. The French Revolution followed.

Microsoft even takes credit for lowering the price of software. In 1990, a single application such as MS Word cost $399 (U.S.). Today computer users can buy Microsoft Office, which includes three other principal applications along with other smaller programs, for $499 (U.S). Other software developers of suites, such as Lotus Development and Corel, have also lowered prices.

Microsoft is conveniently ignoring the economic effects of a much larger number of computer users, due to widespread adoption of PCs and much lower PC prices.

When I first purchased a VCR almost 20 years ago, the device was a novelty. There were only a small number of VCR owners. VCR software, a movie on videocassette, was an expensive luxury, priced at $100 and up. Now that millions own VCRs, there's a much larger market for videocassettes and you can buy one for under $20.

Similarly, the number of PC owners has increased explosively this decade. It's estimated that more than 80 million new PCs will be sold this year alone. If Microsoft maintained its former high prices for software, it would sell far fewer programs and be far less profitable.

In taking credit for lower software selling prices, Microsoft is asking us to pat it on the back for following its economic self-interests and maximizing its profits.

Microsoft's actions in giving away its browser to gain dominance in a new software market are reminiscent of Rockefeller's Standard Oil Trust in the early years of this century.

As demand for oil and gasoline boomed due to the growth in the use of industrial machinery and the automobile, Standard Oil prospered. It extended its grip on the energy business by practicing cutthroat competition. When it moved into a new geographic area, the company slashed prices far below the competition. Losing money, competitors either sold out or went out of business. Then Standard Oil was free to raise prices to normal levels.

Just as an automobile requires gas to operate, computer hardware is useless without programs. In effect, software is the fuel that gives value to computers.

The Standard Oil Trust eventually went through a government-ordered breakup to restore competition in the oil and gas business.

In its competition brief, Microsoft alludes to the oil trust. They owned a monopoly on oil fields and pipelines, says Microsoft. Since anyone can buy a PC and develop software, Microsoft argues it can't be a monopoly. I think I'll go out and develop a new operating system tomorrow!

Microsoft ignores the anti-competitive sales practices that led to the development of an oil monopoly, perhaps because it comes uncomfortably close to the software developer's own methods of operation.

Even if I developed a better operating system than Windows, I wouldn't be able to market it effectively. There's an enormous cost involved that effectively bars entry to all but the foolhardy or those with deep pockets. It's estimated that IBM has spent over $1 billion (U.S.) developing and marketing OS/2, an operating system that is now clinging to life by a slender thread.

While Microsoft is experienced in dealing with the Justice Department at this time, the recent U.S. Senate committee hearings must have come as a shock to Gates.

He hasn't actively sought the support of politicians in the past. Some say that competitors at the hearing, such as Netscape and Sun Microsystems, are now using politics to gain what they couldn't win in the marketplace.

However, the unpopularity of Microsoft in the backrooms of Washington, D.C. is a direct reflection of its business practices. It's a very centralized company, with employment concentrated in Washington state, in and around Seattle.

There are few Microsoft employees (and voters) in other states who could persuade their local politicians to support the software giant.

Other computer companies that operate internationally are far more decentralized than Microsoft. In effect they spread the wealth around instead of concentrating it in one area.

For example, IBM Canada employs 15,383 people. One of every 18 employees in IBM worldwide works in Canada.

Microsoft has 25,183 employees worldwide of which just 750 work in Canada, one in every 34. If Microsoft's employment was decentralized to the same degree as IBM, its Canadian head count would almost double to 1,400.

Of course you can't add employees without the revenues to support their salaries. Without a look at Microsoft Canada's financial statements, it's impossible to determine if the company is siphoning money Canadians pay for software to support jobs in Washington state.

Microsoft Canada declined to disclose its sales revenues, in response to my request. Yet other big players in the Canadian computer industry such as IBM Canada, HP Canada and Compaq Canada readily make this information public.

Even without this financial information, there are some disturbing indicators. Microsoft Canada cut down the functions it performs in Canada over the past couple of years, shutting down its Mississauga warehouse and the finance area, exporting those jobs to the U.S.

After Microsoft acquired a Vancouver-based e-mail software company it boasted it would maintain the company's developers in Canada. The product was successfully developed into Microsoft Mail. Yet little more than a year after the acquisition, the developers were moved to the Seattle area.

Only two of the people involved in the localization of Microsoft software for the French-Canadian market work in Canada. The rest are in Ireland.

It isn't as though Microsoft can't find Canadian programming talent. The company regularly hires new graduates from Waterloo, Sheridan College and other Canadian educational institutions. The Canadian taxpayer subsidizes most of the higher education costs that train these new Microsoft employees. Yet most graduates wind up working in Washington state, where they pay no Canadian income taxes.

Yet there are recent indications that Microsoft is cognizant of the need to return more back into local economies. Development work for MSN Canada Web sites and the latest Canadian version of MS Money was handled in Canada. Softimage, a more recent acquisition, continues to be located in Montreal.

In the long term, Gates will need to run Microsoft more like a large international organization, instead of a overgrown Seattle-based postgraduate school for computer techies, and distribute its economic impact.

As for the U.S. senators, I think it's unlikely they will order the breakup of Microsoft at this time. But unless Microsoft changes its tactics, this issue will keep haunting the company.

The problem lies at the root of Microsoft's success. Its corporate culture is ruthless and doesn't like to quit.

Microsoft doesn't hesitate to play hard ball, whether it's negotiating with small software suppliers or large customers. Even mighty Compaq Computer backed away from removing the Internet Explorer icon from the Windows desktop loaded on its PCs when threatened by Microsoft.

Gates and his able lieutenant Steve Ballmer have done a great job maintaining that small company feel. They motivate employees so they feel the company's very survival depends on their work.

Now the engineers must pull back on the throttle so their mid-level managers don't always go for the jugular. Tactics that were necessary when Microsoft was small software outfit scratching for survival, aren't appropriate for an $11 billion dollar behemoth. CW

Richard Morochove, FCA, is a Toronto-based computer consultant.

Copyright ©1998 by Morochove & Associates Inc. All rights reserved. This work may not be copied or distributed by any means without our prior written permission.

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