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a view on ms futures
From: David Farber <farber () central cis upenn edu>
Date: Sat, 28 Jan 1995 12:21:46 -0500

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Motorola V. InterDigital
Patent Infringement Trial Could Be A Shocker To Telecom World

Software Giant Will Have Enough Trouble Navigating 90s,
Even Without A Tougher Consent Decree

Reback's Theory

Small state may take big move to encourage budding technology

Virginia, California, Washington?




                     . . . and more

Software Giant Will Have Enough Trouble Navigating 90s,
Even Without A Tougher Consent Decree

Microsoft Corp. officials and lawyers must wonder what cruel
fate they were dealt to land in the court of Judge Stanley
Sporkin of the D.C. District Court. They were looking for a
rubber stamp to ink their antitrust consent decree with the
Justice Department. They instead found an iron will.

"Can I use my own pen to sign the decree, or is the government
going to supply that?" Sporkin asked in court last Friday. "I
mean, I got to have some role here."

Sporkin is trying to figure out whether the proposed decree is
tough enough to curb Microsoft's monopolistic practices. He
shouldn't waste his time.

With or without the leveling influence of a decree, Microsoft
will have a tough time writing a second act for itself.

For Microsoft to do well in the future, it must willingly--even
gleefully--break its ties with the past, especially the rich
tributary of royalties from creaky, outdated operating systems.
So far, Microsoft has been unwilling to take the step. Far from
being a feared monolith, Microsoft could easily end the 1990s in
the same shape as IBM in the 1980s, wondering where it all went


The chief proponent of a tougher consent decree is Gary Reback
of Palo Alto's Wilson, Sonsini, Goodrich & Rosati. He is
lobbying Sporkin to make modifications on behalf of nameless
Microsoft competitors who are frightened of retribution if they
are identified.

Reback argues that Microsoft was handed a goldmine and
unlawfully turned it into a company town. As IBM's appointed
provider of operating systems for the PC industry, Microsoft has
been able to build a "locked-in" market of captive customers who
are joined at the hip to Microsoft and its products. Left
unchecked, Microsoft's next casualties are home banking and
on-line services. That's the theory.

In oral arguments, Sporkin was taken by Reback's contention that
Microsoft announced "vaporware," software in the early stages of
development, in order to forestall competition. He repeatedly
quizzed a testy Anne Bingaman, the Justice Department's
antitrust chief, on the consent decree's failure to deal with

Sporkin: So, in other words, the message to Microsoft [is]
continue with this practice? Is that the message you want the
Justice Department to give?

Bingaman: Your Honor, my statement to you is I'm the prosecutor.
You're the judge. I decide what makes out a winning case, and if
I don't want to file it, nobody can make me file it. . . . Your
role is to accept or reject. Mine is to decide what to file.
That's the reality.

(Judge Harold Greene would certainly dispute Bingaman's view.
His fingerprints are all over the Modification of Final Judgment
that broke up the Bell system.)

These exchanges made for enjoyable entertainment if not
elucidation. "Take it easy. Let's not destroy the furniture,"
Sporkin told Bingaman after one of her numerous pleas.

The proposed consent decree focuses on Microsoft's practice of
forcing computer makers to pay royalties on machines that
weren't installed with Microsoft software. Bingaman defended her
exclusion of other strongarm tactics of Microsoft by saying "if
I had a case today that I could file on those practices, I would
file it."

Likewise, Reback could bring a private antitrust case against
vaporware. That's what Bell Atlantic Corp. and NYNEX did when
they were dissatisfied with the proposed consent decree
governing AT&T Corp.'s acquisition of McCaw Cellular Corp. The
two companies arguably had more to fear from AT&T Corp. than do
Reback's unnamed clients from Microsoft. Their suit was settled
on the eve of trial. Their settlement went beyond the consent

Reback instead chose to try to enter these consent decree
proceedings after the conclusion of the public comment period
once it was apparent that Sporkin, always an iconoclast, would
be receptive.

Leaving aside the soundness of his economics and tactics, Reback
is overly optimistic about Microsoft's ability to shape the
future. He would be better off preparing his clients for when
Microsoft inevitably falls from grace.

Likewise, Sporkin is proof that a little knowledge is a
dangerous thing. Much of what he knows about the software
industry he learned from a single book, Hard Drive.

As was said about the aging Willie Mays, Microsoft's future is
behind it.

                       A SHAKY FOUNDATION

Microsoft's riches are built on the foundation of DOS, the
operating-system software that sits between a computer's
circuitry and the user. DOS became an industry standard in the
early 1980s, due more to Bill Gates's business acumen than DOS's
inherent strengths. After several missteps, Windows, which sits
on top of DOS, also became an industry standard by the early

The Windows-built-on-DOS configuration is an inadequate
operating environment for power users. It can't do two things at
once well. It's unstable. It is forced to run on out-of-date
hardware configurations. It is grossly inadequate for the future
when computing merges with entertainment and communications.

                        THE REAL DECREE

Microsoft's future growth largely depends on making the
transition to the day of telecomputing, when users can bank,
shop, view movies, compute (and maybe even make whoopee) all
from the same box. But for Microsoft to get from here to there
it must scrap and cannibalize its past. Microsoft's willingness
to make this move--a market-imposed decree of sorts--is far more
important to its well being than the proposed consent decree,
even if it is made tougher.

Can Microsoft make that transition? The first clue is in how it
manages the migration of users from Windows to the much-delayed
operating system, first called Chicago, now labelled Windows 95.

This transition will be a crisis, in the classical definition of
a turning point that represents both danger and opportunity.
There are numerous forces in the market and within Microsoft
suggesting that the transition won't be smooth.

IBM Corp.'s OS/2 and Apple Computer's System 7 operating systems
are showing new signs of life. Impatient customers who are
dissatisfied with Windows have at least two alternatives today
to Microsoft's Windows 95 tomorrow. Most of what Windows 95 will
offer tomorrow, such as Internet access and true multitasking,
is available today in OS/2.

Microsoft's challenge is to hold impatient customers and
persuade contented customers that they should be itching to

Microsoft promises to make the upgrade painless. All existing
Windows programs, for example, will run under Windows 95. But
this promise could be Microsoft's undoing. By being faithful to
its customers and their desires for compatibility, Microsoft is
tying itself to the past and stripping Windows 95 of its
technical prowess. Windows 95 won't be nearly as sophisticated
in its internal workings as a built-from-scratch system.

                        SOFT UNDERBELLY

Rather than being the juggernaut portrayed by Reback,
Microsoft's installed base of 120 million computers may be its
soft underbelly, forcing the company into compromising design
decisions. These decisions in turn undercut many of the
compelling reasons to upgrade to a new operating system in the
first place.

Microsoft may be too much of a marketing powerhouse and have too
tight a grip to mishandle the Windows 95 transition entirely.
But sooner or later Microsoft must confront the reality that its
past is not a prologue to the future. Tomorrow's Bill Gates is
tinkering in her garage, designing something completely
different, while Microsoft wants its customers to believe
everything will be same as it always was.

The proposed consent decree is largely irrelevant to how
Microsoft steers into these headwinds.

          (see 7/22/94 issue for additional listings)

Client            Firm                    Lawyers

Microsoft Corp.   Inhouse                 William Newkom, David Heiner
                  Sullivan & Cromwell     Richard Urowsky, Steven Holley
                  Preston, Gates,         James Weiss
                  Ellis & Rouvelas Meeds

IDEA Associates   Inhouse                 Gautam Gupta, David Page
                  Jacobovitz Law Firm     Jeffrey Jacobovitz, Mark Rosenberg

Computer &        Gilbert, Segall         John Chapman
Communications    and Young
Industry Assn.

Unnamed software  Wilson, Sonsini,         Gary Reback, Susan Creighton,
companies         Goodrich & Rosati        David Killam, Neil Nathanson,
                                           Irwin Gross

----- cut here -----

Reback's Theory

Is Microsoft like a local phone company, with its clutches so
deep into its customers that it can cross-subsidize operations?

Or is the software giant more like a supplier of expensive,
proprietary equipment (say, AT&T's cellular equipment
manufacturing arm), which can take advantage of "locked-in"

Or is the operating system market a creature unto itself, with
its own sets of dynamics?

The answer, according to Gary Reback's brief attacking the
proposed consent decree between the Justice Department and
Microsoft, is yes. Microsoft's dominance is similar to
traditional monopolistic scenarios but different from them too.
Depending upon the page in his 96-page brief, one of these three
alternatives is likely to emerge as the reason Microsoft must be

Reback's brief argues that these economic arguments are "widely
accepted as mainstream economic analysis." More precisely, they
represent a composite of theories of differing levels of

In Reback's view, the business computing environment borrows
many features of old-fashioned networks, like a telephone
system. Microsoft, Reback argues, operates in an "increasing
returns" business common in networks where the value of the
network increases with the number of users. The comparison only
goes so far in terms of economies of scale and interconnection,
but there are similarities.

Further, according to Reback, "costs to a consumer of using or
switching to a different system are so high that the vendor with
the installed base has a substantial advantage over
competitors." This sounds like a lock-in relationship between
supplier and captive customer.

Advancing on that notion, Reback argues, "a company with a
monopoly in one market [operating systems] that faces
competition in a second market [applications] can use the
locked-in installed base . . . to wipe out competition in the
second market by 'tipping' the second market." This happens when
Microsoft announces "vaporware" or when it gives a head's up to
inhouse application developers and not their competitors about
secret tricks of DOS and Windows, Reback claims.

There is a heavy dose of fatalism to Reback's plea. He has
written off the home banking and online markets as hopelessy
controlled by Microsoft. This pessimism is at best premature.
Microsoft has not even won antitrust approval to acquire Intuit,
its vehicle into home banking, or started Marvel, a planned
online service. Moreover, Reback predicts that Microsoft will
sell 20 million copies of  Windows 95, which so far has been the
company's most notorious vaporware, in its first year.

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Copyright 1995 Mark Voorhees. Unauthorized duplication
prohibited by law.

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