On Friday, July 15, Microsoft signed a consent decree with the Antitrust Division of the U.S. Department of Justice (DoJ), ending a four-year investigation by U.S. antimonopoly agencies--first the Federal Trade Commission (FTC) and later the DoJ--into Microsoft's trade practices. At the same time, Microsoft signed a nearly identical settlement with the Directorate-General for Competition of the European Commission. The judgment lasts for six and a half years in the U.S., four and a half in Europe.
Microsoft agreed to immediately abandon several arrangements for licensing the MS-DOS and Windows operating systems to PC hardware vendors. It also agreed to halt some "unnecessarily restrictive" clauses in its nondisclosure agreements (NDAs) for the forthcoming "Chicago" version of Windows. The consent decree explicitly excludes Windows NT.
The consent decree is still subject to a 60-day public review. The full text of the DoJ's July 15 complaint against Microsoft for violations of sections 1 and 2 of the Sherman antitrust act, the U.S. District Court final judgment in U.S. v. Microsoft, and the "Stipulation" signed by the DoJ and Microsoft consenting to the final judgment, are available via Internet Gopher from the DoJ's Gopher server.
The consent decree was first viewed as a victory for the DoJ and Microsoft's competitors. The New York Times (July 17) carried the front-page headline, "Microsoft's Grip on Software Loosened by Antitrust Deal," and crowed that "the pact could reshape the world of computing_. The accord could undermine Microsoft's near total control of the market for operating systems." The Boston Globe's headline was equally enthusiastic: "Microsoft Accord to Create Competition in US, Europe."
Indeed, the consent decree sounds at first as if it should cramp Microsoft's style, and lead to more competition in PC software. For years, Microsoft has provided PC hardware manufacturers (original equipment manufacturers, or OEMs) with per-processor licenses to MS-DOS and Windows, in which the vendor pays Microsoft based on the number of machines it think it will ship, rather than the number of copies of DOS or Windows it actually uses. In 1993, such per-processor agreements accounted for about 60 percent of MS-DOS OEM sales, and 43 percent of Windows OEM sales.
According to the DoJ, "Microsoft's per processor contracts penalize OEMs, during the life of the contract, for installing a non-Microsoft operating system. OEMs that have signed per processor contracts with Microsoft are deterred from using competitive alternatives to Microsoft operating systems." The consent decree put an immediate stop to this practice, leading to the hope that non-Microsoft operating systems would now have a shot at the desktop.
But the morning after, nearly everyone realized that, in fact, U.S. v. Microsoft is a victory for Microsoft. Directly contradicting the previous day's headline, a New York Times (July 18) news analysis by John Markoff spoke of "Microsoft's Barely Limited Future": "Rather than reining in the Microsoft Corporation, the consent decree_frees the company to define the computer industry's ground rules through the rest of the decade." The Wall Street Journal had a similar take: "A Winning Deal: Microsoft Will Remain Dominant Despite Pact In Antitrust Dispute." According to the Journal, Gates "has just won big again, this time by letting the Justice Department rake in a small pot while his company retains the power to dominate the nation's desktops."
In the first day of trading after the settlement, Wall Street made its statement on the consent decree: Microsoft stock rose $1.87, to $50.50. Rick Sherlund, an analyst for Goldman Sachs, stated that with the settlement, Microsoft "should dominate the market for desktop software for the next 10 years." Another frequently quoted analyst, Richard Shaffer, announced that "The operating system wars are over--Microsoft is the winner_. Microsoft is the Standard Oil of its day."
But how could a ban on an important Microsoft trade practice be viewed as cementing Microsoft's hold on the industry?
First, to achieve the DoJ's goals, the change from per-processor to per-copy licensing probably comes about four years too late. Despite some brave words from IBM and Novell after the consent decree, it seems unlikely that the change will lead to a larger presence for OS/2 or Novell DOS. As a spokesman for Compaq (which already offers OS/2 to its customers) noted, "Windows is the standard--not much will change."
Nor does the consent decree address the key questions about Microsoft's role in the PC software industry. Companies such as Lotus and Borland that compete with Microsoft in application areas such as word processors and spreadsheets have long asserted that Microsoft "leverages" its control of the operating system to benefit its applications--particularly the Microsoft Office "suite," which bundles together Microsoft Word, Excel, Access, Mail, and PowerPoint--at the expense of applications and suites from other vendors.
More and more, Microsoft's applications seem like part of the operating system. Many PCs today come, not only with MS-DOS and Windows preinstalled on the hard disk, but also with Microsoft Office. The forthcoming "Chicago" release of Windows will include numerous features once considered the province of third-party applications developers. Microsoft not only has a near-monopoly on the operating system, but is constantly expanding the definition of what belongs in the operating system.
Some commentators see these increasing ties, and the DoJ's apparent refusal to touch them, as a good thing. For example, Steward Alsop was quoted in the New York Times (July 18) as saying, "If you really care about improving the personal computer, you want Microsoft to take over all the pieces of the pie."
There is a certain logic in this. For example, one reason the Apple Macintosh was for so long far easier to use than a PC was that Apple had a closed architecture and completely dominated the market, guaranteeing that almost everything came from a single vendor. Monopoly has some clear benefits. In certain situations, such as public utilities, monopoly may be the only viable industry structure, leading to a so-called "natural monopoly."
Interestingly, the superb biography Gates, by Stephen Manes and Paul Andrews (Doubleday, 1993), quotes a 1981 statement by Microsoft chairman Bill Gates where he noted that volume and standards in PC software can lead to a "natural monopoly." But companies in such a favored position usually are forced to make an important trade-off: so-called natural monopolies are generally regulated, are prevented from expanding their monopoly into new areas, and so on.
Microsoft already has MS-DOS installed on about 120 million PCs in the world, and Windows on about 50 million. With the DoJ consent decree, Microsoft can move even more rapidly toward its goal of becoming an unregulated, nonpublic utility providing total, one-stop shopping for all your software needs.
Microsoft continues to deny that it monopolizes the PC software industry. Nor has it admitted to any guilt by consenting to the court's final judgment. The consent is explicitly "without trial or adjudication of any issue of fact or law; and without this Final Judgment constituting any evidence or admission by any party with respect to any issue of fact or law."
Nonetheless, the PC software industry has been treated to some puzzling denunciations of Microsoft trade practices from high government officials. After the signing of the consent decree, U.S. Attorney General Janet Reno said, "Microsoft's unfair contracting practices have denied other U.S. companies a fair chance to compete, deprived consumers of an effective choice among competing PC operating systems, and slowed innovation."
The Assistant Attorney General for Antitrust, Anne Bingaman, noted that "Microsoft is an American success story but there is no excuse for any company to try to cement its success through unlawful means, as Microsoft has done with its contracting practices."
"Microsoft has used its monopoly power, in effect, to levy a 'tax' on PC manufacturers who would otherwise like to offer an alternative system," said Bingaman. "As a result, the ability of rival operating systems to compete has been impeded, innovation has been slowed and consumer choices have been limited." According to a DoJ press release, Bingaman noted that Microsoft has maintained the price of its operating systems even while the price of other components has fallen dramatically, and that, since 1988, Microsoft's share of the market has never dropped below 70 percent.
No matter what else it says, the fact remains that the consent decree addresses only a narrow issue: OEM sales represent less than 25 percent of Microsoft revenue.
The complaint notes that "At least 50,000 applications now run on MS-DOS and over 5000 have been written to run on Windows. Microsoft sells a variety of its own very successful and profitable applications." But that is all it has to say about applications!
The complaint also notes that "All versions of Windows released to date require the presence of an underlying operating system, either MS-DOS or a close substitute," but says nothing about alleged tying arrangements between Windows and MS-DOS (see "Examining the Windows AARD Detection Code" DDJ, September 1993).
Similarly, the complaint mentions "critical information about the interfaces in the operating system that connect with applications--information which the ISVs need to write applications that run on the operating system"--yet doesn't address the issue of whether or not Microsoft unfairly withholds some critical information, trying to give its developers exclusive use of undocumented interfaces.
Likewise, the DoJ was well aware of, and quite interested in, the issues surrounding Microsoft's ownership of the vastly important DOS and Windows standards. Yet none of this is addressed in the consent decree, which ends up looking quite similar to what Microsoft probably could have got from the FTC a year ago. Even Bill Gates, who was apparently in the habit of denouncing even the mildest FTC and DoJ questions as "communistic" and "socialistic," had to admit that the final settlement was no big deal saying, after years of investigation, that "this is what they came up with" (Wall Street Journal, July 18).
Why did the DoJ settle for so little? How could they seemingly ignore the entreaties of so many PC software vendors?
One theory is that the Clinton administration views Microsoft as a "national treasure," and put pressure on DoJ to leave Microsoft alone. The press made much of a May 25 meeting between Bill Gates and Clinton's chief economic advisor, Robert Rubin. The date is significant because just one week later, Gates testified under oath before the DoJ. According to one anonymous source, Gates pointed out to Rubin that Microsoft is responsible for a substantial portion of U.S. software exports (Information Week, June 27).
Frankly, I don't buy Clinton administration pressure as an explanation for the DoJ's limited settlement. Microsoft may be highly visible, but it simply isn't that important to the U.S. economy, at least when compared to companies such as IBM or GM that make tangible goods. Microsoft, remember, produces software. While software is a crucial part of the modern world economy, consider that even "giant" Microsoft has only about 15,000 employees and that its quarterly sales are about $1.25 billion, compared to $13.3 billion for IBM, or even $2.5 billion for Apple.
What makes Microsoft different is its incredibly low costs. This is very nice for Microsoft, but it's hard to see what it does for the U.S. economy, especially when 45 percent of Microsoft's stock is owned by insiders. Had it wanted, the DoJ could have made a moderately plausible case to the American public that Microsoft, far from being a "national treasure," is simply a grossly profitable monopolist, with few employees and few stockholders, that gives back little to the public.
Another explanation is that DoJ feared a repeat of U.S. v. IBM, which dragged on for 13 years, only to be dropped as "without foundation." While you could easily imagine lawyers for the DoJ not wanting to stake their careers on a losing battle, you have to wonder whether U.S. v. IBM was such a complete washout, after all. Even though the case was eventually dropped, for years it had a serious effect on IBM. You could even argue that it was this supposedly unsuccessful case that caused IBM to unbundle software from hardware, thereby opening the way to an independent software market, making room for software upstarts, including a company called Microsoft. In many cases, Microsoft was a beneficiary of U.S. v. IBM, and "the next Microsoft" could have been a beneficiary of a U.S. v. Microsoft case.
Ultimately, I think that the DoJ didn't push for more against Microsoft for the very simple reason that they felt they couldn't win anything else. Responding to widespread criticism of the settlement as a DoJ sell-out, Anne Bingaman protests, "folks, we looked at every aspect of this. We brought the case that was there to bring." According to the DoJ, the Microsoft settlement was "everything we could have hoped for in a fully litigated case, and possibly more."
This is probably true. Law, like politics, is an "art of the possible." While the settlement gives the Microsoft steamroller the green light, at the same time it's hard to see what the DoJ could have done differently. The DoJ's job is to enforce the antitrust laws, not to make industries more competitive--and the two are not the same.
What all this means is that those Microsoft practices studied by the DoJ, but not covered in the settlement, are either not illegal, or would be too difficult to prove illegal.
While there might be some private antitrust action from Novell, Lotus, or Borland, and while the terms of the settlement are subject to public review, Microsoft must be feeling emboldened by the limited scope of the consent decree. Microsoft should be able to go full-steam ahead with its plans to greatly expand the operating system's dimensions in Chicago. Microsoft Office will increasingly seem like an essential part of Windows. With policies such as its new, heavy requirements for using the "Windows Compatible" logo (see "How to Adapt an App for Chicago: Requirements for the New Windows Logo," Microsoft Developer Network News, July 1994), Microsoft is raising the Windows development bar ever higher.
The PC-software industry is rapidly headed in the same direction as many other technology-based industries before it: rapid consolidation to a handful of vendors. There once were hundreds of U.S. car manufacturers; now there are just a few. With Novell's acquisition of WordPerfect and parts of the Borland product line, with Symantec's acquisition of Central Point, and Microsoft's purchasing a minority share in Stac Electronics, we are already seeing the same (probably inevitable) process occurring in software. As Table 1 shows, market shares reflect an already highly concentrated industry.
On most scales, Microsoft is about twice the size of its two nearest competitors combined. Lotus had 4450 employees and Novell also had 4450; Microsoft has 14,450. In 1993, Lotus sales were $981 million and Novell sales were $1.123 billion; Microsoft sales were $3.753 billion.
Given that the DoJ could apparently do very little about this increasing concentration in the software industry, what are software developers and vendors to do?
It is probably stating the obvious, but there is little point in trying to compete with Microsoft over productivity apps and office suites. These are rapidly becoming a quasi part of Windows itself, and even Novell and Lotus probably have little chance in this area. Microsoft Office is everywhere and everything. Perhaps there is still some room in databases, desktop publishing, and personal-finance software.
As always, another interesting area is plugging holes in Microsoft's own offerings: add-ins to Microsoft Office, remedying the inevitable temporary problems in Chicago, and so on.
The best bet is to find areas where Microsoft doesn't have a product, and where there is a chance of a several-year window of opportunity before it does have a product. On the other hand, the only market I've ever heard of that Microsoft didn't want to get into was pornographic screen savers and related multimedia titles. As one company employee told me, "We looked carefully at adult software, and decided to leave that money on the table."
Copyright © 1994, Dr. Dobb's JournalWho Won?
Grabbing the Whole Pie
Exposing Microsoft's Monopoly
The Road Not Taken
Why So Little?
Where To Now?
Table 1: Application-software market shares.
Market Share (Percent)
Operating Word
Systems Processors Spreadsheets
Microsoft 66 47 52
Novell/WordPerfect 14 35 --
Lotus -- 3 37
IBM 17 -- --
Apple 2 -- --
Borland -- -- 6