Overdrive, page 26
Armed with Sporkin’s gutsy ruling, competitors continued to fire away at Gates and Microsoft. Novell CEO Bob Franken- berg, speaking at a computer conference in Phoenix, Arizona, said that Novell had not ruled out an antitrust lawsuit against Microsoft. “There are some potential problems with restraint of trade there,” said Frankenberg, whose comments came as something of a surprise in light of the fence-mending visit he had made to Microsoft soon after succeeding Ray Noorda.
During that same conference in Phoenix, Steve Hayden, an advertising executive doing work for IBM, concluded his presentation by unbuttoning his shirt to reveal a T-shirt bearing a picture of Sporkin and the words “Our hero.” The audience roared.
In early March, the issues raised by Sporkin erupted into a public war of words between Gates and Jim Manzi of Lotus. Manzi fired the first salvo in an article published by the Wall Street Journal on its editorial page. Manzi praised Sporkin for having the courage to stand up to Gates. “Microsoft has systematically blocked rate-of-change competition, and has actually slowed the rate of innovation in the marketplace,” Manzi wrote. “When winners can parlay their success into permanent industry-slowing advantages, we must acknowledge a new form of anticompetitive behavior.”
Gates counterpunched a few days later. His article, in part personal, took up about a quarter of the JournaVs editorial page. “It is understandable,” Gates wrote, “that Mr. Manzi would prefer to measure performance in terms of competitor criticism; Lotus has not fared well with customers under Mr. Manzi’s leadership. It was larger than Microsoft when Mr. Manzi became CEO, and today it is less than one-fifth of Microsoft’s size.” He went on to describe Manzi’s complaints as “shrill,” and said that complacency by Lotus, not unfair competition, had resulted in Microsoft moving in to fill the void left by Lotus when its flagship spreadsheet lost market share.
Gates also wrote at some length about the five-year antitrust probe of his company, and the decision by Sporkin to reject the final settlement:
Microsoft has been subjected to what I believe is one of the most thorough audits of any business in modern times. It was a major distraction and cost the company tens of millions of dollars. It won virtually unprecedented to Imvc both the Federal TYude Com- mission ami the Justice Deportment conduct separate investigations. During this lime, our competitors hired plenty of lawyers, economists and other experts to “help out,” and every complaint they would conjure up was put forward and investigated by the government. At the end of this exhaustive process, the government found cause for concern only with certain aspects of our licensing practices with PC manufacturers. We agreed to make some modest changes to accommodate the government’s concerns not because we had done anything wrong but because by agreeing to these changes we could focus 100 percent on building great software. Although Judge Stanley Sporkin’s decision to reject the agreement has provided some fireworks at the end of the process, I am confident that the consent decree will be entered.
When a journalist informed Philippe Kahn about the exchange between Gates and Manzi in the Journal, Kahn wrote an “open letter” to both men, which the paper also published on its editorial page. In his letter, Kahn was much more critical of Manzi than of Gates; he focused on the Lotus executive’s decision to bring the Quattro Pro copyright suit against Borland. A federal appeals court had recently ruled for Borland in the case. Kahn wrote:
Mr. Manzi, you accuse Mr. Gates of anticompetitive practices.
This is very hypocritical. If anyone has used anticompetitive practices in the software industry, it is you, Mr. Manzi. Let me refresh your memory. Over four years ago, you unfairly attacked Borland by alleging copyright infringement. You knew, like all of us, that “systems” and functionality cannot be copyrighted. Nevertheless, you relentlessly tried to put our company out of business.
In contrast, Kahn was downright nice in some of his comments to Gates, though he did ask him not to “stick it” to the industry. “As you know, a lot of issues were raised recently when Judge Sporkin read an internal Microsoft memo where some of your executives expressed an intention to ‘stick it to Philippe.’ You can understand that it’s a bit worrisome for me to be in the sights of one of the most powerful companies in the world (it’s also flattering!).”
Kahn went on to praise Gates for all that Microsoft had accomplished.
Unlike Mr. Manzi, who tried to use the legal system to gain a competitive advantage, you, Mr. Gates, competed in the marketplace—and you did a very good job of it. You deserve credit for that. You’ve actually done such a great job at it that today Microsoft clearly dominates the software industry. Some say that Microsoft is like a government that has been democratically elected but is now tempted to take advantage of its position of power. Mr. Gates, prove these critics wrong. Use your position of leadership to foster industry practices that will help the software industry grow to its next stage of maturity, assuring our customers that the software industry will remain fair and competitive for decades to come.
In what seemed to be an astonishing turnabout, between the lines of his letter Kahn was making a peace offering of sorts to his old nemesis. Kahn’s new company, Starfish, was developing products to run on Windows 95, and some cooperation was in order. Gates had already extended a peace offering when he sent Kahn an e-mail when he resigned as Borland’s CEO, saying he hoped Microsoft and Starfish could enjoy a good working relationship.
In early March, both Microsoft and the Justice Department asked the U.S. Court of Appeals in Washington, D.C., to disqualify Sporkin and to reassign the consent decree. In her brief, Bingaman said that Sporkin had overstepped his authority and that his decision was “an invitation to anarchy.” She said that Sporkin had acted contrary to the Tunney Act when he questioned the Justice Department’s decisions on the kind of case to bring against Microsoft. “The United States concluded that Microsoft was engaging in particular unlawful practices that diminished the prospects for innovation and competition,” she wrote. "It negotiated a decree for complete and prompt termination of these practices.”
If the appeals court did not step in and remove Sporkin from the case, Bingaman said, the only recourse for the department would be to file suit against Microsoft “with all the irretrievable costs and uncertainty of result that such a course would entail. Without immediate appeal, the parties would return to their adversarial roles.”
In its appeal brief, Microsoft argued that Sporkin was “fixated” on the book Hard Drive and improperly relied on allegations raised therein to reject the consent decree. The brief was unusually personal. “From the very outset,” the brief read, “Judge Sporkin’s views about Microsoft were shaped by Hard Drive. It is apparent that in Judge Sporkin’s mind, a book based largely on conversations with Microsoft competitors and disgruntled former employees had replaced the complaint as the yardstick with which the sufficiency of the consent decree was to be measured.”
Microsoft also contended that the involvement of Gary Re- back’s law firm raised ethical questions. “The law firm ... has never explained how it can act as regular counsel for Novell Inc. (and have a partner on Novell’s board of directors) while at the same time directly attacking Microsoft’s planned acquisition of Intuit, in which Novell has a substantial interest as the purchaser of a personal finance software product to be divested by Microsoft. That important ethical question has been simply swept under the rug by the District Court.”
In sum, Microsoft urged that Sporkin be removed from any further proceedings on the consent decree. “By engaging in its own fact gathering, the District Court assumed an inquisitional role of a European magistrate, a clear basis for disqualification.”
A three-judge federal appeals panel promised to expedite a hearing on the case. Later that spring, the panel took the rare
step of removing Sporkin, and reassigned the consent decree. In a stinging rebuke of Sporkin, the appeals panel said it was “deeply troubled” and “distressed” at his handling of the case. The court added that Sporkin did not have the authority to second-guess the Justice Department on the kind of case it chose to bring against Microsoft. And it chastised Sporkin for allowing the three computer companies that had bankrolled Reback’s brief to go unnamed. The court said it did not know of any case where someone was allowed to bring action against a defendant anonymously. “Such proceedings would, as Microsoft argues, seriously implicate due process,” adding that Sporkin “did not fulfill his duty to consider the impact of anonymity on the public’s interest in knowing the identities of the participants, nor did he consider the possible unfairness to Microsoft.”
Sporkin also came under criticism for relying on the book Hard Drive, an action which the appeals court found had “contaminated” the hearing process. “The book’s allegations are, of course, not evidence on which a judge is entitled to rely,” the court wrote. It also said that the Tunney Act did not permit a judge to order the Justice Department to conduct a new investigation, and that Sporkin was misguided in accusing the Justice Department of not filing the strongest case possible against Microsoft. “Remedies which appear less than vigorous may well reflect an underlying weakness in the government’s case.”
In an unsigned section of the opinion, the court noted that Sporkin had made “several comments during the proceedings which evidenced his distrust of Microsoft’s lawyers and his generally poor view of Microsoft’s practices.”
The case was reassigned to U.S. District Judge Thomas Penfield Jackson. On August 21, 1995, Jackson held the first and only hearing on the decree. Jackson began the proceedings by saying, “This hearing will be short and sweet, ladies and gentlemen. I have my own pen.” A few moments later he declared, “The decree has been entered,’’ The case that had dragged on for more than five years was over in 17 minutes. Later in the day, on CNN’s Larry King Live, Gates said about the settlement, “It’s great to see it finally come to a close, because there were a lot of years there where we were producing a lot of documents.”
Three days later, on August 24, Microsoft launched Windows 95.
During the spring of 1995, all the while the Justice Department was teamed up in court with Microsoft in the ultimately successful effort to have Sporkin removed, it continued to scrutinize the company outside the courtroom. Bingaman and her staff were hard at work investigating complaints from the big three on-line services that claimed that Microsoft would have an unfair advantage in the marketplace if it were allowed to bundle the Microsoft Network with Windows 95. At the same time, Bingaman’s staff also was winding up its examination of Microsoft’s planned purchase of Intuit, a deal that one industry pundit said would mean “everybody’s most favorite software company being bought by everyone’s least favorite software company.”
The planned merger had drawn immediate fire when it had been announced in 1994 because of industry fears that Microsoft would be able to expand its already extensive reach into the emerging market of electronic commerce and on-line services. As the Justice Department began its investigation, it requested thousands of documents about the acquisition from Intuit and Microsoft. Some of those documents, in which executives of both companies discussed how the merger would eliminate competition, would give the department the ammunition it needed to block the deal.
In one document, Intuit Chairman Scott Cook described Microsoft as “Godzilla,” in reference to the legendary Japanese monster that destroyed everything in its path. Cook had used the name in a memo to his board during negotiations with Microsoft in 1994. He wrote that Intuit’s “future vision is both vulnerable to and would benefit from Godzilla’s strengths.” A merger with Microsoft, Cook went on to say, would give banks one clear choice of software product. “Our combination gives [financial institutions] one clear option, eliminating a bloody share war.... That, in turn, enriches the terms of the trade we can negotiate” with the institutions. Cook’s point was that since Microsoft and Intuit already dominated the market, banks and other financial institutions would have only one place to go after the companies merged, and the software companies could set their own pricing terms.
According to another document obtained by the Justice Department, Microsoft had told Intuit that it would spend as much as $1 billion to aggressively promote Money over Quicken unless Intuit agreed to the merger. The threat was implicit in a memo written by a Microsoft executive to Gates, which explained that he had told Cook to accept the merger or else face the consequences. “I tried to tell him how much we could do with $1 billion. I tried to be nonthreatening, but let him know we would do something aggressive.”
These documents and others became part of the public record when, on April 27, the Justice Department filed suit in federal court in San Francisco to stop the merger. Bingaman told reporters that the merger would stifle competition in the personal finance software business. “Allowing Microsoft to buy a dominant position in this highly concentrated market would likely result in higher prices for consumers who want to buy personal finance software, and would cause those buyers to miss out on the huge benefits from innovation,” said Bingaman.
She also said that Microsoft’s proposed solution of selling off its Money product to Novell would not realistically preserve competition in the marketplace. “This so-called fix just won’t work,” she said. “Novell simply can’t replace Microsoft— with its leading position in the personal computer software industry—in competing against an entrenched, dominant product like Intuit’s Quicken.”
Microsoft now had a choice: it could take its case to trial against the Justice Department, or it could walk away from the merger. After first insisting that it would fight the government tooth and nail, Microsoft realized that there were more important battles to fight down the road; and in this case, the chance of victory was doubtful. So, on Saturday, May 20, Gates announced that the merger was off. Microsoft agreed to pay Intuit $46.25 million in compensation for terminating the deal. Asked by reporters how the failed merger would affect Microsoft’s future business strategy, Gates replied sarcastically, “The way this might affect our business is that we’ll probably wait at least a week or two before doing anything like this again.”
Six days later, on May 26, Gates sent a memo to his executive staff that signaled he had finally set his watch to Internet time. Microsoft was about to become a very different company. In the memo, titled “The Internet Tidal Wave,” Gates wrote that he believed that the Net was the single most important development in the computer industry since the IBM PC. “I have gone through several stages of increasing my views of [the Internet’s] importance,” he wrote. “Now I assign it the highest level of importance.” It was time for Microsoft to get moving or be left behind.
Bill Gates had become increasingly paranoid about Netscape, a company that by late spring of 1995 had only 200 employees, had posted a loss of $2.7 million in the most recent quarter, and did not expect to show a profit until sometime in 1997. On paper, it appeared to be the kind of harmless but irritating business gnat that Microsoft otherwise might swat away nonchalantly. But in only six months more than 5 million copies of Netscape’s Navigator browser had been either sold or downloaded free off the Internet, giving Netscape an estimated 70 percent chunk of the browser market. That was the kind of market share usually reserved for only one company in the computer industry.
Netscape was hot. It was the most talked-about Internet company on the planet, and a lot of investors wanted a piece of the action. In April, Netscape sold 11 percent of its stock to five media and software companies: Times Mirror, the Hearst Corporation, Adobe Systems, Knight-Ridder, and TCI Technology Ventures, a unit of cable giant Tele-Communications Inc. There were rumors on Wall Street that Netscape would soon make a public offering.
Paul Maritz, a member of Microsoft’s inner circle who advised Gates, had posted his own Internet memo in February, titled “Netscape as Netware,” in which he warned that Netscape could end up dominating the Internet much as Novell did the networking market. No one had to remind Gates that heading his list of Microsoft’s greatest mistakes was losing the networking market to Novell. Novell set the standard, not Microsoft. Now Netscape, not Microsoft, was looking to set an Internet standard. And that was unacceptable to Gates, who resorted to the familiar strategy he had used just recently with Intuit: If you can’t beat a company, buy it.
When Netscape came calling on Microsoft to request Windows 95 code in advance of the scheduled August launch date so it could include certain features in its browser and server software, it gave Gates the opening he was looking for. He talked to Jim Barksdale, who had joined Netscape in January as its chief operating officer, about a possible buyout. When that didn’t work, Gates proposed that Microsoft buy a 20 percent stake in the company and a seat on its board of directors. “Clearly, he understood our plans from day one,” Barksdale would say later. “But we had read the book on Microsoft, so we said no thanks.” Netscape founder Jim Clark added that the offer was nothing nunc than an attempt by Microsoft to try to control the Internet, as it did the desktop. “It’s not in Microsoft’s bones to cooperate with other companies,” he said.
At Microsoft, attitudes about the Internet were considerably different from those a year earlier when the company held its first Internet retreat at the Shumway Mansion. As programmers came off the Windows development team, they were put to work on Microsoft’s browser, Internet Explorer, which was intended to be available as an add-on to Windows 95. Subscribers of the Microsoft Network also would be able to download the browser.
Gates put Maritz in charge of the company’s Internet efforts. “We went through all the stages—denial, grief, anger, acceptance. Then we got on the job,” Maritz would later tell Newsweek.
Gates’s Internet Tidal Wave memo was purposefully leaked to the press as an announcement to the industry that Microsoft was not going to be left behind, according to a Microsoft source. “Frankly, I think Bill was getting tired of all the stories about Netscape,” said the source. “I don’t know who actually leaked the memo, but it was done with Bill’s knowledge.” It had taken Gates weeks to draft the multipage, singlespaced memo. It began by confirming his belief that the Internet was going to set the course of the industry for the foreseeable future.
