Overdrive, page 5
In October 1991, Novell bought Digital Research for about $125 million in stock. Although the FTC staff at the Bureau of Competition had been spending a lot of time investigating Microsoft, they had heard nothing about a possible merger with Novell. It was not until December, when Washington, the lead investigator on the antitrust case, called Noorda to ask about the relationship between Microsoft and Novell that he learned Gates wanted to acquire Novell. The news hit the FTC like a bombshell. It seemed clear evidence of Microsoft’s predatory nature.
But discussion between Microsoft and Novell about a merger ended for good in early 1992 when Noorda found out that Gates planned to buy Fox Software, a database competitor. Gates had never said anything to Noorda about the Fox acquisition.
Noorda and others at Novell, including David Bradford, Novell’s corporate counsel, later questioned whether Microsoft ever seriously wanted to merge the two companies. They figured Gates was up to his old business tricks and had engaged Novell in talks in an attempt to delay its purchase of DR DOS. With the merger talks over, and the distrust deeper than ever, Novell stepped up its anti-Microsoft crusade. Other Microsoft rivals, including Borland, Lotus, and WordPerfect, also were talking to FTC investigators. Microsoft now filled the ,bully role once played by IBM. Alan C. Ashton, president of WordPerfect Corporation, in Orem, Utah, summed up the feelings of many of Microsoft’s competitors and victims: “Microsoft is a threat to everyone in the industry.”
Novell had also been considering filing a civil suit against Microsoft. “If things get any worse, if Microsoft fails to make a level playing field, Novell would certainly have to consider legal action,” Bradford, Novell’s counsel, told the Wall Street Journal.
On September 29, three months before the FTC staff submitted its report to the commission, Novell gathered various legal representatives of Microsoft rivals at its office at Dulles Airport outside Washington to determine how serious they were about taking private legal action against Microsoft. Among those who came to trash-talk Microsoft were Bradford, Novell’s counsel; Duff Thompson, WordPerfect’s in-house counsel; and lawyers for Borland and Lotus.
Even Go Corporation sent a lawyer to the meeting. This tiny software company, which had developed an operating system for small, pen-based computers, had its own ax to grind. Microsoft had approached Go about writing applications for pen-based computers and had examined the company’s operating system, then said it wasn’t interested. Soon thereafter Microsoft developed its own operating system for pen-based computers, and some of the programmers who had examined Go’s operating system helped design Microsoft’s.
Although the roomful of lawyers agreed that there were grounds for a civil suit against Microsoft, they decided not to act immediately. It did not make good legal sense to take on Microsoft in the courtroom before the FTC acted, because any civil suit would become a costly legal battle, perhaps taking the rest of the century to resolve. It was better to let the government deal with Microsoft first, they felt.
Further, FTC investigators believed they had a strong case against Microsoft, especially in light of mounting evidence that the recalcitrant giant of the Silicon Forest in Redmond had tried to eliminate the market for DR DOS after it was purchased by Novell. The rival operating system had gradually gained acceptance since its release by Digital Research in 1988, especially in the retail market, as word spread that it was a superior product. Then, suddenly, by the end of 1992, the market for DR DOS all but disappeared, and many industry analysts were writing it off as a good but lost cause.
What happened? Initially, Microsoft upgraded its own version of DOS to include some of the features of Digital’s operating system; then it cut prices. And when DR DOS 5.0 was introduced in April 1990, Microsoft announced that it was about to bring out DOS 5.0 with the same features, effectively freezing sales of DR DOS as customers eagerly awaited Microsoft’s version of the product. In fact, it took another year before Microsoft’s DOS 5.0 was released. There’s a word for a product that is announced long before its time: vaporware. Although everyone in the industry plays the vaporware game from time to time, no one plays it as well, or as often, as Microsoft.
Microsoft’s per-processor fee also helped doom DR DOS. Computer makers such as Dell, for example, could not afford to offer DR DOS on its machines since Dell had already agreed to pay Microsoft a licensing fee for DOS whether it shipped a computer with Microsoft’s operating system or not. Business Week reported that one unnamed computer maker told Microsoft it planned to ship DR DOS on 10 percent of its machines, with the remaining 90 percent loaded with Microsoft’s DOS. Microsoft responded by doubling the price the computer maker was paying for MS DOS. The computer maker quickly changed its plans and did not offer DR DOS on any of its machines.
To FTC investigators, these were troubling business practices by Microsoft, to be sure, but they paled in comparison to growing evidence that Microsoft had deliberately tried to sabotage the market for DR DOS by spreading the word that it would not work properly with Windows. This had become known to the antitrust investigators as the “incompatibility problem.”
In fact, DR DOS did work with Windows. But Microsoft programmers had written some curious code into the beta version of Windows 3.1 that was distributed to tens of thousands of selected customers for testing in late 1991 and early 1992. When the beta version was used with DR DOS, an error message popped up on the computer screen, warning “non- fatal error detected.” The user was directed to call Microsoft for assistance. This not only allowed Microsoft to determine who might be using the rival operating system, but it scared away DR DOS customers.
The FTC also heard from Andrew Schulman, a programmer and author who had written about hidden features in DOS and Windows. He told investigators about a message that he had found in a Microsoft language compiler used to write programs for Windows. The message read, “Warning: This Microsoft product has been tested and certified for use only with the MS-DOS and PC-DOS operating systems. Your use of this product with another operating system may void valuable warranty protection by Microsoft on this product.” Although the warning did not mention DR DOS by name, it was clearly the target.
In January 1993, a month after the FTC staff report on the findings of the 33-month Microsoft investigation had been given to the commission, Novell leveled a new charge against Microsoft, claiming that some of Novell’s code was discovered in Microsoft’s Access database product without Novell’s authorization. Microsoft denied the charge but removed the code. Later that month, more evidence about Microsoft’s questionable business practices suddenly fell into the laps of FTC investigators. Stac Electronics, a Carlsbad, California, maker of software that compressed files to save space on a computer’s hard disks, filed suit against Microsoft for patent infringement. It also supplied information to the FTC.
The tiny company had tried to negotiate a deal with Microsoft in 1992 so that its award-winning data-compression software could be included in the upcoming version of DOS 6.0. Stac claimed Microsoft tried to leverage the smaller company into an unfavorable deal; and when it refused, Microsoft copied Stac’s technology and built it into its own data-compression product.
On Friday, February 5, 1993, less than two weeks after Stac filed its lawsuit, the Federal Trade Commission finally met to consider whether to take action against Microsoft. In the final days before the hearing, the commissioners were heavily lobbied by attorneys and representatives of Novell, Lotus, Borland, WordPerfect, and other companies that for nearly three years had been complaining bitterly about Microsoft and providing the evidence the ITC staff needed to bring down Microsoft.
Novell, which had been working with an FTC legal team for up to 20 hours a day in the weeks before the scheduled hearing, had no fewer than seven representatives give presentations to FTC lawyers and economists, as well as to each of the commissioners.
When asked about the FTC investigation nearly a year earlier, Gates had remarked that the worst thing that could happen to him was that he would trip going up the steps of the FTC building. Now, given the number of times Gates and Microsoft lawyers called on the commissioners to make their case in private sessions in the last week before the February 5 meeting, it began to look not that far-fetched that Gates might indeed trip on the steps of the old FTC building on Pennsylvania Avenue.
Although Microsoft had long steered clear of politics, as a preventive measure the company had already begun to raise its profile in Washington. In the past, Microsoft had left the lobbying and legwork to the Business Software Alliance, the software industry’s trade association that included Novell, Lotus, and WordPerfect. But in 1992, Microsoft began to use Bruce Heiman, an attorney with a Seattle law firm, to lobby in D.C., not so much to win special deals as to learn how to communicate with the government.
During the presidential campaign, Steve Ballmer, second in command to Gates, had publicly supported the Clinton- Gore ticket. Ballmer, who, together with Gore, serves on Harvard University’s prestigious Board of Overseers, even led a group of software executives who endorsed Clinton.
Advisers to Clinton had said that if elected president, Clinton would review current antitrust investigations as part of a general examination of how antitrust laws affect the global competitiveness of U.S. firms. On October 20, 1992, Ballmer wrote a letter to software executives in the Pacific Northwest calling for them to support the Clinton-Gore ticket. Earlier in October, Ballmer had introduced Gore at a fund-raiser and written a $2,000 check to the campaign. He later felt compelled to deny that there was any connection between his support of the Democratic ticket and the FTC investigation.
Although Gates’s parents had long been active in Republican Party politics, Gates had remained apolitical for much of his adult life, though he considered himself to be more liberal than his parents, and had voted for Clinton in the 1992 presidential election, according to a family friend.
In early January 1993, Microsoft co-sponsored a reception in Washington, D.C., for House Speaker Tom Foley, the Democrat from Spokane, on the other side of Washington State from Microsoft’s Redmond campus. Two weeks earlier, Microsoft had hosted a reception for the state’s new congressional delegation. This care and feeding of lawmakers was largely the work of Kimberly Ellwanger, who was hired in 1992 as the company’s first lobbyist. Shortly after she was hired, Microsoft joined United for Washington, the political action arm of the Association of Washington Business.
By the beginning of 1993, Microsoft’s political action committee (PAC) was five years old but still tiny compared to those of other companies half its size. Microsoft’s PAC would disburse $7,541 in 1993, mostly to members of Congress. At the end of the year, it would have a meager $12,400 left in its coffers.
In part, the acknowledgment by Microsoft that it needed to become politically connected came with a greater maturity of the company, but it also came about because Gates and others realized that issues Microsoft faced, such as trade and software counterfeiting, were increasingly federal, and Microsoft needed a voice in D.C. Finally, it arose in response to the public criticism of Microsoft by Novell and other rivals.
Said William Ncukom, Microsoft’s general legal counsel: “When we learned our competitors were out to poison the well, we did make every effort to make sure Microsoft did not become viewed within the beltway as a one-issue company—a big software company with an antitrust problem.”
Antitrust cases, despite all their legal trappings, are essentially political battles, and Democratic administrations have created a more favorable climate for antitrust action. It was on the last day of President Johnson’s administration that Attorney General Ramsey Clark filed the government’s antitrust suit against IBM, and it was on the first day of President Reagan’s administration that the disastrous 12-year-long investigation was dropped.
The Federal Trade Commission was established in 1914, and over the years it occasionally had its funding cut when it took a position that was viewed as too extreme by the administration in power. Although Bill Clinton, a Democrat, was president in 1993, the five members of the FTC who would decide the fate of Microsoft had been appointed by Republican presidents, Bush and Reagan; three were Republicans, one was a Democrat, and one was an independent.
Commission chair Janet Steiger was new to the job, having been appointed by Bush in 1989. She was a Fulbright scholar, but she had no legal background. Before going to the FTC she was chair of the Postal Rate Commission, having been named to the job by President Reagan. Her late husband, Congressman William Steiger, had been good friends with Bush. Both came from Texas, and they had entered the U.S. House of Representatives together as freshmen in 1966.
Clinton could have replaced Steiger but chose not to, and it was Steiger who had persisted, despite some reservations from her fellow commissioners, in calling for the February 5 vote on the Microsoft case. “I don’t have a lot of respect for the chairman,” said a well-known Washington lawyer and fellow Republican who had worked in the Justice Department and the FTC and who knew Steiger. “She has never opposed the staff on anything. She’s not even a lawyer. She votes for whatever the staff wants.”
Of the five commissioners, Debra Owen, a conservative Republican, was by far the most colorful. Like Steiger, she had been appointed to the FTC by Bush in 1989. She had previously worked for a South Carolina law firm, which had an office in Washington, and was general counsel to that state’s longtime senator, Strom Thurmond.
Dennis Yao, a soft-spoken professor of economics on leave from the Wharton business school, was the only Democrat on the commission. He, too, had been appointed by Bush.
Mary Azcuenaga had first been appointed to the commission by Reagan, then reappointed by Bush. Politically, she was more of an independent than a Republican. Azcuenaga was not highly regarded by the FTC staff, who considered her overly cautious because of what they considered her penchant for analyzing cases to death before taking action.
The fifth commissioner, Roscoe Starek III, recused himself because of a conflict of interest and did not take part in the Microsoft case. Starek had inherited a trust fund from his mother that included stock in some of the computer companies involved in the investigation. His recusal meant that an even number of commissioners would vote on whether to take action against Microsoft, and this factor set the stage for the eventual deadlock.
The Bureau of Competition thought it had built a strong antitrust case against Microsoft. While it is not illegal for a company under U.S. antitrust law to build a monopoly by offering a better product, it is illegal to abuse market position through predatory practices. And by that measure, Microsoft’s competitors felt that Microsoft was clearly guilty, but it would not be easy to convince three of the four commissioners whose votes were needed for an injunction.
Shortly before the February meeting, Gates had said in an interview that the complaints of Microsoft’s rivals were a case of sour grapes. “Our greatest success is due to one single fact ... that I was willing to bet the whole company on the graphical interface,” Gates said.
Although the FTC’s Bureau of Competition saw him as Darth Vader, the agency’s Bureau of Economics saw him as Luke Skywalker and was dead set against taking any action against Microsoft. Critics charged that Microsoft had grown so powerful that it dominated emerging new markets, stifling competition in a vibrant industry where entrepreneurship is considered the key to long-term health. But in the eyes of one FTC economist, Microsoft was a national treasure that needed to be preserved, and a drawn-out antitrust action could severely damage the company, not reform it. More than 500 companies had been formed to create software for Windows, and those companies employed about 18,000 people nationwide. The U.S. software industry, with Microsoft leading the way, held 90 percent of the worldwide market. Not only was Microsoft a significant job creator and a major exporter, but with the decline of Big Blue, Big Green had become the standard- bearer for American high technology. What would happen if the government pounced on Microsoft the way it had pounced on IBM?
A protracted court fight could damage Microsoft simply because of the expenses involved. This was an argument put forth by professor William Grimes of the Southwest School of Law in Los Angeles. Grimes worked on the FTC staff and had spent eight years as chief counsel to the House Judiciary Committee’s Subcommittee on Monopolies and Commercial Law. He speculated that IBM’s slide could be blamed, in part, on the antitrust action that was started against the company at the Microsoft, meanwhile, continued to shoot itself in the foot. In May, when asked about Novell’s competing operating system, Microsoft Vice President Brad Silverberg said, “Why take the risk with all the compatibility problems that DR DOS has had?”
That same month, Schulman, the programmer who had talked with FTC investigators about the undocumented calls in DOS and Windows, wrote to the agency, explaining that the hidden APIs were an “attempt to thwart discovery, and is more the sort of thing one expects from a teenager writing a virus than from a multibillion-dollar corporation.”
By mid-summer, Microsoft had produced more than a half million pages of documents for the FTC since the probe had started, and had met nearly two dozen times with investigators to answer questions. As the investigation dragged on, and the verbal bashing of Microsoft by its competitors intensified, voices from outside the industry said that it was time for the FTC to back off and find some real scoundrels to pursue.
When syndicated computer columnists T. R. Reid and Brit Hume, who is also an ABC White House correspondent, wrote a rave review about Borland’s new spreadsheet program Quattro Pro, hundreds of readers sent letters and faxes arguing that Microsoft’s Excel was far better. In a subsequent column, they suggested that if President Clinton was looking for ways to eliminate 100,000 government jobs, he might start with the FTC.
“Any company could have written a program like Windows,” they wrote in their column, “Computer Corner,” “but Microsoft was the one that actually committed the huge investment and the thousands of person-years required to do the job. It doesn’t seem right for the government to punish a company for hard work.”
