GATES FIGHTS BACK

By MICHAEL KRANTZ AND JOHN F. DICKERSON

When Microsoft potentate Bill Gates strolls his vast mansion in Washington (the state), the music changes to suit his taste, the art morphs into his favorite styles, and the entire environment--like the computer-software market--realigns itself to meet his needs.

Unfortunately, Washington (the snake pit) isn't following suit. Last week a phalanx of Microsoft executives flew into the nation's capital to face various strains of nasty music: delivering the company's response to the Justice Department's recent contempt action, withstanding two days of populist attack from Ralph Nader and girding for assaults by both the House and Senate judiciary committees. Where D.C. is concerned, as Microsoft is learning, receiving record amounts of Wall Street's love means learning ever more diplomatic ways to say you're sorry.

In fact, fighting the Justice rap (federal district court hearings are set for early next month) may be the easy part. Microsoft's long-term problem is the capital's growing perception that the company is bullying competitors and partners alike, abusing the leverage its Windows monopoly gives over a critical industry. It's a mushrooming p.r. cloud that threatens to damage Microsoft both explicitly (if Justice decides to monkey-wrench Gates' Windows 98 plans) and implicitly, by hampering his ability to influence future legislation on such crucial Infobahn issues as copyright protection and encryption.

Washington influence peddling is that rare arena in which Gates is a legitimate underdog. Sun, Oracle and Netscape--the ABM (Anybody But Microsoft) coalition's holy trinity--have emerged as a potent force with an unlikely assortment of top-drawer allies, from Nader on the left to the Progress and Freedom Foundation's Jeff Eisenach on the free-market right. Senate majority leader Trent Lott is an old college buddy of Netscape CEO Jim Barksdale's. House Speaker Newt Gingrich cooled on Microsoft after a private dinner in 1995 during which he was rebuffed by the notoriously apolitical Gates, who nonetheless knew enough to call the G.O.P. a pawn of the religious right.

What's worse, the ill feelings may translate into congressional action. Last week Sun CEO Scott McNealy was on Capitol Hill lobbying House Judiciary chairman Henry Hyde. Orrin Hatch, Hyde's Senate counterpart, has already held a Microsoft hearing, and is likely to hold more next year; Hyde is mulling similar action. "No one company," Hatch has solemnly opined, "should be able to dominate everything in one industry."

And no one player should be able to dominate a horse trade. Microsoft in the past seemed to regard the Federal Government as an industrial-era irrelevancy; Gates has donated startlingly little political money by CEO standards, and he opened an official lobbying office only two years ago. The company's disdain for D.C. was written between every line of its response to the Justice complaint, which Microsoft labeled "perverse."

The threat of a potentially devastating antitrust trial must concentrate the mind wonderfully, however, for Gates has finally focused on his Washington woes. And he is attacking the issue the way he storms into any battle he's losing: identify the problem, open his wallet, and buy a solution. In this case, that means pricey Beltway sluggers like former Reagan imagemaker Mike Deaver; Congressman-cum-fixer Vin Weber; and Tom Downey, former New York Democratic Congressman and close personal friend of Al ("Year 2000") Gore's.

The result is fatter lobbying bandwidth than Microsoft seemed able or willing to muster in the past. Days after the Justice decision, spinmeisters in Redmond were dialing Washington State's congressional delegation to demand retaliatory action. Before last week's Senate hearing, Weber and Downey met privately with Judiciary Committee members, arguing that federal interference would stifle the high-tech industry's fabled spirit of innovation at the behest of a bunch of whining marketplace losers. A consulting outfit called the Strategic Alliance Group devised a clumsy plan to buff Microsoft's image by wooing consumer groups away from Nader's interventionist cabal, lobbying the six state attorneys general now looking into Microsoft and recruiting public officials deemed potentially sympathetic. "We could readily enlist [Wisconsin Governor] Tommy Thompson and others in a pro-Microsoft effort," says a memo leaked from the group.

That's the spirit. But it's only a start. The Microsoft battle won't be fully joined until corporate giants like banks, telephone and cable companies, and real estate interests start choosing up sides. If they decide that Gates is trying to take over desktop banking, local communications and other forms of commerce--kidnapping, in essence, their slice of tomorrow's digital pie--their considerable lobbying operations will pile into the fight.

When that happens--and some observers say the free-for-all will begin in earnest when Congress returns in January--the anti-Microsoft forces will come packing awfully hefty checkbooks. Even in the digital age, Washington is a Middle Eastern bazaar. The going is about to get tough, and it may be time for Bill Gates to go shopping.