Gates Gets Slammed

By ADAM COHEN

Bill Gates glad-handed his way through the corridors of power in Washington last week. He dropped by the White House for a new-economy conference, where President Clinton lauded him for his "phenomenal" charitable contributions. And he roamed Capitol Hill for meetings with more than 125 members of Congress, including a private chat with Senate Commerce Committee chairman John McCain. The tourists ate it up; the $100 Billion Man attracted movie-star crowds wherever he went. But the whole scene left Microsoft's critics fuming. "It just makes you wonder what for," Senator Orrin Hatch groused. "I certainly hope it's not to discuss the case."

The case, of course, is the government's landmark antitrust lawsuit against Microsoft. And it's a fair bet the case was at least one of the reasons for Gates' congressional group hug. Two days earlier, Judge Thomas Penfield Jackson had issued a toughly worded ruling that did just what everyone expected: it branded Microsoft an "oppressive" monopolist and laid the legal groundwork for imposing what could be draconian remedies in the next few months. It was a sharp blow to Microsoft--the company's shares plunged almost 15% the day of the ruling and helped set off last week's rout of tech stocks.

Microsoft moved quickly to appeal Judge Jackson's ruling--to Congress and to the court of public opinion--and it seemed to be working. Senate majority leader Trent Lott called on fellow lawmakers to investigate whether the Administration had pushed the company too far. House majority leader Dick Armey (dubbed "MS Dick Armey" for his pro-Redmond sympathies) said he'd "rather break up the Justice Department" than Microsoft. Republicans put Al Gore on notice that they intend to make an issue of the case this fall, but Democrats seemed just as caught up as the G.O.P. was in Gatesmania. New Jersey Senator Robert Torricelli lamented that "only the U.S. would consider breaking up a company that has done this much economically to advance our national interest."

Why the Microsoft lovefest? It could be, as Torricelli says, that the company has done a lot of good. But it may also be because Gates & Co., having shunned the political fray for years, have become overnight capital insiders. Microsoft has made $1.7 million in campaign contributions so far this election cycle. It's now the nation's sixth largest soft-money donor, and its lobbying staff boasts four former members of Congress.

Gates' public relations offensive comes just as the gavel is about to crash down. Having found Microsoft guilty, Judge Jackson says he will move quickly--probably in the next three months--to impose remedies to rein it in. Some hawks in the Justice Department are expected to demand a "structural" remedy--breaking the company up into smaller and less dangerous pieces. Microsoft is likely to ask for "conduct" remedies--limits on its future behavior.

But for all the legal wrangling, the battle over remedies boils down to this: What to do about Windows? The heart of the government's case was that Microsoft used its Windows monopoly as a club to bully its way into other markets, such as Internet browsers. Judge Jackson will be looking for a way to stop Gates from unfairly using Windows for leverage in the future. Depending on how bold he decides to be, he could let Microsoft keep its monopoly but require it to play more fairly. He could force it to share Windows with its competitors. Or he could tear the company into smaller pieces.

Windows is the operating system--the brain and central nervous system--of 90% of the world's PCs. That makes Windows not just a monopoly, but a highly strategic weapon as well. It gives Microsoft an unequaled platform from which to launch new products, and it makes it easy for Gates to intimidate other tech companies into doing things Microsoft's way. Software writers, chipmakers and dotcom companies all have a lot to lose if they don't stay on Microsoft's good side.

The law doesn't ban monopolies, even those as potent as Windows. But Microsoft crossed the line, Judge Jackson held, when it used Windows in a "predatory" way to protect its monopoly and build new ones. A key Microsoft tactic: adding features to Windows. Microsoft originally developed its Explorer Web browser as a separate consumer item, but then it decided to include--or bundle--the browser in Windows in 1995. The upshot was that Windows users got a free browser when they bought their PC's--making it awfully hard for Netscape to persuade them to buy its competing program.

Microsoft says it bundles browsers and other applications to make Windows better. And it insists it must have the right to continue to innovate by adding any "functionalities" it wants. But Judge Jackson held that Microsoft was simply using this innovation argument--a "technological artifice"--in order to extend the Windows monopoly into an Internet browser monopoly. And that, he ruled, was illegal.

Access to the Windows desktop was another weapon in Microsoft's war with Netscape. Microsoft wanted to persuade leading Internet content providers--including the Disney, Intuit and National Geographic websites--to side with Explorer. Microsoft offered them a deal. If they promoted and distributed Explorer--and not Netscape's Navigator--their sites would be listed on the Windows desktop. That would give them free access to millions of Windows users, an invaluable source of traffic for a fledgling site. All this leveraging proved highly effective: Netscape's share of the browser market plunged from 80% in 1996 to 30% today.

Microsoft also used Windows to punish companies that crossed the software maker. When IBM insisted on developing products that Microsoft saw as a threat, Microsoft withheld technical support and raised the price it charged IBM for Windows. And Microsoft used its Windows monopoly to help its applications division--the programmers who write software like Microsoft Word--by giving them preferred access to the complex Windows source code. Non-Microsoft programmers have long asked for equal access to the source code--but Microsoft has steadfastly refused to give it.

For any remedy to work, it will have to change how Microsoft uses Windows for leverage. The least drastic approach--and the one most likely to be upheld on appeal--would put restrictions on Microsoft's conduct. Judge Jackson could fashion a set of rules or commandments to live by: Thou shalt not sell Windows to some PC makers at lower prices than others; thou shalt not use placement on the Windows desktop as a bargaining chip; and so on.

The trouble with a conduct remedy is that almost nobody thinks it would work. It's tough enough to craft rules to stop all the bad things Microsoft has already done. It may be impossible for any court to anticipate how the company might misbehave in the future. "There's a real question about whether a conduct remedy can be sufficiently forward looking," says Barry Jaruzelski, a computer analyst at Booz, Allen & Hamilton, a consulting firm based in McLean, Va.

And then there's the problem of getting Microsoft to obey the new rules. "Conduct remedies require some degree of cooperation and good faith--or a very significant enforcement apparatus," says Ed Black, president of the Computer & Communications Industry Association. Microsoft's critics complain that the company doesn't act in good faith: they point out that this case was filed in the first place when Justice determined Microsoft had violated a 1995 consent agreement. Enforcement mechanisms have their own problems. Almost nobody--inside Microsoft or out of it--wants the Federal Government overseeing Microsoft's business decisions and product designs.

One of the conduct remedies cited most often by Microsoft's competitors is to force Gates to share the Windows source code. "It would level the playing field and allow programmers to write applications just as good as Microsoft's," says Bob Young, founder and chairman of Red Hat, a Microsoft rival. Microsoft could also be required to license Windows to competitors, who could then sell Windows clones.

Microsoft's fiercest detractors insist that only one remedy will address all Microsoft's misdeeds and ensure that it sin no more: breaking up the company, much as AT&T was split into the Baby Bells in 1984. In one scenario, Microsoft would be divided along functional lines: one company that makes applications software, one built around the Internet and other new media, and one that just does Windows. A functional breakup would prevent Microsoft from using Windows for leverage in the applications and new-media markets, but it would leave the Windows monopoly intact.

The other leading scenario is to slice Microsoft into several "Baby Bills": mirror-image companies that all have equal rights to Windows. An advantage to this approach is that it would create real competition in the operating-system market. Since the Baby Bills would be fighting for market share, each would have a strong incentive to improve Windows--to offer it more cheaply, to make it more crash resistant, and so on.

Despite all of the breakup talk, the end result of the litigation may well be less extreme. Microsoft's lawyers are working hard to get Judge Jackson's decision reversed--and they'll fight fiercely against any structural remedies. Courts are usually reluctant to break up a company, and the D.C. Circuit Court of Appeals and the U.S. Supreme Court, which would hear Microsoft's appeal, will be no exception. "I don't think Judge Jackson's opinion will emerge unscathed," says George Washington University law professor William Kovacic. "And if it's diminished in significant ways, the foundations on which to build a bold remedy begin to crumble."

In the meantime, Microsoft shows no sign that it is relaxing its public relations onslaught. After Gates left Washington, he showed up on TV, the star of his own feel-good ad campaign. "Twenty-five years ago, my friends and I started with nothing but an idea--that we could harness the power of the PC to improve people's lives," Gates says earnestly. The closest he comes to referring to Microsoft's legal difficulties is his send-off: "The best is yet to come."

It's a soft sell, but it would be a mistake to conclude that Gates has gone soft. Earlier this month--just a day after settlement talks between Justice and Microsoft fell apart--he reiterated his interest in bundling speech-recognition software into a future version of Windows. That could prove just as disastrous for IBM and Dragon Systems' competing voice-recognition software as the decision to bundle the Explorer Web browser was for Netscape. And it would give the Justice Department yet another argument for dismantling the Windows monopoly.

--With reporting by Jay Branegan and Viveca Novak/Washington

With reporting by Jay Branegan and Viveca Novak/Washington