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  • Microsoft Report

  • Federal antitrust efforts

  •   ANALYSIS
    For Gates, Fight May Prove Costly

    Gates/Reuters Microsoft Corp. Chairman Bill Gates, left, explains his firm's position in defending itself against the new antitrust lawsuits. He was accompanied by Microsoft officials Jeff Raikes, center, and Bill Neukom. (Reuters)
    By Elizabeth Corcoran
    Washington Post Staff Writer
    Tuesday, May 19, 1998; Page A01

    REDMOND, Wash., May 18 – Microsoft's combative chairman, Bill Gates, loves a fight, and he's now in what may be the biggest one of his life – battling for what he sees as the soul of his company, against an army of government lawyers.

    After briefly entering settlement negotiations last week, Gates decided to stand his ground. At a news conference here today, he blasted the Justice Department's decision to sue his company for monopolistic practices as "a step backwards for America, for consumers and for the PC industry, which is leading our nation's economy into the 21st century."

    Like the hero of a Shakespearean tragedy, Gates is blessed and cursed by the same trait – his passionate and sometimes fanatical determination to dominate the technology marketplace by producing the best products and selling them in the most aggressive ways.

    Over the past 20 years, those characteristics have transformed Microsoft from a start-up into one of the world's most powerful companies, an enterprise valued at more than $200 billion by Wall Street and a firm whose products are used by hundreds of millions of people around the globe.

    Just two months ago, 12,600 business managers surveyed by Fortune magazine voted Microsoft as the No. 2 "most admired" company in the nation, topped only by General Electric Co.

    But antitrust lawyers at the Justice Department now have gone to court to argue that Gates's passion has jumped the boundary in an illegal effort to suppress competition from new rivals, such as Netscape Communications Corp.

    Microsoft executives are angry and incredulous at the spot in which they find themselves. Why has Microsoft become the Pol Pot of high tech? asks one Microsoft executive. Hasn't Microsoft helped create the enormous economic boom that the United States is enjoying? How can it be so bad if its products are used by so many?

    Unfortunately, Microsoft's public relations problems are probably just beginning. Like former antitrust targets International Business Machines Corp. and AT&T Corp., the software giant is about to discover what it's like to operate under the cloud of a giant antitrust suit.

    If the IBM and AT&T cases are any guide, Microsoft will pay at least a modest price in terms of its image with customers and suppliers, and its employee morale. But the harshest penalty – and the one Gates will most want to avoid – is the enervating effect on the company's top leadership.

    Both Gates and Microsoft's vice president for legal affairs said today they will work hard to keep the company from getting caught up in the vortex of the lawsuit.

    "It will require some real leadership to make sure that we're not distracted, but I don't see any reason why we should be," Gates said. "Certainly, there will be a substantial expense to the government and a substantial expense to Microsoft in going through with this lawsuit. The most comparable example is probably the IBM lawsuit. You can look back and see what a waste of resources was involved there."

    T.J. Watson Jr., IBM's chairman during the early years of the Justice Department suit, would have understood Gates's dilemma well. "My own private impulse [when confronted with the suit] was to forget the niceties and fight like hell to protect IBM," Watson wrote in his autobiography. "It was like some primitive instinct – as though [Justice Department officials] were threatening my child."

    Although IBM technically "won" the case when Justice abandoned its lawsuit in 1982, the cost was devastating. Even in its early days, "the antitrust case began to color everything we did," Watson wrote.

    "For years every executive decision, even ones that were fairly routine, had to be made with one eye on how it might affect the lawsuit," he wrote. "To keep damning evidence to a minimum, the lawyer even dictated what we could and couldn't say at meetings. . . . This sort of mealymouthing went against my instincts. I wanted IBM to be the best in everything and recognized as such, which meant making no apologies and capturing more market share than anybody else. Instead we were slowly tying ourselves in knots."

    Emerson Pugh, a longtime IBM executive, contended that IBM had only a paper victory. "Considering the heavy constraints antitrust enforcement placed on IBM's ability to compete, it might have been wiser to break the company in several smaller units as the government proposed," he wrote in his book, "Building IBM."

    A longtime AT&T executive who lived through the breakup of the Bell system concurred. AT&T technically "lost" its case when it agreed to a settlement that broke the old Bell System into a long-distance company and seven regional operating companies.

    But the executive contended that the company profited far more from this antitrust "loss" than IBM did from its "win." AT&T learned how to change with the times. By contrast, IBM became more deeply mired in the status quo and lost sight of how the industry was changing around it.

    Corporate behemoths such as IBM and AT&T symbolize everything Gates hoped to avoid when he launched his new software company.

    Microsoft was incorporated in July 1981 – a month before IBM announced its first personal computer, barely six months before the Justice Department quit its antitrust suit against IBM. There was no "PC industry" back then, just tools for hobbyists.

    And because IBM didn't think the PC was a serious product, it made the biggest blunder of its history: It left control of the operating system to tiny Microsoft and the central processor chip to Intel Corp. By doing so, IBM inadvertently turned over its clout in the market to the two upstarts.

    Microsoft executives have long said they want to avoid "big company" disease. In the 1980s, IBM became the caricature of corporate gout: Decision-making was restricted by red tape, there were layers of bureaucracy, employees could not see how their efforts would budge the monolith and fighting internal political wars sometimes took precedence over fighting competitors in the market.

    Gates and his lieutenants built a culture that prized the work of an individual. Employees hired by Microsoft knew that their efforts would make a difference. Inexperience was no obstacle, provided the person had the spunk and energy to move an idea ahead. Fierce arguments could be won by the most junior person on a team if that person presented the right data. And even as the company grew breathtakingly rich and successful, most Microsoft employees continued to work the kind of grueling hours that usually mark a start-up.

    "Forgive me if I feel surprised about the position we have been put in by our competitors in this," wrote Gates in an e-mail interview with The Washington Post last month. "We have done more for computing than any company, and we have a lot more that we are doing if we are allowed to keep innovating."

    That kind of atmosphere fosters ambition – and mistakes. When people run a start-up, they can change directions a dozen times and shake up only their immediate partners. But a billion-dollar company casts a bigger shadow.

    "What are you afraid of if you're an antitrust enforcer?" said James Tierney, a former Maine attorney general who now consults with other attorneys general. "You worry about arrogance and the attitude that you can do no wrong . . . [about] someone who doesn't understand their own limits."

    But William Neukom, Microsoft's vice president for legal affairs, counters that a big company shouldn't be treated any differently than a little one.

    "There's an underlying misunderstanding about what we're doing," Neukom said. "We're in business. We are not the government. And this is not a system where people in business have to decide how to create a level playing field," he said. If a company, like Microsoft, has widely used products, it's "entitled to continue to improve those products," he said.

    © Copyright 1998 The Washington Post Company

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