New York Times

March 9, 1998

Microsoft and Critics Debate Meaning of 'Monopoly'

By STEVE LOHR

Bill Gates, the chairman of Microsoft Corp., was rhetorically bobbing and weaving in the face of the combative questioning of the chairman of the Senate Judiciary Committee, Orrin Hatch, at last Tuesday's committee hearings. The steely Republican from Utah kept trying to pin the software entrepreneur down, repeatedly, on just one word.

Gates doggedly resisted. He went on at length saying that his company's products are short-lived, that the software industry is brutally competitive and that Microsoft's only lasting advantage is the ingenuity of its engineers. In four hours before the Judiciary Committee, Gates successfully avoided ever mentioning the M-word: "monopoly."

Gates and his top managers are unwilling to concede that Microsoft, for all practical purposes, has a monopoly position in the market for personal-computer operating systems. Microsoft's popular Windows program is the operating-system software — the equivalent of a PC's central nervous system — on about 85 percent of PCs in use worldwide and on more than 90 percent of new machines sold. In antitrust cases, companies with far smaller market shares have been deemed monopolists.

For Microsoft, the M-word is no mere matter of semantics. The company's control of the PC-software market, antitrust experts say, has legal and political implications. A dominant company, like Microsoft, is simply not as free under antitrust law to make some of the same deals that were perfectly legal when it was smaller.

That is why many of the questions posed to Gates in the Senate hearing focused on the details of Microsoft's contracts with PC makers, Internet access companies and Web-site operators.

But Microsoft's rise to dominance, some industry analysts say, also means the company must modify its corporate culture and behavior in ways that Gates and his staff do not yet seem fully to grasp.

"I view the biggest challenge for Microsoft going forward, now that it's in the position it's in, is changing its culture adequately to no longer consider itself to be the underdog," Stewart Alsop of New Enterprise Associates, a venture-capital firm in San Francisco, told the Judiciary Committee.

Some say the world's dominant software maker acts like an underdog.

Becoming a monopoly is not inherently illegal. As Judge Learned Hand, a legendary federal court figure, once observed, "The successful competitor, having been urged to compete, must not be turned upon when he wins." And Microsoft is not the target of antitrust scrutiny because its Windows software controls the PC market.

But the Justice Department has sued the company, contending that it has violated its 1995 consent decree with the government by trying to use its operating-system dominance to unfairly gain the upper hand in the market for Internet browser software. The Justice Department is also considering a broader antitrust case against Microsoft.

Microsoft denies that it has done anything illegal, and the company is vigorously defending itself in court. Its top executives often go further, expressing annoyance at the entire process and suggesting that Washington's antitrust officials are little more than lackeys for Microsoft's rivals.

Gates spoke at the New York Public Library on Wednesday, the day after his Senate testimony. "Every competitor with complaints knows the number to call to get taxpayer money to work investigating those complaints," he said.

Nathan Myhrvold, the chief technology officer and a member of Microsoft's executive committee, was asked last month whether he thought that there are significant policy and industry issues associated with his company's dominance over a crucial technology. Myhrvold brushed the idea aside. "This is a jealousy-driven thing," he said. "It's about getting us.

"Now, of course, we understand limits," Myhrvold said, to explain his company's stance. "And we have worked very hard to understand the law and stay within those legal limits. But the people attacking Microsoft are making this argument that because you are so powerful, the rules should be different for you."

The tighter antitrust constraints on dominant companies, says Steven Salop, a professor at the Georgetown University Law Center, apply mainly to their deals with customers and suppliers. A dominant firm cannot sign contracts with its distributors that require them to buy one product as a condition of getting another product.

That is the issue in the government's current case against Microsoft, in which the company is being sued for forcing PC makers to load Microsoft's Internet Explorer browser as a condition of licensing its Windows operating system. Microsoft contends that its browser is an integrated feature of Windows and not a separate product.

A dominant company is also less free than most companies to sign exclusive deals with distributors, under the antitrust theory that such agreements may enable the most powerful company to unfairly stifle competition. But exclusive-dealing cases, Salop noted, are less clear cut than cases of tying one product to another. "It's a question of degree," he said. "A few exclusionary deals may not be determined to truly harm competition."

On the eve of the Senate hearing, Microsoft did drop one practice that had been criticized for excluding competition — limiting the freedom of Internet service companies to promote rival browsers, like Netscape's Navigator, in exchange for featured placement on Microsoft's Windows program.

Still, questions have also been raised about other Microsoft contracts. For example, to obtain featured billing on Microsoft's Internet software as one of the Web sites in its Active Desktop channel guide, the Web-site company must agree to certain terms.

But Brad Smith, Microsoft's associate general counsel, characterized that portion of the contract as a routine marketing agreement similar to that used in many industries.