Into battle against the gatekeeper

Date: 06/11/1997

By Tim Jones

BILL Gates has overstepped the mark.

It was bound to happen sometime. His rivals in the computer software market have long been worried about the progress of the Microsoft juggernaut, but now the world's two most powerful regulators in Washington and Brussels have woken up.

Earlier this year, Competition Commissioner Karel van Miert used the proposed merger of US companies Boeing and McDonnell Douglas to loosen Boeing's grip over the world market for civil aircraft. Fresh from his victory, he now has Seattle's second industrial behemoth in his sights.

Both the European Commission and the US authorities, federal and state, have never really taken their eyes off Bill Gates and his ever-growing empire. The difference now is that Microsoft has given the regulators something to get their teeth into. And, once they are in, they may never let go.

Last month, US Attorney-General Janet Reno claimed formally that Microsoft was in violation of an anti-trust agreement reached two years ago with the federal authorities because it was bundling its Internet Explorer 'browser' together with its phenomenally popular Windows 95 computer operating system.

The Internet Explorer browser, which competes with rivals such as Netscape and Oracle, provides a simple tool for computer users to find their way around the 30-million-page Internet. Since the Windows operating system is already installed on 90% of all the computers used in the world, allegations that Microsoft is including its browser in all upgrades to the exclusion of other competing products are serious.

Since Microsoft launched its free Internet Explorer 3 last year, analysts estimate that Netscape's market share has fallen from more than 80% to as low as 65%. At the same time, Microsoft has so far bucked the market trend in profit-making, earning 580 million ecu in profits in the third quarter on the basis of 2.7 billion ecu in sales revenue.

Reno called on the federal court to stop Microsoft from bundling Internet Explorer and fined the company 880,000 ecu per day until it complied.

Not wishing to be left out, the Commission announced that it was investigating contracts Microsoft had signed with 23 Internet service providers in Europe.

These are the companies which, for a monthly fee, provide the software and the capacity for their customers to surf the Net and use electronic mail. For instance, a year ago Diemen-based service provider NLNet began negotiations with Microsoft and Netscape on terms for using their browser systems in their software packages. Both wanted exclusive deals. NLNet, the top Internet service provider for Dutch business, refused.

"We provide access to the Internet," said managing director Ted Lindgreen. "The Internet only works because everything is in the public domain. As soon as you allow exclusive services, you end up with all the same problems you have in the market for computers."

In the end, after Netscape dropped its demand for exclusivity, NLNet opted for the market leader. "We think Netscape is better because it has paid more attention to security," said Lindgreen.

Microsoft is not using its monopoly power to force service providers to do anything but, like Netscape, the company wants its browser icon to appear alone once service provider software is loaded. Then, they hope, the customer will stick with it.

It is the story of IBM all over again. In the Seventies, the US justice department concluded that the 'Big Blue' had a stranglehold over the computing market by bundling together software and hardware. IBM was forced to unbundle its prices and quote separate fees for software so that rivals knew what they were competing with.

The big difference with the situation today is that IBM only had a stranglehold over the world's top 500 companies, as the market in question - 500-million-ecu mainframe computers - was out of the range of the average citizen.

Now, with personal computers in homes throughout the world and with Windows believed to be running nine out of ten of them, the threat of monopoly is that much greater.

"The problem with Microsoft is that Windows 95 and Internet Explorer are not the best products in the market," said David Brailsford, professor of computing at the University of Nottingham in the UK. "Their great success story has been in taking technology that is rather old - always at least one step behind the cutting-edge - and, because it is bundled into your existing system, you go along with it."

The videotape market is similar in that the VHS standard is acknowledged not to be the best. However, no one company owns the VHS standard whereas Microsoft owns MS-DOS and Windows.

What is unique about Microsoft is that the company has a monopoly of the operating system, so that each time it upgrades and offers a new feature to this system, it has to be investigated for anti-competitive motives.

For example, the company is planning to integrate Internet Explorer fully into its upgrade of Windows 95, to be known inevitably as Windows 98, when it comes out next year. Everybody wanting to boost the powers of their Windows system will have to load the Explorer software.

While Microsoft argues that this is simply an improvement to a product owned by most of the world's computer users, regulators suspect that it is an attempt to lock people into the company's products through stealth.

If the regulators in the US and the EU do manage to head Gates off on this issue, the effects could be profound.

Not only could Internet Explorer be stripped out of the Windows 98 system or other browsers advertised on it, but the regulators could taste blood and go after Microsoft in other areas.

"The situation of Microsoft is not so different from John D Rockefeller and his gigantic empire earlier in the century," claimed Brailsford. "Sooner or later, some kind of regulation along the lines of the Sherman act could come in."

With the Sherman act, the US authorities broke up the energy and transport monopolies of Rockefeller, the man who once boasted that "individualism has gone, never to return". Even after they were broken up, the constituent parts - Amoco, Esso, Conoco and Gulf - remained giant corporations in their own right.

The Commission, the US justice department and even the federal trade commission (if a group of senators gets its way) are constantly looking into Microsoft. Sun Microsystems Inc is suing Microsoft for alleged infringements of its licence to develop Java - a programming language which is widely accepted to be the most efficient way to use the Net.

Gates' unrelenting attempts to break into all areas of software delivery are also under scrutiny. Looking into the future, Gates wants to make sure that even if people try to get into the Internet via something other than a computer, Microsoft software will be there to meet them.

In June, his company bought 12% of the US' fourth-largest cable firm Comcast for 900 million ecu, on top of last year's 300-million-ecu purchase of WebTV Networks Inc. With both, Microsoft hopes to develop television set-top devices to access the Internet, but regulators fear that the company could end up setting the standard for delivery and reception of content which everyone else would have to meet.

"The fact is that end-users want a bundled-in solution. It is easier for them," said Brailsford. "But this can be done in a way whereby the standards are published openly with no hidden features designed to lock you in."

Major feature on the increasing interest taken by the EU and US competition authorities in Microsoft.