Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (15 page)

He took two of the mice along with him, promising to check them out. I sent him a couple e-mails, eager to learn what he’d concluded. After two weeks, the guy was still looking into the matter! Not responding well to silence, I went over his head and engaged Rick Thomson, VP in charge of MS’s hardware division, one more time. Rick was an engaging guy with great business sense and an excellent understanding of doable hardware technology. Performing the same screwdriver exercise in my office, I got the response I had wanted in the first place. Rick had heard about my newly found mouse though had never seen its innards firsthand. He promised to get engaged at once by lighting a fire under somebody’s behind, understanding immediately that his retail business could be next to fall.

Two weeks later, he personally visited with the Taiwanese manufacturer and closed a sweetheart deal. Purchasing the design, related patents, and manufacturing rights, he placed a one million mice order with the company. Our run rate would allow us to sell them in less than two weeks. The new design had cut our cost in half and resulted in an up-to-date, most reliable, and sexier-looking product. When Logitech and the rest of the bunch woke up to the news, they found themselves outgunned. We had regained enough of a competitive edge to win additional critter business. During the hardware division’s midyear review, Bill commented that I had saved our total mouse business. He never told me personally, but I made sure the sales rep who had invited me to visit her UK customer received extra stock options. Vig, who had gifted me the prototypes, was granted free internal use of MS Office for his company. Unfortunately, my rescue did not guarantee success for long. When new technology emerged, I had to repeat the bailout a second time.

MONOPOLY ACCUSATIONS

“MS’s responsibility is to keep her customers happy.”

And that might have an opposite effect on MS competitors, as our general council once remarked. I fully agreed with him, and let me add—so be it.

In February ’93, MS got good news: the five FTC commissioners had deadlocked; no antitrust action would be forthcoming. One of the commissioners owned stock in the company, and the other four were divided. No majority, no action. We nearly popped the corks but were cautioned by our general counsel, Bill Neukom, who knew how to interpret political vagaries. He had come to MS from the law firm Bill Gates’s father had helped found. Dartmouth- and Stanford-educated Bill N., in his trademark bow tie, stood well over six feet and was an accomplished marathon runner and fly fisherman, indicating to me that he could be a patient man. I considered him an astute and extremely smart attorney, fully capable of managing the over three hundred lawyers we employed along with the myriad of outside firms MS retained. Bill N. was warm and good-natured but tough as nails when need arose. He was aided by Dave Heiner, who headed up the antitrust section. He made sure the OEM division was getting sufficient training on antitrust issues and our contracts would survive government scrutiny. I liked working with Dave. He was an established expert in his field, a bit on the dry side, but always with a good joke in hand.

The Federal Trade Commission being deadlocked didn’t mean the case against us was in the dustbin. Far from it! Janet Reno, a bumbling misfit of a US attorney general (AG), and her crack teammate Anne Bingaman were still purring over the case. The two ladies toured Capitol Hill long enough to convince equally brilliant and presciently motivated politicians they possessed a solid case against us. Funds were made available, and in August ’93, the Department of Justice (DOJ) announced that Anne Bingaman, the head of its antitrust division, had eagerly taken over the stalled investigation ready to lead a tough pursuit.

More depositions were conducted, and more subpoenas were issued. Our attorneys raided my office and my e-mail storage sometimes several times a week, though nothing of much interest was ever found. People working for me, other execs, and product group personnel experienced similar invasions. The government was treating us as criminals. The raids executed on behalf of the DOJ created a distorted prism of anger, violation, and helpless despair. I counseled employees to not feel belittled and guilt ridden or distracted when suffering random searches or reading vilifying press articles. Innocent until proven guilty? Certain politicians, the press, and the DOJ turned that noble principle on its head. Our competitors happily chimed in and joined the witch hunt. Public opinion labeled us a monopolist, and competitors and their lawyers branded us the evil empire
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a slogan that stuck.

Resenting the uproar most was Bill. Once upon a time, he had been the darling of the press and Wall Street. He had been honored by President Bush with the Technology Achievement Medal, no small feat but counting no longer. Being characterized as a greedy monopolist was tough on his stomach. How can tireless hard work—the deepest of all possible commitments and sacrifice—and enviable success or overachievement become punishable by law? Bill once told me in private that he feared for his legacy if the world would ever remember him as just another Rockefeller. It scared the shit out of him! Bill had, of course, basic legal education from his stint at Harvard and whatever had rubbed off from dad. A conviction under antitrust laws, he knew, could cause considerable damage to companies and individuals. Deeply worried about the unfolding story, his sleep came less easy at night. Even so, he assumed that the government did not have a solid case. The potential stigma was what bothered him foremost. Blindfolded Lady Justice, that allegorical personification of truth and fairness, bearing her delicately balanced scales of impartiality into the brave new future of PC software tech, shook her head in incredulity.

With the danger of being sued by the Feds quite imminent, the two Bills made it their top priority to settle the case by shuttle diplomacy, visiting the Feds in their lair in Washington, DC. In public, wrongdoing was adamantly denied. Behind the scenes, MS’s team was adroitly probing how a fair and favorable compromise could be reached.

Meanwhile, the government was painting MS as a company “in a position of immense power in the software industry.” People working there disagreed. From the day I had stepped into the company, I personally observed our absolute and nearly daily vulnerability. Stop innovating? You would lose. Was this no longer true? Had our leaders created paranoia simply for fun? Using emotional outbursts, feeding fear, and projecting doom too often had won few accolades with me, but I never doubted we indeed lived in a hypercompetitive and exposed world. We had to earn our success the hard way, producing and marketing innovative software people wanted to buy and use. As the saying goes, good products win. Mostly! Management knew no other principle cause for success than striving to deliver them.

Admittedly, version 1.0 product realizations were mostly visionary and imperfect, which left us vulnerable, offering competitors dangerous openings if they attacked early enough. After version 3.0 appeared, a counterstrike was harder. After we gained the lead, competitors either envied or hated us! An opportunity missed. Carpe diem, dear opponents! Build a stronger team, work a few extra hours, and make essential personal sacrifices. Finding themselves unable to beat us fair and square, they exploited the legal route. Stirred by legal arguments of overambitious and tea-leaf-reading lawyers. Self-identified losers never quite acknowledging their inability to compete or how badly they timed countermeasures. Shame on them, and welcome to a US system of jurisprudence allowing these political and legal escapades! Garry Reback, starry-eyed high priest of antitrust litigation, among others of his lowbrow ilk, built empire careers teaming up with marketplace losers trying to publicly flog victors like us in the US court system.

At the very end of the nineteenth century, Congress had passed so-called antitrust laws extending powers to the DOJ for reining in superstars like us. The way I read these laws: a successful company had to produce winning products and compete rigorously for buyers. Any company surviving such competitive warfare and emerging in a leadership position was, as result of these laws, free game for ambitious DOJ attorneys. Shady politicians regularly joined con gusto, cheered on by the press stirring up public animosity, using sensationalistic hysteria aroused by unproven allegations. Gotta sell print and attract viewers! Nothing had changed since medieval times or Salem; religious dogma hunts had just been replaced with antitrust pursuits.

I look at antitrust allegations and dealings from a business perspective—disgustedly. Ayn Rand, the phenomenal philosopher, said it better in the headline of one of her early essays
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about the topic: “Antitrust. The Rule of Unreason.” Government exploits in the past, regulating meteoric superstar companies, had mostly damaged consumers. If changes in competitive behavior of punished leaders were ever achieved, they never produced regulators’ desired results. The ultimate punishment under antitrust laws was to break up a company more often than not, only leading to needless pain and suffering for her employees and clientele. In undertaking antitrust actions, the government punished her people and did not protect them as the constitution intends. Politicians exploiting the spirit and intent of the law should all be ashamed. Why not allow the vibrant wellspring of bottom-up, wholesome, and creative human endeavor—what could easily be argued as the very divinity of commercial evolution herself—to freely and naturally flow forth? In its place, spending energies on top-down judicial smothering of beautiful and powerful human enterprises had become not only acceptable but also celebrated. Government for the people and by the people through excessive regulations?

Fair or not, interpreted properly or not, the antitrust laws were on the books. Rockefeller’s Standard Oil experienced antitrust regulations; so did AT&T, IBM, the NFL, and the MLB organizations. These laws, according to regulators, existed to protect consumers first and foremost, not necessarily competitors. The government was supposedly doing her citizenry a public service when applying them. In reality, these laws provided cover for reward-losing competitors. Any notably successful enterprise with high market share was suspect of being a monopolist and, therefore, might be accused of hurting consumers.

The legal community was split on just how genuinely effective government antitrust actions really were. If an antitrust case wound up in court, a sitting judge was no guarantee for justice being served. Judges were charged with having to be not only absolutely unbiased but also smart and wise enough to see right through the phony arguments and theories the plaintiff’s lawyers and economists presented. They were often not well equipped to handle antitrust conundrums, lacking sound understanding of underlying economic theories and, certainly in today’s warp-speed world, up-to-the-second technological insight.

As a mathematician, I consider economics inexact, leaving room for speculation, guesswork, unproven assumptions, and political maneuvering. Any court having to deal with antitrust issues was therefore in a tough situation. Trying to pass a fair judgment would therefore be, to some degree, subjective and certainly prone to appeal. Flaky career lawyers at the DOJ and biased politicians like Janet Reno and Anne Bingaman did not share my views of antitrust bias. In their high-handed view, they embraced the opportunity to rein in MS on what amounted to a grossly misguided mission to serve. Glorifying their political prowess by taking over the case from the FTC proved too tempting for them. MS’s aim was to confront the damage head-on, dissect the dynamic duo’s questionable motives, and limit any harm unleashed by them.

Let’s quickly examine what constitutes a monopoly. Certainly there is such a thing. According to USLegal.com, a monopoly is a control or advantage obtained by one entity over the commercial market in a specific area. The two elements of monopolization are the power to fix prices and exclude competitors within the relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident. Firms with monopoly power have, in general, little or no competition—indicated but not proven by high market share—and are able to completely dictate the terms and conditions of how her products get acquired. Ironically, an enterprise can obtain monopoly power legally. The US postal service or state lotteries come to mind. Consequently, a firm labeled of being a monopoly remains, against common belief, an honorable company encouraged to compete vigorously.

Economists then argue that monopoly power is typically derived by creating or using barriers to entry, effectively barring competitors from the marketplace. Barriers of entry can be formed in various ways. To judge this properly, the relevant market, meaning the environment a firm is operating in, has to be firmly determined—one of the most contested subjects in antitrust trials. According to most economists, market power of a monopolist is often demonstrated in setting prices independent of any competition. Consequently, in a monopoly situation, as the theory goes, the usual supply-and-demand model fails to function.

Take a look at your local electric power company. Assuming there is only one around, she could, in theory, extract any price from customers not possessing their own generator or a naturally fueled energy source. Certainly a valid reason to watch her carefully.

Excess profits and profit maximization are other signs of a monopoly-governed marketplace. The laws in the United States require any enterprise to not conduct her business in an abusive way, defined as limiting supply, engaging in predatory pricing or price discrimination, refusing to deal, entering into exclusive dealings, or engaging in unreasonable tying/bundling of products. Some examples: consequentially, MS could not have made the sales of MS-DOS conditional to buying Windows or refused to sell MS-DOS to a single OEM while supplying all others.

According to economists, a typical monopoly charges unjustifiably high prices. Let’s examine if this could have been a reason for labeling us a monopolist. OEMs typically paid MS 1–2 percent of total system value for DOS systems and twice that much for the ones powered by Windows. Prices for OS/2 and the Mac OS resided in the same neighborhood, with UNIX being at least three times as expensive, while DRI charged approximately half. Nothing indefensible here, as we had always kept prices in check! My discussions battling MS top management certainly bore that out. I was consistently told to compete by lowering prices and be fearful of the pirates who operated at zero.