Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (25 page)

As congenial as our meeting was, it did not prevent IBM from supporting competitive products like Linux and Java or aiding to unite the industry against MS and help the Feds in any way possible to condemn us. I couldn’t care less; I wanted IBM to preinstall more Windows as long as she manufactured PCs making life as easy as possible for her PC division. I wrote Bill a short e-mail about my meeting, and he responded favorably, saying, “Make Sam your friend. If he indeed becomes CEO one day, I will have to meet him, and it would be nice to finally find some common ground.” He never gave up!

IN THE SHADOW OF THE FEDS

THE ONLY MAN BILL GATES MAY FEAR

This was how, in August of ’97, the partial headline in
Wired
magazine read. The article that followed was not the only one I had read about the underground conspiracy coalition led by the lone ranger of antitrust justice, Gary Reback, generously funded by our competitors. I understood the word
conspiracy
to mean “a secret coalition of individuals with a common goal.” Theirs was to influence the DOJ leadership and sympathetic politicians to relentlessly pursue MS and find an avenue to classify our vigorously competitive behavior violating antitrust laws. In barrister Reback’s view, we were a danger to society. As quoted in the
Wired
article, “It’s not just our lunch, but our carcasses that MS wants to eat. There are grave societal consequences to that strategy and a whole new wave of opportunity that MS wants to suck into its OSs to maintain its monopoly.” Pretty strong and outrageous allegations if you asked me—particularly for a lawyer.

His first actions in his fight against MS had been to deliver a brief to Judge Sporkin’s court, rejecting the 1994/95 consent decree as inadequate. When the judge’s opinion was reversed and he himself was removed from the case, the Reback group did not give up lobbying the Feds. She gained further momentum when Netscape funded her to investigate our Internet strategy. On June 23, 1995, Mr. Reback fired off a letter to the DOJ, asserting the Internet was a new platform rendering OSs useless. He cited statements made by MS executives and referred as proof to meeting notes he had obtained from Netscape. Concurring with the lofty opinions of his clients, he then demanded MS, the OS powerhouse, should be forbidden to compete in the Internet arena with an integrated Windows browser.

His arguments and actions were straight along the lines of Senator Hatch. We need to protect start-ups like Netscape, introducing disruptive technology. The DOJ’s initial response to his letters was lukewarm, encouraging him to lead his group into a guerilla war as he explained in his book
Free the Market!
. According to Netscape’s general counsel, he was sent “to be the government’s worst enemy. Criticize them everywhere… . Until they sue MS. Then you will be the government’s best friend.” Certainly a thought-provoking tactic—one reminiscent of the magnanimous ethical standards so many lawyers publicly bear forth into the world!

Let’s listen to him again to fully understand his provocative aim: “Microsoft’s enemy is not Netscape. It’s the consumer choice.” Obstructions of consumer choice—a nice, catchy accusation and line for the sensationalist media market, but did reality truly support this? Think about the number of reasonably priced Windows applications available by then, the millions of dollars MS actually poured into supporting competitors to develop them, how OEMs could add browsers to their heart’s content to the Windows desktop, and let’s not forget all the other vast information choices Internet-connected Windows PC users had.

Yet Reback’s relentless quest consigning the MS case to the DOJ continued. By now, the antitrust division had a new boss in Joel Klein. Enlisting the help of Susan Creighton, the conspirators dug out an old Supreme Court ruling, enlisted Robert Bork—a judge with controversial reputation after not making it to the Supreme Court—and got the Texas AG to start an investigation. The group used public statements by MS officials and depositions from the Texan investigations to further beef up their alleged monopolization case. Most of their accusations were boiled down into a still-secret 220-page document funded predominantly by Netscape. The DOJ staffers quaffed the poisonous brew with gusto and issued a document demand to Netscape and MS. A new investigation was on!

Giving IE away at no charge was the next contention. The conspirators cavalierly labeled this predatory. According to Professor Frank Easterbrook, an economic expert whose windy opinion the group adhered to, setting a zero price for a product was irrational business behavior. Mr. Reback described this in his book: “Predatory pricing inevitably harms consumers by eliminating competition.” To further prove his allegation, he quoted the opinion of an executive from Silicon Valley Company, saying, “Regardless of how good your product is, you can’t compete against free.” Think about Google, Facebook, Twitter, or Linux and think again. In the end, the nefarious mercenary lawyers backed away from the predatory pricing theory. The phrase, while catchy, was hard to prove!

Even Steve Jobs got engaged in the conspiracy by inviting Joel Klein to visit his headquarters and telling him to keep MS tied up in litigation, enabling him to gain share with the new iMac PC. Bill had mocked his new baby in public, so he joined the witch hunt and not for the last time.

Tallying it all up, I estimate that the Feds got a nearly $10 million worth of indirect legal freebies from the conspirators paid for by our competitors. Sanctioning their work, the DOJ eventually built a labyrinthine case against us while Garry Reback gained considerable praise—and not to forget fees—for sinking his thirsty mandibles into the warm host hide of evil pioneer MS.

BACK IN JACKSON’S COURT

Sam Palmisano had foresight. Shortly after we met, the Feds, buttressed by Reback’s briefs and their own investigation, filed a motion in Jackson’s court, accusing MS of violating the 1994/95 consent decree. Most employees, in particular people working for me, could not believe what they read. “Microsoft unlawfully maintained its monopoly by using exclusionary and anticompetitive contracts to market its PC OSs.” Allegations and accusations—none of them proven—fueled the fire of public opinion and made my cohorts feel like criminals.

Our contracts were approved by our attorneys, and if they had been exclusionary, they would have never passed muster. On the other hand, being labeled anticompetitive sounded honorable to me. Any company struggling to win in a free market is, by nature, anticompetitive. This held true throughout the world of free commerce, from plumbers to architects and to auto manufacturers.

The Feds’ main accusation was that MS was illegally tying IE to Windows. Straight out of Reback’s secret play script came the following: “By forcing OEMs to license and distribute Internet Explorer on every PC they ship with Windows 95, Microsoft is not only violating the final judgment,
33
but in so doing is seeking to thwart this incipient competition and thereby protect its OSs monopoly.” Therefore, the Feds asked the judge to find MS in contempt of court and order her to cease her tying practice or pay a one-million-dollar daily fine.

The Feds based their petition on the following clause in the consent decree: “Microsoft shall not enter into any license agreement (with any OEM) in which the terms of that license agreement are expressly or impliedly conditioned upon: (i) the licensing of any Covered Product, OSs Software or other product (
provided however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products
).” In other words, IE was supposedly just bolted onto Windows to swart—according to the Feds—competitor Netscape without deriving any valid consumer benefits.

Condemning the integration of IE into Windows ran completely against common practice in our industry. Software products live with perpetually integrating meaningful features to increase product values over time. Otherwise they die. Reading the above quotation correctly, in particular the section emphasized in italics, what we had done seemed expressively allowed under the decree. Were the Feds going back on their own word? And reading it a second time, the reader might agree with the opinion of a clever analyst once quipping humorously, “There is no limit of what MS is allowed to integrate into Windows—even a ham sandwich.”

The lawsuit came as no surprise. The Feds had contacted us a few months earlier demanding the separation of IE from Windows. Our legal team had made our interpretation of the ’95 decree unwaveringly clear and refused to relent. The DOJ’s action was a direct result of MS’s refusal to deal.

After both sides made their points in court, Jackson ruled that MS was not in contempt of court. Nonetheless, he issued a preliminary injunction ordering us to deliver an IE-free version of Windows 95 to OEMs. Bill Neukom, our general council, commented about his ruling that same day: “The court denied the Justice Department’s petition for contempt; the case should have ended there… . It is inappropriate for the court to unilaterally expand the case beyond the scope of the government’s petition.”

We had no choice but to comply and went ahead separating IE from Windows, with the predictable result of breaking it. With discomfort and a diminutive smirk, I signed a letter accompanying its deliverance, warning OEMs of the separated code being defunct. Not what the judge had had in mind! Steve, dead set against poking Jackson in the eye, was overruled by Bill, who gave the go-ahead to cripple Windows—as he thought it was ordered.

The baffled Feds, reacting at once and with fury, hauled MS back into court. Agitated and visibly angry over our audacity of following his order literally, Jackson let it out on David Cole, then the Windows product manager. He absorbed his rap with stoic grace. MS had told Jackson in no uncertain terms beforehand that Windows ex IE would not and could not work because they shared common code. Not good enough for him. He had to try himself. In open court, one of his clerks removed the IE icon from the Windows desktop, which every user could do. In Jackson’s belief, he had just removed IE from Windows—a full-on charade. A mouse click restored it. Jackson’s courtroom theatrics only served to emphasize his complete misunderstanding of software-integration technicalities. It took another month to work out a preliminary compromise. Eventually we agreed to produce a functional and partially IE-disabled version by permanently removing only its icon.

I had no desire to deliver such a crippled version to OEMs simply to please a disgruntled judge and the now-victorious and self-congratulatory Feds. The compromise made no sense to me, and OEMs confirmed my doubts: none of them ever installed it. The Internet had taken hold, and a Windows-powered PC without its native browser was no longer considered sellable. Thus, market realities made the agreed-upon compromise meaningless.

To convince the judge to make his preliminary ruling final, the Feds tried to prove that we had bolted IE onto to Windows just to swart Netscape. Their investigation had unearthed a humungous number of memos and e-mails, which they believed substantiated their accusation. At the end of ’96, Jim Alchin, our SVP of Windows development, had written, “I do not believe we can win on our current path. Even if we get Internet Explorer totally competitive with Navigator, why would we be chosen? They have 80 percent market share. My conclusion is we have to leverage Windows more.” He added, “We need something more: Windows integration.”

With Netscape gunning for 100 percent share according to public statements made by Mark Andreessen, a cofounder, the Feds should have applauded MS for taking on the browser juggernaut. Jim Alchin’s skepticism and anxiety about the potential unpopularity of his browser baby was typical for a software engineer. A bit of an introvert, like most of them, he was nevertheless humble enough to question the success of his own design. Bravo! If Jim further meant leveraging Windows equaled tighter integration, nobody should have been surprised. First of all, this was the plan we were following since ’93, and second, Jim knew no better! Any software developer, responding to cutthroat competition and, in particular, when coming from behind, intuitively knows integrating more features increases value and ultimately benefits customers.

After reading Jim’s e-mail snippet, the Feds perceived it differently and concluded, “Everybody saw it; they [sic: MS] really captured the essence of what we believed.” Mr. Malone, the chief prosecutor in the case, added, “They [sic: MS] had that power.” Power for him translated into MS having monopoly power. Our method of improving products through integration was therefore deemed illegal. What would he attack and forbid next?

In early May of ’98, Jackson made his preliminary ruling permanent and extended it to 95’s successor, Windows 98. MS appealed. The clock was ticking. With the launch of 98 scheduled for the end of June and no contingency in place to deliver it sans IE, we were in big trouble. My customers needed four to six weeks’ prep time to install it and get backup CDs and documentation produced. Not knowing if and when to expect a ruling and how favorable it might be, it felt like we were playing Russian roulette.

Fortunately, the court responded with surprising alacrity and, on May 12, lifted Jackson’s injunction for Windows 98. Studying the ruling meticulously, you could easily conclude it would probably hold up for 95 as well because the appellate court reasoned that courts were ill prepared to take upon themselves entrance into the arena of software design. A clear signpost for the Feds to back off? Not really when reading in the same ruling: “The parties [sic: MS and Feds] agree that the consent decree does not bar a challenge under the Sherman act.”
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And that was the comment the otherwise-disappointed Feds unfortunately took to heart most.

While we were jubilant, we nevertheless harbored deep fears regarding their next move. Joel Klein, the DOJ’s antitrust division head, immediately recognized that winning the pending 95 case had only a very slim chance. Conferring with Janet Reno, his boss, he received authorization to broaden the litigation by accusing MS of wide-ranging antitrust violations. The Reback gang had finally hit pay dirt. Informing MS’s legal team of the developing situation, Joel Klein expressed his desire to settle the case only if we would make further-reaching concessions. Once again, Bill, together with his legal team, engaged in transcontinental shuttle diplomacy to avoid a costly and prolonged antitrust battle.