Bill Gates (7 page)

It may well take years for the Sun lawsuit to be decided; many computer industry suits consume two to five years of legal maneuvering. In the meantime, Sun and other Microsoft rivals were bending ears at the Justice Department, trying to persuade the Antitrust Division to take new action against Gates’s company. Even Ralph Nader, the legendary consumer activist, got into the act in September 1997, holding a much publicized meeting with top Justice Department officials. The director of Nader’s Consumer Project on Technology said at that time, “We think it’s an outrage that the Justice Department hasn’t taken action to stop Microsoft.” Spokespeople from Microsoft immediately professed astonishment that Nader would go after a company that had worked so hard to improve software technology while at the same time lowering the prices consumers paid for it.

While considering the possibility of new actions against Microsoft in various areas, the Justice Department took a major step on Monday, October 20, 1997, to reassure those who had been filing complaints about Microsoft. In a news conference given by Attorney General Janet Reno and Joel I. Klein, assistant attorney general for the Antitrust Division, who had been confirmed by the Senate in July, it was announced that the Justice Department had filed a complaint in federal court stating that Microsoft was in violation of the 1995 consent decree it had signed with the federal government and had asked the court to stop Microsoft from bundling Internet Explorer, its browser, with the Windows 95 operating system. The presence of Janet Reno at the news conference ensured headlines, but what really got the attention of the media was the request by the Justice
Department that once such an order was issued by the court, Microsoft should be fined $1 million a day until it complied.

The one-million-dollar-a-day potential fine made for splashy headlines, but it was quickly pointed out that although a fine of such proportions would be unprecedented, it would still be a drop in the bucket to Microsoft. Several commentators used the phrase “chump change” to describe what a million a day was to Gates, and
Newsweek
noted that in the days following the announcement of the Justice Department complaint, Microsoft stock went up three points, adding $846 million to Gates’s own net worth. Moreover, Gates himself indicated that such a fine was unnecessary, since Microsoft would comply immediately with whatever the court ordered. “That’s the way things work in this country,” he said.

But even leaving aside the matter of the possible fine, the action by the Justice Department was an aggressive challenge to Microsoft. The crux of the complaint was that Microsoft was forcing PC manufacturers to include its Internet Explorer on all new computers or lose the right to install Windows 95. The most damaging testimony was collected from Stephen Decker, the director of software procurement at the top PC manufacturer Compaq. Decker told Justice Department antitrust attorneys that in the spring of 1996 Compaq had wanted to put the icon for Netscape Navigator on its desktop instead of the icon for Microsoft’s Internet Explorer. Both browsers would continue to be available on the new PCs, but since it was assumed that computer buyers knew that the Microsoft browser was always included, Compaq wanted to make it clear that the rival Netscape system was included also. At that point, the Microsoft browser, which had been introduced a year later
than Netscape’s, had only four percent of the browser market, while Netscape’s had eighty-seven percent. The much greater popularity of the Netscape product at that time also made it the more enticing icon to have displayed. But Microsoft got tough on this intended move—fast. It informed Compaq that it was terminating its Windows 95 licensing agreement with Compaq. A few days later it said that it would reconsider if Compaq replaced the Microsoft Internet Explorer within sixty days.

It would, of course, have been ruinous for Compaq not to have been able to ship the world’s foremost operating system, Windows 95, and it quickly complied. By August of that year, the market share of Microsoft’s browser doubled to eight percent, with the added points coming directly from Netscape’s browser, which dropped to eighty-three percent, while the share of smaller rivals remained at nine percent. And by September of 1997, Microsoft had acquired thirty-six percent of the browser market, Netscape was down to sixty-two percent, and the small rivals were left with only two percent of the market. To Janet Reno and antitrust head Joel Klein that was clear evidence that the pressure applied to Compaq (which had been duly noted by other PC manufacturers) had directly harmed Netscape and amounted to Microsoft “unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly and undermine consumer choice,” as Janet Reno put it. At the October 20, 1997 news conference Reno added that the Justice Department “won’t tolerate any coercion by dominant companies in any way that distorts competition.”

The question of whether Microsoft had in fact violated its 1995 consent decree depended on whether or not its browser was considered an entirely separate product from
Windows 95 or an integrated part of it. If it was an integrated aspect of Windows, then the consent decree hadn’t been violated, most analysts agreed. But if it was an independent product that Microsoft had forced PC manufacturers to accept in order to ship their computers with Windows, then the decree had been violated. From the point of view of Netscape, as put forward to
Time
by Netscape general counsel Roberta Katz, it was unequivocably a separate product: “They’ve produced it as a separate product. They’ve advertised it separately; they’ve produced it separately; they’ve sold it separately.”

But there is a weakness in this statement that some analysts took note of: Microsoft’s Internet browser is
free
. Microsoft does not charge PC manufacturers to install it—they just insist that it be installed. In addition, from the beginning, computer users could download it free if their computer did not already have it. Can a company really be accused of coercion when the product in question is a giveaway? The commonsense answer to that question is no. But to Microsoft’s competitors, the answer is, Wait and see if it’s still free once Microsoft has cornered the market. Ralph Nader hit hard on this point, saying that the fact that Internet Explorer is now free “is a classic definition of predatory pricing. Once they get rid of Netscape you will see the difference.”

But can Microsoft really knock Netscape out of the browser business? The technical analysts don’t think so. Independent computer publications like
PC Magazine
, as well as Wall Street technical analysts, feel that the Microsoft and Netscape products have different strengths and weaknesses, and that the choice of one over the other may depend on what a user wants to do in terms of accessing the Internet. In a November 1997 editorial, Michael J.
Miller, editor of
PC Magazine
, flatly said, “I think you should have both browsers on your system.” What’s more, analysts who specialize in looking ahead suggest that both browsers may be only temporary solutions to accessing the Internet. There are several start-up companies, some with considerable financial support from major corporations that have a stake in the future of the Internet, that are concentrating on the development of set-top boxes for television sets. Such set-top boxes would make it possible for users to access the Internet using remote controls no more complicated than those used for VCRs, with the real computing done at central networks leased to local television cable companies. That eventuality, it is pointed out, is far more of a threat to Microsoft than any Justice Department confrontation, since the Internet would then be available to people who don’t even own a PC, and who would have no need for Windows at all.

The current Justice Department challenge to Microsoft is unlikely to take such future developments into account, however. It will call upon the court to weigh the fact that Microsoft clearly twisted the arms of PC manufacturers, as shown in the Compaq situation, against the fact that Microsoft’s Internet Explorer is free anyway. It will also turn on the history of Microsoft’s development of its browser. Because Microsoft delayed the rollout of Windows 95 for nearly a year in order to change it in ways that would make it possible for users to also use the Internet Explorer, a case will certainly be made by Gates and his lawyers that the browser was thus integral to Windows even though it will not become a technically subsumed part of the operating system until the advent of Windows 98. At a deeper, but perhaps more important, level, the case will have to deal with the ever-changing nature of
computers and computer software, and face the question of whether it makes good sense or good law to prohibit a company from continually enhancing its products to meet the needs of users in an increasingly computerized world. When it comes to that issue, even Microsoft’s bitterest rivals get nervous. They want to see Bill Gates and Microsoft controlled by the government (even damaged), but they don’t want a decision that will inhibit their own ability to create and sell ever more useful products.

Although the importance of Bill Gates and Microsoft to the computer industry is evident in his relationship with collaborators like Andy Grove and detractors such as Scott McNealy, the extraordinary clout that Gates and his company have achieved is most clearly seen in the complex relationship between Microsoft and Apple. The two companies have been linked by far-reaching business agreements since the early 1980s, when both companies first broke out of the pack of fledgling enterprises that were attempting to shape the future of the personal computer industry. But despite these links, the two companies have also been seriously at odds with one another on many fronts. The ups and downs of their relationship reveal the degree to which interdependence can arise between rivals in the computer industry, creating a complex web of crisscrossing loyalties and oppositions that many experts say is like nothing ever seen before in an industrial or technological field.

In 1977, when Steve Jobs and Steve Wozniak unveiled the Apple I personal computer, Bill Gates and Paul Allen were still operating out of a strip mall in Albuquerque, New Mexico. By 1980, Apple II had become a big enough success to goad IBM into changing its tune about the future of the personal computer; it contacted Microsoft to develop an operating system for the PC it had in development. But at that point, few people outside the computer industry had any idea who Bill Gates was. It was Steve Jobs and Apple that were getting the cover stories. Apple became a public company in December 1980, selling 4.6 million shares of stock at the initial offering price of $22 per share. But nine months later, in September of 1981, IBM began shipping its PCs, and their new product quickly eclipsed the sales of the Apple II. Even the upgrade to the Apple
IIe in 1983 wasn’t enough to stem the flood of IBM PCs and its clones.

Part of the problem was that Apple was developing both the hardware and the software for its personal computers. As IBM itself would subsequently discover after Microsoft pulled out of its relationship with IBM because of differences about the development of OS/2 operating software, when a single company is producing both software and hardware, especially in the fast-changing PC world, the hardware forces at the company tend to have the upper hand when it comes to disagreements about how to proceed. Thus when Jobs decided that the way to counter the IBM surge was to develop not simply a new computer but an entirely new kind of operating system, he sought out Bill Gates to share in the development of the software. What they produced together was a revolutionary approach. As Steve Levy wrote in
Newsweek
in August of 1997, “The antidote was Macintosh. People scarcely remember now, but the Mac was a drastic change from all previous PCs. Some people believed that its on-screen graphics made it too toylike to be a business tool; others vowed they would never use that strange device called a mouse.” But it was the future of PCs. Jobs was certain of it, and Gates, who at one point had more Microsoft programmers at work on Mac software than Apple itself, agreed. In fact, Gates had such a clear sense of the importance of the graphical interface that he set his own company on the path to developing a similar operating system that could be used on the PCs sold by IBM and the companies it had licensed to produce IBM clones. The Microsoft operating system would be called Windows.

By taking this step, Gates put Microsoft in the position of being both the chief supplier of Apple’s Macintosh soft
ware and, in time, the chief supplier of software to Apple’s hardware competitors. As Michael A. Cusumano and Richard W. Selby make clear in the appendix to their book,
Microsoft Secrets
, there is an enormous overlap between the Windows software and the software developed for Macintosh. For example, Microsoft’s two “flagship” application products, the spreadsheet Excel and the word processor Word, each of which accounts for a billion dollars a year in Microsoft sales, share “80 to 85 percent” of their code with products produced for Macintosh. Cusumano and Selby’s book is not only sympathetic to Microsoft (despite its somewhat sinister title) but it was also written with Microsoft’s blessing—the authors enjoyed unprecedented access to Microsoft personnel. Gates himself answered the author’s question, Why let us write this book? by saying, “It’s good for our corporate customers to know more about development because they do a lot of development. In aggregate, they have a lot more developers than the commercial software industry does. And so we want to remind them that we have some good ideas, and share those ideas with them. Maybe they’ll buy more PCs.”

Behind these words lies Gates’s conviction that there is nothing at all wrong with the fact that Microsoft’s products for Macintosh and for Windows share more than two-thirds of their code. Apple had of course agreed to allow Microsoft to use code developed for Macintosh in creating its own software for other PC manufacturers. After all, IBM had already done the same thing. And Gates, who always took the long view, would not collaborate under any other terms. It is worth noting that Apple had already become a publicly held company, with its initial stock offering of December 1980, before Microsoft even incorporated, which it did not do until 1981. What’s more, Microsoft was not
listed on the New York Stock Exchange until 1986. It was not until Microsoft’s stock became a Wall Street favorite, outstripping Apple, that Apple began to seriously complain about the overlap between Windows and Macintosh software.

In the meantime, Steve Jobs found himself ousted from Apple. His charisma, enthusiasm, and public relations genius had made Apple what it was, but he was not a financial expert, and in April of 1983 he persuaded the president of Pepsi-Cola, John Sculley, to become head of Apple. Their relationship proved combative, and when Apple posted its first quarterly loss in September of 1985 and Jobs failed in an attempt to force the board to get rid of Sculley, he left the company he had founded.

Jobs and Gates had understood one another, despite some differences. Sculley saw Gates as the enemy, even though Apple remained dependent on software produced by Microsoft. In 1988, Apple filed suit against Microsoft for copyright infringement, citing the newly released Windows 2.03 for making use of code that was Apple’s property. While Bill Gates has noted caustically that there are
always
several dozen suits pending against Microsoft, this new Apple challenge asked for $5 billion in damages and had to be treated with great seriousness.

The case involved both code and the use of the mouse to click on to a graphical user interface (GUI). In the course of developing the original Macintosh GUI, Microsoft developers, as Cusumano and Selby note, “became intimately familiar with the Mac’s user interface and internal workings.” The contract between Apple and Microsoft gave Apple only minimal protection against the possibility that Microsoft would develop its own GUI, preventing it from doing so for one year after the initial shipment of the Mac
intosh. After that, Macintosh was supposedly free to move ahead on its own. But Apple believed that Windows 2.03 emulated the “look and feel” of the Macintosh interface too closely.

The suit was contested for four years, during which time Microsoft released Windows 3.0 (May 1990) and Apple unveiled its PowerBook laptop, both great successes for their respective companies. Microsoft finally got the Apple suit dismissed in April of 1992, in part by arguing that the graphical interface technology did not even belong to Apple but had been invented by the Xerox team at its Palo Alto Research Center, known as PARC. The PARC team had not been able to figure out how to make the technology commercially available, however. In dismissing Apple’s suit against Microsoft, the federal judge in the case, Vaughn Walker, ruled that Microsoft had already licensed some of the technology, and that other similarities could not be covered by copyright. As James Wallace puts it in
Overdrive
, “A ruling in favor of Apple’s claims, the judge said, would have ‘afforded too much protection and yielded too little competition.’ This not only vindicated Microsoft, it was also significant for the industry, clearing away doubts about the rights of software programmers to adapt aspects of other systems.” This legal victory had by that time cost Microsoft $9 million in legal fees.

The relationship between Apple and Microsoft had been further strained by another kind of problem. As far back as 1987, Microsoft had earned the everlasting enmity of many Macintosh users by producing a bug-ridden version of its Word 3.0 for Macintosh. Not only were there as many as seven hundred bugs but some of them were so serious that they crashed the program completely. Even though Microsoft spent a million dollars shipping an up
grade two months later, the suspicion was planted in the minds of Macintosh users that Bill Gates regarded them as second-class citizens. That impression was furthered in 1993 when Mac Word 6.0 proved to be slow and cumbersome. Once again, an upgrade, in this case a trimmed-down one, had to be shipped. It was incidents of this kind that virtually assured the appearance on the Internet, as it developed in the mid-1990s, of virulent anti-Gates and anti-Microsoft web sites, which have always been much visited by Macintosh devotees.

The anti-Microsoft bias on the part of Macintosh users only grew in the mid-1990s as Microsoft extended its grip on the computer industry with Windows 95, while Apple encountered more and more difficulties. In 1993, Apple unveiled a new product, the handheld Newton computer, which was disparaged from the word go and was a complete commercial flop. In the wake of that disaster, John Sculley was deposed, and Michael Spindler was brought in as CEO. A German, he was nicknamed “the Deisel,” but as
Newsweek
reported, his “regime was more like a train wreck.” Among the other problems on his watch was a parts shortage for the new Power Macintosh of 1994, which created a billion dollars in back orders.

One positive step taken during Spindler’s term was to license the manufacture of Macintosh clones by other companies. This was a step that many industry analysts had been recommending for years; indeed, Gates had formally suggested it as far back as 1985, offering to assist in such a move. IBM had allowed such clones of its PC from the start and benefited greatly, but Apple had always had a strong resistance to surrendering what it saw as its unique identity. By the time the step was finally taken in 1994, many observers felt it was too late.

Apple losses were growing steadily when Spindler was replaced in February of 1996 by Gil Amelio, who had a reputation as a “turnaround” expert. A nervous board of directors tried to find a buyer for Apple, but such companies as IBM, AT&T, and Sun proved to be extremely skittish about such a deal. Apple had been promising a new, revolutionary operating system, but its development was in serious trouble. In order to get it jump-started, Amelio decided to purchase NeXT, a company that had been started by Steve Jobs after leaving Apple, and to integrate the NeXT technology with Apple’s. Jobs had become more interested in another company he owned, the computer animation firm Pixar, which had had a major hit with its new process in the movie
Toy Story
. Jobs thus agreed to sell NeXT for $430 million.