Bill's Next Move

For those who believe that Microsoft chairman Bill Gates is destined not only to rule the world but to own everything in it, last week unfolded pretty much according to plan. Several hundred billion dollars' worth of stockholders packed Microsoft's 13th annual meeting, confident that, no matter what the United States government did, there would be many more of them. Gates announced a deal to invest $100 million in Tandy Corp. and put what amounts to Microsoft boutiques in 7,000 Radio Shack stores nationwide. The company spun off its money-losing Expedia travel Web site, minting a few new millionaires as the stock soared from $14 to $52. And Microsoft's own stock closed down a barely perceptible $2 or so a share. That seemed to reflect the market's judgment, a week after U.S. District Court Judge Thomas Penfield Jackson's historic ruling that the company used its software monopoly to hurt competitors and consumers, that in the end the most powerful country on the globe would be no match for the world's richest corporation.

Jackson's blistering "findings of fact"--which will provide the basis, together with the "conclusions of law," due next year, for his eventual decision--provided several unintended ironies. Although he had earlier expressed hopes the two sides could settle, by siding with prosecutors on almost every factual issue he emboldened the Justice Department and its allies, the 19 state attorneys general who had joined the government's antitrust suit. As one government insider told NEWSWEEK, "the debate has shifted more toward the stronger remedies." That, of course, is code for breaking up the company--something Gates is unlikely ever to accept voluntarily. The prospect of strong measures also frightened many of the government's natural allies--notably, the companies of Silicon Valley, who didn't want to trade the tyranny of Microsoft for more government oversight of the technology business, especially since many of them dream of becoming Microsoft someday. And the ruling pointed up the painful transition facing Microsoft as it grows into maturity: the realization that the hypercompetitiveness that made it strong may no longer work now that it is one of the most powerful companies on earth.

Gates, for his part, left the door open to a settlement, telling NEWSWEEK that "we'd like nothing more than to move on." But he also emphasized the importance of being able to continue to innovate and improve on Microsoft's key product, Windows. "To preserve that principle, if it's necessary, we'll go through more steps in the process"--signaling, even before Jackson issues a final verdict and order, Gates's willingness to undertake a long and costly appeal. People familiar with the company's legal strategy were busy last week spreading doubts about one key assumption that many observers believed would work against Microsoft: that higher courts are bound by the trial judge's findings on strictly factual questions, so the appeals battle would have to be fought just on the law. If Microsoft was to fight, it would fight every step of the way.

Whether or not the survival of the company was ultimately at stake, Jackson's ruling seemed to open the doors to raids on its immense horde of cash, roughly $19 billion. "If we're successful, we're entitled to civil penalties," Iowa's Attorney General Tom Miller said, adding that "we're trying to figure out" how to calculate and distribute the prospective windfall. In what was potentially even worse news for the company, some of the same lawyers who brought the tobacco companies to their knees with class-action lawsuits were scouting for victims of Microsoft's alleged depredations. "We're looking at it," Stanley Chesley, a prominent plaintiff's lawyer, told reporters. "Millions of people bought Windows, and if the company overcharged consumers, it should be held responsible." Microsoft spokesman Mark Murray called it "unfortunate... that these kinds of groundless lawsuits would be threatened against a successful American company that is consistently driving down prices." And, more pointedly, he added, "the finding of fact has no legal weight in other cases [unless] it is entered as part of a ruling and verdict."

Also watching the case with great interest were Microsoft's competitors and partners--who, of course, are sometimes the same companies (sidebar). Jackson's ruling also caused great soul-searching in Silicon Valley because it brought into conflict two cherished principles: hatred of Microsoft and belief in absolute economic freedom. Even someone like Kent Savage, the CEO of a company called Netpliance--which hopes to bite off a tiny share of Microsoft's market by selling cheap computers for Internet access that won't run on Windows--lives in faith that "private enterprise will find a way to put in place the right business practices." On the other hand, Nuance Communications, which makes speech-recognition software for corporations, could be driven out of business if Microsoft were to come up with a competing product--or, as it did just two weeks ago, buy a company that makes one--and bundle it with Windows. As Judge Jackson found, that's just what Microsoft did in the market for Web browsers, where Internet Explorer, inextricably embedded in Windows, outcompeted the rival product, Netscape Navigator. So Steve Erlich, vice president of Nuance, finds himself "in favor of at least trying to break Microsoft up a little bit," although, he admits, "everyone I speak to has a different opinion."

Is it possible to break Microsoft up "a little bit"? Government lawyers were reportedly studying a wide range of possibilities. The most extreme, and probably least likely, was to divide it along operating lines on the model of AT&T, giving rise to separate companies for operating systems, applications software and Internet business. The disadvantage for Gates is that he could run only one of these; the upside is that history suggests that the separate parts will eventually be worth more than the whole, so he (along with all the other stockholders) would end up even richer.

Other, less drastic remedies were also under discussion. Law professor Herbert Hovenkamp, who is advising the government, said he favored allowing other companies to produce their own versions of Windows, either by auctioning off the rights to it or putting its secret "source code" in the public domain. The one solution that few observers thought likely, or desirable, was a "conduct" remedy that would leave Microsoft and its monopoly status intact, but impose specific rules on its behavior toward customers and competitors--something that might take the entire Justice Department to enforce.

Any such measures appeared far off last week, barring a sudden change of heart, or at least tactics, by Microsoft. Both sides were preparing briefs for Jackson's "conclusions of law," the other step necessary to reach a verdict--expected no sooner than February and almost sure to be followed by appeals. Jackson's finding on the facts was so definitive that it would seem to leave little room for dispute, but it's precisely that sweeping nature that makes some legal scholars uneasy. "Facts are messy," says law professor Eleanor Fox of New York University. "It's very unusual that all the facts of a case will stack up on one side." Observers say the D.C. Court of Appeals, which would hear the case, is believed to be friendlier to business than Jackson's court. And, of course, in a little more than a year there will be a new president; a Republican administration might not be all that eager to press an antitrust case brought by the Clinton Justice Department. And Microsoft, which long held itself above the need to curry favor with politicians, doubled its lobbying budget last year to $3.7 million--and stepped up its campaign contributions, mostly to Republican legislators.

Still, there were some last week who thought that the time was ripe for a settlement. Roger McNamee, a prominent Silicon Valley venture capitalist, believes this could mark a historic turning point for Gates and his colleagues. Microsoft, he points out, is still a first-generation corporation; the people who run it haven't quite gotten over the idea that they're in a constant struggle for survival. "They had to be scrappy in those days," he says, "and that culture was so powerful it hasn't changed." What's permissible in a start-up doing battle with IBM, though, is no longer appropriate for a company more than twice IBM's size. Folks like McNamee thinks it's time for Gates to grow up--even if it means realizing that fighting for every advantage isn't always a winning strategy.


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