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a view on ms futures
From: David Farber <farber () central cis upenn edu>
Date: Sat, 28 Jan 1995 12:21:46 -0500
*********************************************************** Information Law Alert* ||||||||| || |||| * a voorhees report * || || || ||* * || || || || * 718-369-0906 * || || ||||||||| * voice * || || || || * 718-369-3250 * || || || || * fax * ||||||||| |||||||| || || voorhees () interport net *********************************************************** 411 First St., Brooklyn, NY 11215-2507 IN THIS ISSUE Motorola V. InterDigital WIRELESS COMMUNICATIONS FACES JUDGMENT DAY Patent Infringement Trial Could Be A Shocker To Telecom World LEAVE MICROSOFT ALONE Software Giant Will Have Enough Trouble Navigating 90s, Even Without A Tougher Consent Decree Reback's Theory IS IT VOODOO ECONOMICS OR VISIONARY? UTAH DIGITAL SIGNATURE BILL OPENS DOORS FOR ELECTRONIC COMMERCE Small state may take big move to encourage budding technology Virginia, California, Washington? GOV'T MULLS WHICH ROUTE TO SUPREME COURT ON TELEPHONE CHALLENGES TO VIDEO BAN TRIPLE-DES ON THE MOVE TEXACO PANEL SAYS NO WAY GEOTEK, NEXTEL SWAP . . . and more LEAVE MICROSOFT ALONE Software Giant Will Have Enough Trouble Navigating 90s, Even Without A Tougher Consent Decree Microsoft Corp. officials and lawyers must wonder what cruel fate they were dealt to land in the court of Judge Stanley Sporkin of the D.C. District Court. They were looking for a rubber stamp to ink their antitrust consent decree with the Justice Department. They instead found an iron will. "Can I use my own pen to sign the decree, or is the government going to supply that?" Sporkin asked in court last Friday. "I mean, I got to have some role here." Sporkin is trying to figure out whether the proposed decree is tough enough to curb Microsoft's monopolistic practices. He shouldn't waste his time. With or without the leveling influence of a decree, Microsoft will have a tough time writing a second act for itself. For Microsoft to do well in the future, it must willingly--even gleefully--break its ties with the past, especially the rich tributary of royalties from creaky, outdated operating systems. So far, Microsoft has been unwilling to take the step. Far from being a feared monolith, Microsoft could easily end the 1990s in the same shape as IBM in the 1980s, wondering where it all went wrong. FACELESS The chief proponent of a tougher consent decree is Gary Reback of Palo Alto's Wilson, Sonsini, Goodrich & Rosati. He is lobbying Sporkin to make modifications on behalf of nameless Microsoft competitors who are frightened of retribution if they are identified. Reback argues that Microsoft was handed a goldmine and unlawfully turned it into a company town. As IBM's appointed provider of operating systems for the PC industry, Microsoft has been able to build a "locked-in" market of captive customers who are joined at the hip to Microsoft and its products. Left unchecked, Microsoft's next casualties are home banking and on-line services. That's the theory. In oral arguments, Sporkin was taken by Reback's contention that Microsoft announced "vaporware," software in the early stages of development, in order to forestall competition. He repeatedly quizzed a testy Anne Bingaman, the Justice Department's antitrust chief, on the consent decree's failure to deal with vaporware. Sporkin: So, in other words, the message to Microsoft [is] continue with this practice? Is that the message you want the Justice Department to give? Bingaman: Your Honor, my statement to you is I'm the prosecutor. You're the judge. I decide what makes out a winning case, and if I don't want to file it, nobody can make me file it. . . . Your role is to accept or reject. Mine is to decide what to file. That's the reality. (Judge Harold Greene would certainly dispute Bingaman's view. His fingerprints are all over the Modification of Final Judgment that broke up the Bell system.) These exchanges made for enjoyable entertainment if not elucidation. "Take it easy. Let's not destroy the furniture," Sporkin told Bingaman after one of her numerous pleas. The proposed consent decree focuses on Microsoft's practice of forcing computer makers to pay royalties on machines that weren't installed with Microsoft software. Bingaman defended her exclusion of other strongarm tactics of Microsoft by saying "if I had a case today that I could file on those practices, I would file it." Likewise, Reback could bring a private antitrust case against vaporware. That's what Bell Atlantic Corp. and NYNEX did when they were dissatisfied with the proposed consent decree governing AT&T Corp.'s acquisition of McCaw Cellular Corp. The two companies arguably had more to fear from AT&T Corp. than do Reback's unnamed clients from Microsoft. Their suit was settled on the eve of trial. Their settlement went beyond the consent decree. Reback instead chose to try to enter these consent decree proceedings after the conclusion of the public comment period once it was apparent that Sporkin, always an iconoclast, would be receptive. Leaving aside the soundness of his economics and tactics, Reback is overly optimistic about Microsoft's ability to shape the future. He would be better off preparing his clients for when Microsoft inevitably falls from grace. Likewise, Sporkin is proof that a little knowledge is a dangerous thing. Much of what he knows about the software industry he learned from a single book, Hard Drive. As was said about the aging Willie Mays, Microsoft's future is behind it. A SHAKY FOUNDATION Microsoft's riches are built on the foundation of DOS, the operating-system software that sits between a computer's circuitry and the user. DOS became an industry standard in the early 1980s, due more to Bill Gates's business acumen than DOS's inherent strengths. After several missteps, Windows, which sits on top of DOS, also became an industry standard by the early 1990s. The Windows-built-on-DOS configuration is an inadequate operating environment for power users. It can't do two things at once well. It's unstable. It is forced to run on out-of-date hardware configurations. It is grossly inadequate for the future when computing merges with entertainment and communications. THE REAL DECREE Microsoft's future growth largely depends on making the transition to the day of telecomputing, when users can bank, shop, view movies, compute (and maybe even make whoopee) all from the same box. But for Microsoft to get from here to there it must scrap and cannibalize its past. Microsoft's willingness to make this move--a market-imposed decree of sorts--is far more important to its well being than the proposed consent decree, even if it is made tougher. Can Microsoft make that transition? The first clue is in how it manages the migration of users from Windows to the much-delayed operating system, first called Chicago, now labelled Windows 95. This transition will be a crisis, in the classical definition of a turning point that represents both danger and opportunity. There are numerous forces in the market and within Microsoft suggesting that the transition won't be smooth. IBM Corp.'s OS/2 and Apple Computer's System 7 operating systems are showing new signs of life. Impatient customers who are dissatisfied with Windows have at least two alternatives today to Microsoft's Windows 95 tomorrow. Most of what Windows 95 will offer tomorrow, such as Internet access and true multitasking, is available today in OS/2. Microsoft's challenge is to hold impatient customers and persuade contented customers that they should be itching to upgrade. Microsoft promises to make the upgrade painless. All existing Windows programs, for example, will run under Windows 95. But this promise could be Microsoft's undoing. By being faithful to its customers and their desires for compatibility, Microsoft is tying itself to the past and stripping Windows 95 of its technical prowess. Windows 95 won't be nearly as sophisticated in its internal workings as a built-from-scratch system. SOFT UNDERBELLY Rather than being the juggernaut portrayed by Reback, Microsoft's installed base of 120 million computers may be its soft underbelly, forcing the company into compromising design decisions. These decisions in turn undercut many of the compelling reasons to upgrade to a new operating system in the first place. Microsoft may be too much of a marketing powerhouse and have too tight a grip to mishandle the Windows 95 transition entirely. But sooner or later Microsoft must confront the reality that its past is not a prologue to the future. Tomorrow's Bill Gates is tinkering in her garage, designing something completely different, while Microsoft wants its customers to believe everything will be same as it always was. The proposed consent decree is largely irrelevant to how Microsoft steers into these headwinds. MICROSOFT ANTITRUST CONSENT DECREE (see 7/22/94 issue for additional listings) Client Firm Lawyers Microsoft Corp. Inhouse William Newkom, David Heiner Sullivan & Cromwell Richard Urowsky, Steven Holley Preston, Gates, James Weiss Ellis & Rouvelas Meeds IDEA Associates Inhouse Gautam Gupta, David Page Jacobovitz Law Firm Jeffrey Jacobovitz, Mark Rosenberg Computer & Gilbert, Segall John Chapman Communications and Young Industry Assn. Unnamed software Wilson, Sonsini, Gary Reback, Susan Creighton, companies Goodrich & Rosati David Killam, Neil Nathanson, Irwin Gross ----- cut here ----- Reback's Theory IS IT VOODOO ECONOMICS OR VISIONARY? Is Microsoft like a local phone company, with its clutches so deep into its customers that it can cross-subsidize operations? Or is the software giant more like a supplier of expensive, proprietary equipment (say, AT&T's cellular equipment manufacturing arm), which can take advantage of "locked-in" customers? Or is the operating system market a creature unto itself, with its own sets of dynamics? The answer, according to Gary Reback's brief attacking the proposed consent decree between the Justice Department and Microsoft, is yes. Microsoft's dominance is similar to traditional monopolistic scenarios but different from them too. Depending upon the page in his 96-page brief, one of these three alternatives is likely to emerge as the reason Microsoft must be stopped. Reback's brief argues that these economic arguments are "widely accepted as mainstream economic analysis." More precisely, they represent a composite of theories of differing levels of acceptance. In Reback's view, the business computing environment borrows many features of old-fashioned networks, like a telephone system. Microsoft, Reback argues, operates in an "increasing returns" business common in networks where the value of the network increases with the number of users. The comparison only goes so far in terms of economies of scale and interconnection, but there are similarities. Further, according to Reback, "costs to a consumer of using or switching to a different system are so high that the vendor with the installed base has a substantial advantage over competitors." This sounds like a lock-in relationship between supplier and captive customer. Advancing on that notion, Reback argues, "a company with a monopoly in one market [operating systems] that faces competition in a second market [applications] can use the locked-in installed base . . . to wipe out competition in the second market by 'tipping' the second market." This happens when Microsoft announces "vaporware" or when it gives a head's up to inhouse application developers and not their competitors about secret tricks of DOS and Windows, Reback claims. There is a heavy dose of fatalism to Reback's plea. He has written off the home banking and online markets as hopelessy controlled by Microsoft. This pessimism is at best premature. Microsoft has not even won antitrust approval to acquire Intuit, its vehicle into home banking, or started Marvel, a planned online service. Moreover, Reback predicts that Microsoft will sell 20 million copies of Windows 95, which so far has been the company's most notorious vaporware, in its first year. ****************************************************** * PLEASE KEEP THIS BOX ATTACHED TO NEWSLETTER * ****************************************************** Information Law Alert (ISSN-1068-8129) is published 20 times a year by Voorhees Reports, 411 First Street, Brooklyn, NY 11215-2507. Subscription rates: E-mail subscriptions are available for $195 a year. $550 a year for print newsletter. For information, call 718-369-0906 or 800-369-4840, or fax 718-369-3250. E-mail address: voorhees () interport net. On line: Information Law Alert is available electronically to subscribers of NewsNet (800-952-0122); Dialog (800-334-2564); and Dow Jones News Retrieval (800-522-3567). E-mail subscriptions are also available through Counsel Connect (800-952-0122) under the Resources section. Copyright 1995 Mark Voorhees. Unauthorized duplication prohibited by law. ************************************************************
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- a view on ms futures David Farber (Jan 28)