Can Gates Monopolize Innovation?

Sand Hill Road is one of Silicon Valley's most prestigious addresses. Framed by hills carpeted with spring grass, the venture-capital firms that call this address home make it their job to spot innovation in technology and reward it.

Peter Nieh is one of the ones with binoculars. Scanning the valley for start-up businesses that are ready for the big time, he weighs many factors before committing money. One consideration that can kill an investment outright: "Is Microsoft going to get into this [field]?"

The presence of Bill Gates's Microsoft has always been felt here, even though it's based in Seattle. Wielding enormous power, Microsoft can make partners rich and competitors obsolete.

The software giant's clout in Silicon Valley and the technology sector as a whole is at issue in the landmark antitrust case begun this week, pitting Microsoft against the Justice Department and 20 states. And the key concern, experts agree, is innovation and whether it will continue to flourish. What they can't agree on is what scenario - a Justice or Microsoft victory - best perpetuates the ingenuity that has been the lifeblood of the emerging Information Age.

There is agreement that the technology sector is so big and changing so rapidly that innovation is unlikely to be killed under almost any imaginable scenario. What is more likely, experts say, is a change of pace or direction in the industry's expansion, though predicting that course is nearly impossible today.

"Innovation is the core issue in this case. It's all about the future," says Robert Litan, an economist with the Brookings Institution and a former Justice Department official. "Whatever the outcome, experts will argue for decades about whether innovation was helped or hurt."

Microsoft and the Internet

Microsoft has been integrating products into its operating system for a decade. But the current dominance of its Windows operating system, which runs 90 percent of the country's personal computers, and the firm's more recent bundling of its Internet browser with Windows, has triggered the high-stakes legal battle. The Justice Department wants Microsoft to either decouple its browser program from Windows or include with it the main competing browser, Netscape.

The government's central argument is that tying a product with a near-monopoly position to another one is unfair and anticompetitive. Microsoft critics also say the bundling of its Internet browser with its operating system threatens to give it a choke hold over broader aspects of the burgeoning world of the Internet.

Microsoft insists integrating its browser into Windows is an efficient and consumer-friendly innovation, creating a better product that the government has no business trying to undo.

Whatever the case's outcome, there is consensus that innovation is a big part of what has made the technology sector special - not only in that it is transforming modern-day life, but also that it is doing so less expensively. The cost of computing power is declining by about 30 percent per year, according to economist Ken Flamm of Brookings. Intense competition is a major factor. So is the fact that it's an industry where key materials - like new ideas and the cyberspace to deploy them - are virtually limitless.

Full of ideas

For now, the technology sector is brimming with new ideas. Venture capital companies pumped $9 million a day into Silicon Valley enterprises during the first three months of 1998, according to a survey by Price Waterhouse and the San Jose Mercury News. "The pace is at a near-record level and the hottest areas are Internet-related technologies, software in general, and the life sciences," says Marshall Mohr of Price Waterhouse.

One of the biggest winners this year was Unwired Planet of Redwood Shores, Calif. The two-year-old software firm wants to bring the Internet to cell phones. Mr. Nieh's firm smelled promise and earlier this year plunked down $33 million.

"The ability to hatch a good idea and run with it is alive and well here in Silicon Valley," says Greg Heumann, Unwired Planet's director of marketing.

Seth Neiman, an entrepreneur in the valley for nearly 20 years now with Crosspoint Venture Partners, says, "In areas where there are pressures to find better answers, the pace of innovation is greater than ever."

But if the opportunities are great, so too is Microsoft's influence. It can influence decisions it isn't even aware of. For many investors, a company on the road that Microsoft may travel is less attractive. Some start-ups that catch Microsoft's eye are made rich by a partnership. In other cases, they're made obsolete when Microsoft adapts their technology and gives it away for free.

Microsoft did that with its browser, offering it as part of the operating system for no additional charge. Rival Netscape, based here in Silicon Valley, was forced to stop charging for its software.

"There are zillions of start-ups, that's true," says Chris Le Tocq, an analyst with Dataquest Inc. "But the latest example of a small start-up and what happens when you get big is Netscape."

Whether Netscape turns out to be Microsoft's Waterloo remains to be seen. Mr. Litan of Brookings, who helped forge the Justice Department's original consent decree with Microsoft, is betting that the court case will be settled before it reaches a final verdict.

Meanwhile, Microsoft and its rivals will continue their loud public-relations campaigns and Silicon Valley will watch the battle knowing much is in the balance. But then, watching Microsoft is an established part of doing business here. As Unwired Planet's Mr. Heumann puts it: "If you're not worried about Microsoft, you're not doing your job."