Friend, foe, or both? Microsoft case highlights 'coopetition'

Somewhere, a scriptwriter must be taking notes for a new soap opera from the raw material unfolding at the antitrust trial of Microsoft.

Or maybe "Dallas" and "Knots Landing" have already done the story: Partners are lovey dovey at one moment, carving each other up the next.

Either way, the Microsoft trial, now in its sixth week, vividly depicts how America's newest industry is not only the mother of inventions, but also of some new rules of conduct not found in other, older industries. And in that difference lies one explanation for its dizzying pace of new products and innovation.

In the technology field, friend and foe are often the same. Alliances among competitors are common, and relationships can rapidly swing between extremes.

"Different companies with different skills come together for a specific purpose. Meanwhile, they're ruthlessly competing on other levels," says W. Brian Arthur, an economist with the Santa Fe Institute.

That's been demonstrated amply at the trial.

A prime example is the relationship between Microsoft and Intel. The two so dominate their complementary technology spheres - Microsoft in operating systems and Intel in microprocessors - that they're often called Wintel. Yet despite that close alliance, which strives to keep products compatible and the personal-computer market growing, the trial has exposed a major blowup between the companies - in 1995 when Intel threatened to compete in Microsoft's software field. Intel eventually backed down.

Cooperation also turned into conflict between Microsoft and Apple Computer and AOL, according to evidence at the trial.

And last week, a judge ruled against Microsoft in a separate case brought by Sun Microsystems Inc. that concerned a relationship that was briefly cooperative but turned nasty. Microsoft had licensed the use of Sun's Java programming language, but Sun sued in 1997, charging that Microsoft was using the product improperly to, in effect, sabotage its potential as a longer-term threat to Microsoft.

Some experts have coined the phrase "coopetition" or "coopertition" to describe this pattern of behavior among technology firms. Barry Nalebuff, a Yale business professor and co-author of the book "Co-opetition," describes the phenomenon this way: "It's cooperating to create value and then competing to divide it." That, says, Mr. Nalebuff, can be constructive when firms recognize that by cooperating they are "expanding the pie" and then competing for their portion of the expanded pie. Of course, it can work the other way, too, when competition overwhelms an opportunity to expand a market.

"Coopetition" is a practice born of necessity in the technology field, say experts. And while cooperation between competing companies is not exclusive to the technology sector, it is done to an extraordinary degree.

"There are few other industries where the underlying standards are controlled as intellectual property by others," says Michael Borrus, associate director of the Berkeley Roundtable on the International Economy. Underlying standards means everything from operating-system standards of Microsoft's Windows to the architecture of Intel's microprocessors to cell-phone standards.

Also driving these unusual relationships is the sheer speed of developments in the industry, which puts a premium on acquiring skills to capitalize on emerging markets rapidly. There just isn't time, in many cases, to develop the knowledge in-house, say analysts, so companies look around for partners that can provide complementary skills.

The result is lots of innovation by smaller players, which usually means a steady stream of new products for consumers.

The prevalence of such blurry lines between competitors and allies doesn't suggest that anything goes. The government's argument with Microsoft is that it has a monopoly in operating systems and that it unfairly leveraged that position to crush a competitor, Netscape Communications Corp., in the market for Internet "browsers." And that charge hinges more on an evaluation of Microsoft's power and how it was used than on the fact that Microsoft had lots of complicated relationships with other companies.

Still, while Microsoft has steadily refuted the charges that is has behaved illegally, its broader argument is that the government's case shows it just doesn't understand how the technology industry works.

Indeed, as if to show that disagreement and conflict are not signs of antitrust behavior but just part of doing business, Microsoft issued a statement shortly after Apple accused it in court of trying to squelch its multimedia-software product for the Windows operating system. Microsoft said the two companies "continue to be great partners after more than 17 years of both competing and cooperating in the software industry."