Is Microsoft Playing Fair?

A developing battle of titans between Microsoft Corp. and the United States government may hinge on a simple question: How tough is the software business, really?

Microsoft chairman Bill Gates believes the selling of bits and bytes is a uniquely precarious enterprise. The pace of progress in computing means that today's premium product could be tomorrow's remainderware, according to the boyish demigod of programmers.

Corporate size may be no protection. Mr. Gates told a Senate panel this week that the basements of the nation are full of youngsters with big hard drives, big ideas, and a dream of knocking off the big boys, as he himself once humbled mighty IBM.

But a number of lawmakers and government antitrust lawyers think Gates overstates his case. They believe that Microsoft's dominance of an important corner of the software market, PC operating systems, is in no danger of melting like winter snow - and thus constitutes a monopoly as secure as any railroad or oil franchise from the Gilded Age.

Such a monopoly, by itself, would not be illegal. But it is against the law for firms to use a monopolistic position to crush competitors. That's what Microsoft competitors claim it is doing.

Thus the Justice Department is now weighing whether to bring a broad antitrust suit against the software giant. At stake may be the cost and features of basic building blocks of today's information economy, as well as the future course of one of the great business success stories of any age.

"The question of what to do about Microsoft is going to be a central public policy issue for the next 20 years," said Sen. Orrin Hatch (R) Utah this week, paraphrasing an executive from a rival firm.

If so, this week's appearance by Gates and a number of other captains of high-tech industry before the Senate Judiciary Committee may mark a turning point in the Washington-Microsoft relationship. It was one of the first times that lawmakers have grappled publicly with the nature of competition in the software industry, and the antitrust implications of that behavior, if any.

Not that Gates and such allies as Michael Dell, chief of Dell Computer, say this grappling is necessary. They say the software industry is different - and not just because it has more money.

The conundrum of software is that one giant firm dominates large sections of the market, yet prices for almost all types of programs are falling rapidly and new products are flooding the market.

Not only is it virtually impossible to be a monopoly in this dynamic environment, some experts say, but the old anticompetitive measures don't even apply.

The framework of antitrust law was designed a century ago, when price and service were the criteria for consumer benefit. But in software, indeed in many high-tech industries, the basic coin for consumers is innovation, says Luke Froeb, an assistant professor of management at Vanderbilt University in Nashville, Tenn.

"Innovation" in this sense means new products such as World Wide Web browsers, and new features such as improved program graphics or speed.

"Antitrust laws are not well-suited to preventing or restoring anticompetitive effects in these kinds of markets," says Froeb.

Microsoft competes against not only today's other software firms, but the future itself, says Froeb. A looming generation of software, as yet unknown, might doom its popular Windows PC operating system, for instance., as Windows itself made its DOS predecessor obsolete at a stroke.

That's what Gates means when he says that a monopoly just can't exist in software: "In the span of a term of a senator, we create a product, it becomes a very popular product, and then that product has no demand whatsoever."

But Washington - the Silicon Valley of lawyers - is replete with analysts who think the Microsoft billionaire is acting as if his firm is above the law.

The issue, they say, is not just the future of software, but Microsoft's business behavior today. By this prosaic measure the firm is using monopolistic powers in an anticompetitive way, they argue. Absent such actions the price of software might be even lower; innovation even faster.

"There is not a blanket exemption in the antitrust law that says if you are an innovative company you can do whatever you want to your competitors," says Steven Salop, a law professor at Georgetown University here.

Last fall, the Justice Department filed suit against Microsoft over its tactics in distributing its Explorer Internet browsing software. The European Commission and 11 state attorneys general are also investigating the software giant. Competitors worry that Gates will use his dominant position in operating systems to control the gateway to, and even some of the content of, the vast World Wide Web of the future.

Now Justice lawyers are considering whether to bring a broader suit against the firm that would accuse it of violating the antimonopoly provisions of the Sherman Act. Such a move would mark a profound change in the government's attitude towards the firm, and would be as large, complicated, and expensive as the government's long antitrust struggles against IBM and AT&T.

AGAINST this context the March 3 Senate hearing produced several interesting disclosures.

Gates said he does restrict the ability of some of his Internet partners to deal with Microsoft rivals. Consider a firm that provides dial-tone access to the Internet, and has a contract for its phone number to be included in Microsoft browsing software. The terms of its contract might preclude it from dealing with Netscape, a browser alternative.

Similarly, Mr. Dell of Dell Computer denied that his deal with Microsoft precluded offering consumers pre-loaded Netscape products. But Senator Hatch said that Dell service representatives called by his office had told Senate investigators otherwise.

Such actions might constitute improper use of monopoly power. "They are now a monopoly and they will have to learn to live by the rules that govern monopolies," Hatch said of Microsoft officials after the hearing.