Computing Applications Technology strategy and management

More Lawyers Than Programmers?

Microsoft must alter its strategy to avoid an increasingly litigious future.
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The time has come for Microsoft to stop emphasizing its so-called right to innovate and add whatever features or programs it wants to the Windows operating system, and perhaps to Office as well. For Windows at least, it should design a scaled-down, vanilla version that is cheaper and better—as impervious to crashing and security attacks as Linux and Unix, and priced low enough to make it more attractive for users in developing countries to buy rather than pirate. Microsoft should then sell other programs or applications such as Internet Explorer or Media Player separately and price versions of Windows with these bundled features differently.

I have come to this conclusion after thinking a lot recently about Microsoft’s current plight and future prospects. Apart from ongoing legal problems in the U.S. and Europe over antitrust violations, another major concern among the business press and investment community has appeared: Microsoft may no longer be a "growth machine." The most popular computing device sold today is a cell phone, and Microsoft has a minuscule share in the software for these devices. Video game machines are also very popular, and Microsoft’s Xbox has failed to unseat the leaders in this field, Sony and Nintendo. In addition, sales of personal computers have stagnated, and so has Microsoft’s revenue growth, especially to individual users. Sales to enterprises are actually rather strong for Microsoft. But the problem of how to maintain high levels of growth is a huge issue now for what has become a huge company—with expected sales for fiscal 2004 of approximately $36 billion. Gates, Ballmer, and company have been plowing billions of dollars into R&D for years in the desperate search for new growth markets, with little to show for their efforts. Microsoft still makes approximately 80% of its revenues and all of its profits from Windows and Office.

But Microsoft as just another slow-growing but profitable behemoth is not the future that the company should be most worried about. If Microsoft does not change its approach to product development, marketing, and competition more generally, it is likely that someday the company will have more lawyers than programmers. Or, at least, Microsoft will someday spend more money on legal battles than on product development and research. Because it owns two ubiquitous desktop computing platforms that both qualify as monopoly products—Windows and Office—Microsoft continues to be in a critical position to bring useful innovations to consumers and to integrate a growing variety of important technologies, especially those bridging computing, communications, digital media, and entertainment. But it is also the increasing target of competitors and governments. If Microsoft becomes any more distracted by legal battles, then it will have even less resources—less time and attention, and money—to devote to improving the products and technologies it offers to hundreds of millions of users around the world.

Insisting on an unimpeded right to innovate despite a monopoly position is not practical and has been found to be illegal in some instances.

For example, the March 2004 decision of the European Union’s chief antitrust enforcer, Mario Monti, has two major requirements. One is for Microsoft to release more information on its programming interfaces so that servers and other products made by competitors will work as well with Windows as Microsoft’s own products. This should be good for competitors as well as consumers. The other more controversial requirement is for Microsoft to release a version of Windows without its own media player. This is clearly good news for RealNetworks, which has the second-most popular media player and was a pioneer in this market. Apple also has a strong offering with its Quicktime application. The European decision, then, could be good for consumers, depending on whether PC manufacturers or individual users bundle or download a media player that works as well or better than Microsoft’s Media Player.

But Microsoft executives have vowed not to accept the European ruling. They will appeal and continue to fight for the right to innovate. The appellate process in Europe could take five years. Microsoft has already gone through nearly 10 years of investigations, settlements, and court trials in the U.S. over similar issues, particularly but not exclusively with its Internet browser. We all remember how Microsoft helped destroy the business of Netscape by bundling that company’s main product—the Navigator browser—with Windows. Now Microsoft is bundling Media Player at no extra cost to consumers, and RealNetworks is suing for damages.

Microsoft also includes dozens of other small applications in Windows that, at one time or another, a myriad of companies sold as separate products: all of the basic communications functions as well as programs for file management, faxes, screen savers, data compression, calculators, simple word processing, systems analysis, games, drawing, and on and on. How many companies has Microsoft put out of business through this kind of bundling? I don’t think anyone has an accurate count. But it must be dozens, if not hundreds. How many would-be startups never get started or never get venture funding because of how Microsoft bundles programs and features into new versions of Windows? It must be hundreds, if not thousands.

Microsoft representatives have made the argument that bundling so many functions and features into Windows for low prices is good for consumers. Critics have claimed that Microsoft’s approach squashes innovation from startups like Netscape and RealNetworks or established firms like Lotus, Novell, and Apple. Now, there are some functions that, I think, most users would love to see included with Windows and Office, for free—such as to prevent applications from crashing, or to help detect computer viruses before they do damage to our machines, or to filter out the enormous volume of spam email that increasingly clogs our inboxes.

But the probable outcome of the European ruling and Microsoft’s stance is not likely to be good for anyone. We could very well have a scenario where dozens or hundreds of software companies perceive their actual or potential businesses are threatened by some new feature that Microsoft incorporates into Windows or Office, or applications (such as for small businesses) that Microsoft finds ways of tying to Windows or Office. And every government around the world that does not like Microsoft’s market power might decide to jump onto the bandwagon and also challenge Microsoft’s efforts to add features to its existing products.

Microsoft has already made the idea of litigation very attractive for both its competitors and regulators. The European Union just earned $603 million from Microsoft in fines. This comes on top of Microsoft’s recent payments of $1.95 billion to Sun Microsystems for violations of the Java license, $445 million to Intertrust for violating patents on digital rights management software, and $750 million to AOL Time Warner last year for harming Netscape’s business. The company’s strategy is to avoid more litigation, but it is also possible that Microsoft has simply set the stage to encourage more legal challenges. As I noted in my last column (March 2004), there are also court suits appearing that want to hold Microsoft and other software companies more financially liable for bugs and security flaws. What a financial bonanza this could be!

Of course, Microsoft has been found guilty of violating antitrust laws, and it ships buggy products. The company’s victims deserve compensation. Potentially, though, Microsoft will have to respond with lawyers and money to settle an unending stream of public and private lawsuits. Microsoft will become a regulated monopoly that fights its regulation every step of the way. Many critics and perhaps many users would like to see Microsoft regulated and humbled, and the playing field leveled. But they fail to consider the potential negatives. Consumers could very well get less technology for their dollar, though innovation levels may increase. And governments and courts are not likely to be very good at governing a high-tech industry; they will likely turn it into a low-tech industry, with judges and committees making uninformed technical decisions that become obsolete the minute they get published. And every company that emerges with a dominant market share (70% or more) will become subject to the same sort of legal challenges and government regulation that Microsoft will have to endure.

Again, my solution is for Microsoft to change its strategy to avoid a future of lawyers and litigation. I can sympathize with the complaints of Bill Gates and Steve Ballmer that the company has to protect its right to "innovate." But, the law in most advanced economies requires companies with monopoly market shares to play by different rules. Insisting on an unimpeded right to innovate despite a monopoly position is not practical and has been found to be illegal in some instances. At the same time, I believe Microsoft has the programming skills in-house to compete head-to-head with any other software company and open source programmers. It also has the money to learn from trial and error many times over. The time has come to let the market, rather than the courts, decide on the future of Microsoft.

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