The View From Microsoft

When Bill Gates appeared on Martha Stewart Living last week, he seemed as wholesome as a tin of her homemade gingerbread cookies. He encouraged America's children to "dive in and use the computer, even if they feel like maybe the other kids are better." He talked about his two-year-old daughter who "gets a kick" out of the software she's using to learn the alphabet. And he was warmly supportive when Stewart confided that her 84-year-old mother is getting started on e-mail. "That's fantastic," Gates told Stewart, with genuine interest. "With a few hours you can get very comfortable."

The segment ended before Gates could help make scented candles, but Microsoft's point had been made. Gates' TV appearance was part of a two-pronged effort: a Microsoft p.r. campaign to counter those famously snarly Gates videotapes, and a courtroom defense, begun in earnest last week, to fight the antitrust charges against the company. At the center of both is Microsoft's peculiar vision of the computer world and its place in that realm. Microsoft sincerely sees itself as a force for good--bringing PC users technical innovation and consumer value--and far from being a powerful monopoly, feels threatened on all sides. It's a radically different view from the government's, and the outcome of the antitrust suit may turn on whether Microsoft can persuade the courts to see the world as it does.

How can Microsoft say it's not a monopoly when its software operates 9 out of 10 of the world's PCs? Because it considers nearly every high-tech company--including behemoths like Intel, Sun Microsystems, Oracle and AT&T--to; be a direct rival. The company has become increasingly concerned about the breakneck speed at which those companies are forming alliances. America Online is buying Netscape, At Home is buying Excite, Lucent is acquiring Ascend Communications--all deals worked out since the start of the antitrust trial. "This is a yeasty industry," says Microsoft general counsel William Neukom. "It's important to realize how fast things move." Of course, none of the deals is focused on operating-system software, so none poses a direct threat to the dominance of Windows. But that doesn't stop Microsoft from worrying.

Microsoft is also flummoxed by the government's claim that its allegedly monopolistic practices have hurt consumers. Microsoft argues, with some justification, that PC software has been rapidly improving and continues to do so. As for price, Microsoft's lead witness, economist Richard Schmalensee, testified last week that if it were a monopoly, Microsoft would charge at least 16 times as much for Windows as it actually does. Microsoft makes much of the fact that the government's economist, Franklin Fisher, testified that consumers weren't being hurt by Microsoft's actions in the Internet-browser market. Of course, Fisher also said he believed there will be harm--just that it hasn't happened yet.

Microsoft also contends that the government's factual case--those e-mails about dividing up the Internet-browser market, the deals that reward companies for using Microsoft's browser--is based on a fundamental misunderstanding about how the computer industry works. When the company leans hard on rivals, it says, it's playing typical high-tech hardball. Oracle, Intel or Apple, Microsoft insists, would do no differently. And meetings that look collusive to lawyers in Washington are required in an industry where rival products must fit together. "There have to be some standards," says Neukom. "That means collaboration, that means cooperation."

Microsoft's most intriguing argument is that the industry model it dominates--PCs that run on their own operating-system software--is in peril. "When you think of competition, you have to get out of the mind-set that this is a PC-centered world," says Neukom. In the near future, Microsoft argues, computers may run on free, open-source software, or may use the Internet as a platform for running applications like word processing and e-mail, making Windows obsolete. In Microsoft's view, its dominant market position is just one paradigm shift away from being undone.

Tech experts debate hotly how likely this is to happen, and how soon. Legal experts add that it may be a hard argument to make at trial. "It's difficult because it relies on getting the court to look over the horizon and take seriously events that haven't happened yet," says George Washington University law professor William Kovacic.

It may also seem strange to hear the world's most successful company predict its own demise. But it's a familiar story on Wall Street, where Microsoft is famous for telling analysts that the future looks bleak and then acting surprised when its profits go up. Sure enough, when Microsoft announced its quarterly results last week, it revealed that its income had jumped 75%, handily beating expectations and sending its stock soaring. Investors learned long ago to discount Microsoft's predictions that the sky is falling. Microsoft's challenge is to convince the courts that now it really is.