Good morning, Senators. It’s an honor to be invited to speak with you today, and I commend you for recognizing the significance of this issue to our country. I and many others have become increasingly concerned that Microsoft’s abuse of its monopoly power, unless addressed through enforcement of our antitrust laws, will adversely affect the course of American commerce and communications in the Information Age.
I would like to touch briefly on a variety of points in this testimony, beginning with Microsoft’s monopoly in operating system software.
Microsoft controls approximately 90% of the personal computer (PC) desktops in the world through its monopoly in PC operating-system software. Because virtually all the PC manufacturers must use Microsoft as the sole supplier of this vital PC component, the success of their businesses depends to a great extent on their maintaining good relations with Microsoft. The PC manufacturers’ dependency on Microsoft is key to understanding the state of personal computing today. It helps to explain why Microsoft has played such a large role in determining what software functionality can be offered on the desktop computers Americans buy.
Microsoft makes no bones about its leverage over the PC manufacturers. Indeed, in connection with the DOJ’s recent investigations of Microsoft, Microsoft stated that it has the unfettered right to extend its operating-system monopoly as it alone sees fit -- including by adding “a ham sandwich” or “orange juice” to the operating system -- and to require the PC manufacturers to distribute the resulting package. (See Reply Brief of Petitioner United States of America, United States of America v. Microsoft Corporation, November 21, 1997, at p. 5.) This sort of unlimited extension of the operating-system, in an era of digital commerce and communications, can affect such key areas of our economy as banking, news, and advertising, because these and other services are increasingly provided to consumers in the form of software.
II. Monopolists are Not Above the Law
We certainly agree that Microsoft has made a positive contribution to our economy, and we applaud Bill Gates for having the foresight to understand before others did that the personal computer would play an important role in how we work and play. But Mr. Gates’ foresight and enterprising manner do not now entitle Microsoft to take actions that are above the law. Under this country’s antitrust laws, a monopolist may not abuse its monopoly power and foreclose competitors from moving into their rightful places in our economy by virtue of the competitors’ own creative ideas and business acumen. Such laws are intended to protect American consumers, who demand a choice of goods and services and markets that grow and are refreshed through innovation. I wholeheartedly endorse the notion that if someone builds a better mousetrap that allows them to monopolize the mousetrap market, so be it. But obtaining a mousetrap monopoly does not then give someone the right to dictate what kind of cheese people have to buy.
III. Abuse of Monopoly Power.
Microsoft has recently published some lofty statements about how it is acting in the interest of consumers and fostering innovation. My company has seen the other side of Microsoft – the side that has done everything it could to try to knock us out of the marketplace. Some of the actions it took we believe violate the antitrust laws.
Why did Microsoft target Netscape for such muscling? Netscape’s browser posed a competitive threat to Microsoft’s operating-system monopoly because it could provide some of the same functionality as the operating system. Before the browser existed, the computer user always saw Microsoft’s Windows software on the computer screen, and software developers needed to write applications that would run on the Windows system. After the browser came along, however, some computer users began to work off a browser screen because the browser sat on top of the operating system, and software applications could now be written to run on the browser. In other words, the browser, with its powerful access to the rich content of the Web, could sit on top of Windows and make Windows less important. The use of the browser as a substitute for Windows represented an important shift in computing. I’m proud to say that this shift was largely brought about through the innovative efforts of one of Netscape’s co-founders, Marc Andreessen, who is credited with inventing the browser.
When Netscape was formed in April 1994, Microsoft was busy trying to get Windows 95 out the door, and so it was slow to see the shift in computing that was taking place through the browser and the Internet. By December of 1995, however, Microsoft was aware of the threat Netscape posed to its monopoly and determined to “embrace and extend” the Internet. Microsoft wanted to make sure that it controlled the Internet and not vice versa. As a result, it set about to thwart Netscape, and blunt the popularity of our browser, in every possible way, including through the kinds of coercive actions with PC manufacturers that have been made public in the DOJ’s consent-decree case, as well as through exclusionary contracts with Internet service providers (ISPs) and Internet content providers, through interference in our relationships with customers and prospects, and through some deliberately designed product incompatibilities. Press reports indicate Microsoft’s exclusionary contracts with ISPs were recently challenged by the antitrust authorities of the European Union.
It appears Microsoft’s ultimate goal in its acts was not just to market competitive Internet products but to put Netscape out of business. As Bill Gates said in a June 10, 1996 interview with London’s Financial Times, “Our business model works even if all Internet software is free. We are still selling operating systems. What does Netscape’s business model look like (if that happens)? Not very good.” This theme was later echoed in a January 27, 1997 Forbes interview with Microsoft’s Steve Ballmer, who explained to the reporter that “We’re giving away a pretty good browser as part of the operating system. How long can [Netscape] survive selling it?” From these quotes, one can conclude that Microsoft determined to exploit its operating system monopoly, and its monopoly profits, to destroy a competitor and its popular products -- hardly an act that can be said to be good for innovation or for consumers.
A recently publicized December 1996 email from Jim Allchin to Paul Maritz, both senior product executives at Microsoft, also indicates that, in lieu of innovating as a means to compete with us, Microsoft determined to copy everything Netscape did and then to tie the Microsoft browser ever more closely to its dominant operating system, not because this would be good for consumers or would foster innovation but in order to make sure the Microsoft browser received favored distribution. As Mr. Allchin stated: “I don’t understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product wise…. My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform [is] losing our biggest advantage – Windows marketshare. We should dedicate a cross group team to come up with ways to leverage Windows technically more…. We should think first about an integrated solution – that is our strength.” (See Reply Brief of Petitioner United States of America, United States of America v. Microsoft Corporation, November 21, 1997, at pp. 12-13.)
Lest my recitation of these Microsoft acts and statements be taken for “whining,” let me make clear here that, as I have stated loudly and consistently for the four years of my company’s existence, we at Netscape savor a clean fight in the marketplace, and have no qualms (or illusions) about going up against companies that are older and have greater resources than ours. We are a highly innovative and nimble group of people who like to compete. All we ask is that the fight be conducted in accordance with the basic rules of competition as reflected in our country’s long-standing antitrust laws. This is not just for Netscape’s sake but for the sake of the software industry in general and, even more importantly, for the sake of the American public, for whom software is playing an increasingly vital role.
IV. The Threat to Consumers’ Right to Choose.
Microsoft has stated that it integrates more and more software into its Windows operating system because that is what its customers want. At least when it comes to browsers, however, the statistics indicate otherwise. Earlier this month, reporting on the results of a survey of 200 information technology managers, Information Week stated that “Contrary to Microsoft Chairman and CEO Bill Gates’ assertions that customers want his company to integrate the Internet Explorer Web browser into the Windows operating systems, Information Week research found that 34 percent of corporate information technology (IT) managers want the browser to remain separate,” while only 28% of the respondents said they wanted to see the browser integrated with the operating system, and the rest of the respondents expressed no opinion. (See http://biz.yahoo.com/ bw/980209/cmp_media_4.html)
Similarly, when Fortune conducted a recent poll of online households and asked whether Microsoft’s integration of IE and Windows was “good” or “bad,” 35.5% of the respondents said that such integration was “bad.” (41.8% said it was good.) (See http://www.pathfinder.com/fortune/1998/980202/onlinepoll.html)
Microsoft has vigorously resisted offering computer manufacturers the option of buying Windows 95 without the Microsoft browser. Moreover, it has repeatedly said that when it produces Windows 98, the computer user will not be able to remove the Microsoft browser from the operating system. Given Microsoft’s dominance of operating system software, where, then, is a consumer to go for updated operating system functionality that does not force the consumer to also take the Microsoft browser? This is a serious concern for those millions of consumers who do not want Microsoft’s browser.
Microsoft frequently analogizes its operating system software to cars. As its spokespeople explain, just as cars have the windshield wipers and radios integrated, Windows now has various software features integrated, including Internet functionality. But Microsoft fails to complete the analogy. With cars, American consumers have many, many choices; we can buy Fords, Chevys, Oldsmobiles, Toyotas, Hondas, Mercedes, and so on, each of which has a different set of integrated features. And we also can buy those cars with certain features included or not included. We do not have that choice with Windows. The integrated Windows operating system, as updated by Microsoft from time to time, essentially comes in one version, whether the consumer likes it or not.
This issue of choice becomes all the more important when you add Internet software to the mix. Going back to the car analogy, one could say that bundling Internet access into the operating system is akin to bundling the highway itself into the car. If Microsoft is permitted to abuse its monopoly power to “embrace and extend” the Internet into Windows, we can predict that ultimately over 90% of computer users would be directed to the same places on the Internet – that is, to those Websites where Microsoft’s dominant operating system software automatically takes them.
The worry that this will occur is one reason companies in the news, travel, banking, and other businesses, as well as consumer groups, have begun to protest Microsoft’s practices in the Internet software space. They are concerned that if Microsoft is successful in its plans to dominate the Internet space as it has dominated the operating system space, then providers and purchasers of goods and services on the Internet will be subject to the requirements and whims of a single source supplier of Internet software access, much like computer manufacturers now must deal with a single-source supplier of operating systems. In a June 1997 article entitled “Microsoft Moves to Rule On-Line Sales,” the Wall Street Journal reported that “Nathan Myrhvold, Microsoft’s chief technology officer, confirms that Microsoft hopes to get a ‘vig,’ or vigorish, on every transaction over the Internet that uses Microsoft’s technology, though he says in some cases Microsoft’s share could come from a one-time software licensing fee. (Vigorish is a slang term used by bookmakers that means, roughly, the profit made for bringing bettors together.)” This is all the more worrisome for providers of goods and services that compete with Microsoft’s new online businesses in national and local news (MSNBC and Sidewalk), travel (Expedia), advertising (CarPoint for cars and Boardwalk for real estate), and financial services (Microsoft Investor). Microsoft has already begun to bundle its own online services with its monopoly operating system, giving these services extraordinary advantages over the services of its online competitors.
The right to choose among goods and services is one that Americans hold very dear. As we are seeing in the browser space, that right is under attack through abuse of Microsoft’s monopoly. As more commerce and communications move to the Internet and are provided by means of software, this threat to our right to choose becomes all the greater if Microsoft’s appetite to use its monopoly power to control ever more of the software arena is not curtailed by judicious enforcement of our antitrust laws.
V. The Threat to Innovation.
Microsoft has asserted concern that the government’s law-enforcement actions against it threaten its ability to innovate. This strikes many in the software industry as ironic, coming from a company which not only has frequently copied the successful products and practices of other companies (see the Allchin email referred to above) but whose actions often limit or cut off altogether the innovative efforts of other software companies. A recent Doonesbury cartoon, which is attached to this testimony, incisively makes the point. When Alex tells Uncle Bernie that her goal is to found the next Microsoft, Uncle Bernie answers that she won’t be able to do that because “Microsoft is in the business of preventing that from happening.” Instead, he explains, her new dream should be to invent a new technology “that changes everything… Then, with a little luck, you might start a company so promising that it’ll quickly be taken over and dismantled by Microsoft.”
As quoted in a January 8, 1998 article distributed by Bloomberg News, Bob Herbold, Microsoft’s chief operating officer, put it more bluntly when he was asked how small software companies could compete on products that Microsoft might integrate into its operating system. According to the article, “Herbold said smaller rivals had three possible paths: They could fight a losing battle, they could produce a successful product and then sell to Microsoft or another large company, or they could ‘not go into business to begin with because, hey, if you’re a betting person, you know which way it’s going to go.’” So much for innovation if you are anyone other than Microsoft.
Microsoft often refers to the competitiveness of “the personal computing industry.” This wording requires closer analysis. To be sure, there is vigorous competition among manufacturers of PC hardware. There are several large computer manufacturers, and they compete aggressively on price and features. In fact, even as features have been added to computers, the competition among the manufacturers has brought the prices steadily downward.
But when you look at software companies, the statistics tell a different story. There are thousands of software companies, but the overwhelming majority of these companies are very small shops. Even when you focus on the bigger companies, you immediately see a distortion in the industry. If, for example, you rank public software companies in terms of size and look at the top 20 companies, you discover that Microsoft’s market value constitutes an extraordinary 57% of the combined total market values of the 20 companies. At over $12 billion, Microsoft’s annualized revenues also far exceed the revenues of any of the other companies on the list. Microsoft’s revenues are approximately double those of the next largest software company.
Moreover, with respect to software pricing, in contrast with hardware pricing where prices have fallen even as functionality has been added, it is our understanding that the price of the operating system software to computer manufacturers has in fact increased over time. (See, e.g., http://www.techweb.com/se/techsearch.cgi?action =View&VdkVgwKey=%2E%2E%2F%2E%2E%2Fda, in which a PC manager is quoted as saying that “the price of the operating system to OEMs has crept up by a factor of five from what we used to pay for DOS to what we now pay for Windows 95”) Microsoft has said that it represents less than 5% of total software industry revenues, but even the editorial board of the Seattle Times, after reciting that “Microsoft now controls more than 91% of personal computers, counting its dependent client, feeble Apple Computer,” called for a “reality check.” As the Board wrote, “Rather than acknowledge its clout, [Microsoft] has portrayed itself as a Joey Cora in a big-shouldered industry. A company executive recently called Windows a ‘narrow niche’ product, just 4 percent of total software revenue. Well, here’s a reality check: Walk into a personal computer store and ask for the machine that doesn’t rely on Microsoft software.” (Seattle Times Editorial, Sunday, February 15, 1998)
Microsoft also claims that the government should leave it alone because competition in the software industry is such that it could lose its market dominance at any time. This claim, too, strikes many in the software industry as ironic, coming from a company many believe to be engaging in anticompetitive acts against other companies. Surely a monopolist’s worries about competition and loss of market dominance, whether real or perceived, cannot excuse abuse of monopoly, or preclude law-enforcement authorities from taking appropriate action to stop unlawful behavior. All of us who are in business worry about the competition. That’s a healthy part of a capitalist economic system.
As Business Week put it in its January 19, 1998 issue, “if ever there was a company that has the best seat in the house, it’s Microsoft.” After describing Microsoft’s dominant share in the Windows market, and its 87% “lock” in the Office suite market, Business Week noted that in calendar year 1996, Microsoft’s “$3.1 billion in operating profits was a remarkable 30% of all such profits” for the 613 publicly traded software and information-services companies, allowing Microsoft to spend “a staggering $2.5 billion a year on new-product development – more than the annual profits of the next 10 largest software companies combined.” The article noted that, in the past two years, Microsoft invested in or acquired 37 companies and was beginning to move into many new businesses, including WebTV, online services, software for cars and cellular phones, and powerful server computers to replace mainframes.
No one disputes Microsoft’s right to move into new areas, provided it’s done without abusing its monopoly power or otherwise in contravention of the laws. As long as software developers have assurance that their products will continue to work well with Microsoft’s monopoly products and that their markets won’t be captured by Microsoft once they become profitable, they will innovate. But if, as Bob Herbold and Doonesbury indicate, it is ever more the case that the ultimate course for someone starting in the software business is to lose everything or be forced to sell out to Microsoft, fewer people will enter into the software business, and software innovation will diminish.
The Internet opened a wonderful opportunity for Netscape and other software companies to see a path to real commercial success and for consumers to have real choice. Ever since then, Microsoft has tried to block that path by “embracing and extending” the Internet into Windows. We and other software companies, such as those represented by the Software Publishers’ Association, simply want to have the opportunity to engage in fair market evaluations of our products and services. Surely our laws give us and our customers that right, though it may now take active enforcement of those laws for us to be able to realize that right.
Earlier this month, C/Net did a comparative review of Netscape Communicator and Microsoft’s Internet Explorer and awarded Netscape Communicator its Editor’s Choice award, reversing an earlier preference for Internet Explorer because of “some serious problems” experienced by C/Net and its readers when they used Internet Explorer. (See http://www.cnet.com/Content/ Reviews/Compare/Browsers4/ss01.html) What Netscape wants is the ability to get its products, which are well liked by millions of people, effectively onto the computers of its users, notwithstanding Microsoft’s monopoly in operating systems or its monopoly in Office products.
Let me again be very clear. We want to work peacefully with Microsoft. Its importance in the software arena is undeniable. We, and all other software developers who produce products for the PC, have to be able to work with the sole supplier of the operating systems for those computers if we are going to remain in the software business. But we want Microsoft to play by the rules, for those rules, which were designed for the protection of American consumers, say that Microsoft cannot abuse its monopoly at the expense of its competitors and thereby destroy the free market choices those consumers want.
We do not want the government to regulate the software industry, and we take seriously Assistant Attorney General Joel Klein’s statement that the DOJ does not intend to become “a full-time regulator.” (See http://www4.zdnet.com/intweek/daily/980112a.html) We believe the DOJ’s actions to date have been appropriately respectful of our industry, and we know that those actions have been helpful to our customers. Following the DOJ’s recent settlement agreement with Microsoft relating to Windows 95, we began a program inviting additional distribution of our Netscape Communicator. We have had over 4,000 entities, including ISPs, OEMs, and other software distributors, come forward to say they want to distribute our software. One Internet Service Provider said that once it gave its customers choice again, over 70% of them chose Netscape Communicator. We have great concerns, however, about the effects of Windows 98 on our customers’ right to continue to choose our browser. And we remain concerned about the other areas of anticompetitive behavior we have experienced, including exclusionary licensing. In other words, we continue to believe that enforcement of our antitrust laws is what is needed, and that it will make a difference.
We at Netscape remain convinced that the Internet, if left open, offers incredible promise for commerce and communications. However, in light of Microsoft’s control of PC operating systems and other software, and its view that it has an unfettered right to integrate Internet-related software into its monopoly products to the exclusion of its competitors, we are at a critical point that demands enforcement of the antitrust laws in order for that promise to be realized. As Robert Kuttner put it in his January 19, 1998 column in Business Week, this time is like prior times when “there [was] enormous temptation to use … market power improperly. Earlier in this century, competition policy intervened to keep railroads from gouging shippers; broadcast networks from monopolizing programming; department stores and other distributors from jacking up the prices of retail products; telephone companies from keeping a stranglehold on consumer instruments that used phone lines; and airline cartels from dominating reservation systems. The particulars varied, but in every case the basic affront to competition was the same.”
We are not here to ask you for new laws. We are here because you have rightly wanted to understand the state of the software industry in this important time of transition to Internet-oriented computing. We appreciate your interest, and we respectfully suggest that if we do not as a nation continue to support strong enforcement of our antitrust laws by the Department of Justice today, we will inevitably have regulation of this critical industry tomorrow.
Thank you very much.