STATEMENT OF
LAWRENCE J. ELLISON
CHAIRMAN & CHIEF EXECUTIVE OFFICER
ORACLE CORPORATION
before the
UNITED STATES SENATE
COMMITTEE ON THE JUDICIARY
hearing on
COMPETITION IN THE DIGITAL AGE:
BEYOND THE BROWSER WARS
July 23, 1998
Mr. Chairman, Senator Leahy, members of the Committee. My name is Larry Ellison. I am the founder, Chairman & Chief Executive Officer of Oracle Corporation, the world’s second largest independent software company. I am also a member of the Board of Directors of Apple Computer Corporation.
Oracle Corporation is the leading supplier of software for enterprise information management with two major businesses: one aimed at providing the lowest cost information technology infrastructure, and the other to provide business and competitive advantage through high value applications. With annual revenues exceeding $7 billion, Oracle offers its database, tools and applications products, along with related consulting, education, and support services, in more than 140 countries around the world. Headquartered in Redwood Shores, California, Oracle is one of the first software companies to implement its model of enterprise software management through network computing - capable databases and products, and the first major software company to make full-featured products available electronically on the Internet. We are the only company capable of implementing end-to-end enterprise IT infrastructure and applications solutions on a global scale.
Thank you for the invitation to appear before you today to discuss competition in the digital age. I understand this is the third in a series of hearings you have held on this topic so the committee is well aware of the debate and allegations surrounding Microsoft’s business practices in the desktop computer market. The topics before you are not arcane legal issues or particularly complicated technical questions. These are important, high stakes policy issues which need to be fully debated in the public.
What I thought I would do today is talk about the impact of Microsoft’s monopoly on innovation. Second I would like to describe some of Microsoft’s recent moves which have been less well covered by the media – namely Microsoft’s intent to monopolize the Internet, online content, and consumer devices in the same way they monopolize the desktop. Lastly, I would like to emphatically state that enforcement of existing antitrust laws does not equate to sweeping new regulation of the software industry. It is simply not supportable to claim that compliance with the law threatens innovation.
Mr. Chairman, conventional wisdom would have you believe we have entered the information age. But with less than 3 percent of the world’s population using computers we have not. Actually, where we are today feels more like the space age ... supposedly we are in it, but very few of my neighbors have actually been to the moon.
When will we enter the information age? When accessing information is low cost, simple, and available to everyone around the globe. When markets for all goods and services operate at maximum efficiency through computerized brokers, much in the way financial markets operate at maximum efficiency today. When consumers can buy or sell these goods without regard to physical location. When children across the globe have access to the best educational opportunities. When information about health care or access to government services is readily available. These are, I think, just some of the benchmarks of the information age, but we are not there quite yet.
As we look to the future of competition in the digital age, we must state a fact about the present. In the United States, the majority of households do not own a personal computer. In fact, the adoption rate of PCs lags far behind other consumer electronics. It took only eight years for the television to reach 50 percent of U.S. households. Yet 17 years after its introduction, only 40 percent of U.S. households have personal computers, with many fewer actually connected online.6712
One reason for the slow adoption rate of personal computers is that the cost of computing is prohibitive for most Americans. PC use is closely tied to the education and income level of the household. About 70 percent of households that have an annual income of $75,000 or more have a PC. By contrast, only 25 percent of households that have an income below $30,000 have a PC.0 PC prices are starting to reach as low as $800, but many families still pay as much as $2000 for a multimedia PC, which is well beyond the reach of the average American family living on $34,000 per year.9606
Another reason is that personal computers are far too complex for most people. I don’t mean this to be pejorative, I mean this to be comparative. How many times have we heard individuals – friends, colleagues, relatives -- reject personal computers because they are too complicated?
Microsoft has successfully perpetuated the myth that their technology -- which has become more costly and more complicated -- somehow translates into better, more useful technology for the average user.0 In fact, I believe the true cost of the Microsoft monopoly rests in the 60 percent of Americans – in Utah, and Vermont, and Ohio, and Wisconsin -- who are being left behind.
Microsoft is a monopoly.
Mr. Chairman, let me be clear. Microsoft is a monopoly. It controls 97 percent of the desktop operating system market and a near identical percentage in desktop applications -- word processors, spread sheets, and presentation graphics.1434 It is well documented that Microsoft actively engages in anti-competitive tactics to protect and extend its monopoly into related markets.0
To anyone that doubts Microsoft’s monopoly status, I will state two irrefutable facts. First, by Microsoft’s own admission, the cost of the operating system has remained constant11091 while the cost of all other PC components has plummeted (see Appendix One).0
Even Mr. Gates acknowledged this point in testimony before this committee. He correctly indicated that the “cost of computing has decreased 10 million-fold since 1971.”11352 What he did not tell you is that Microsoft’s operating systems will cost you four times as much.0
Only a monopolist can elude the fundamental economics of the computer industry – more functionality at a lower price.
The second fact can be found in the profit margins Microsoft achieves through monopoly pricing. Microsoft’s net profit margin for fiscal year 1998 was 31 percent compared to the average net profit margin of seven percent for the entire S&P 500.0
But who really pays for the Microsoft monopoly? Consumers pay through the lack of innovation and choice. In market after market, we have seen what happens when Microsoft dominates. Pick a product. Operating systems. No new entrant, no innovation. Word processors. No new entrant, no innovation. The same is true for spreadsheets, presentation graphics, and desktop databases. There has been no new entrant and no innovation. In each case, award winning products were created by other great companies, copied by Microsoft feature for feature and tied to the monopoly operating system. Or, competitors were simply denied timely access to key technical specifications. The result is consumers are free to choose a Microsoft PC from Dell, a Microsoft PC from Compaq, a Microsoft PC from Gateway ... you get the point. Feels to me a little like a Soviet supermarket.
Fortunately, the future of computing is not the desktop, it’s the Internet and that is why these proceedings are so important. As Internet computing continues to mature, consumers will be able to access information using any kind of device, not just a personal computer but a cable set top box, a television, a personal digital assistant (PDA), or a telephone.
Many of us in the computer industry are working to make access to the Internet easier and more affordable for the average family. Netscape’s Navigator™, Sun’s Java™, and Oracle’s Network Computing Architecture™ are three examples of such new technologies. What ties us together is a commitment to open standards and operating system independence.
Microsoft knows these new technologies threaten its monopoly desktop operating system and is seeking ways to crush them before they mature. Its play book is fairly straightforward:
Gain control of the standards and interfaces needed to access the Internet;
Protect its operating system by integrating its web browser, thus extending the reach of their monopoly;
Make proprietary changes to the Java programming language in order to lock users onto the Windows platform; and
Use its monopoly profits to purchase competitive technologies or buy itself into a controlling position in new markets.
Microsoft has disguised these predatory practices as “innovative,” obfuscated their tactics with technical jargon, and forestalled competition just long enough to lock consumers into their proprietary standards.0
After all, for Microsoft, the “browser war” had nothing to do with selling more or fewer copies of its browser, Internet Explorer™. It had everything to do with the threat Netscape’s browser posed to Microsoft’s monopoly operating system. Netscape’s browser offered a more useful platform for developers, a more user friendly interface for consumers and most important, an avenue around Microsoft’s monopoly lock on the desktop. So, Microsoft used its monopoly to crush this threat.0
And because the browser is now free, and tightly tied to Microsoft’s operating system, innovation will cease in this part of the market. I predict that five years from now we will have virtually the same Internet browsing technology we have today. We might have a more attractive user interface or perhaps a few more features and functions, but without competition – and without the possibility for economic return on R&D – there will be no great leap forward. This is not a particularly bold prediction because we have seen this movie before and know how it ends. No new entrant. No innovation.
Beyond the browser, Microsoft’s moves into other markets.
Mr. Chairman, we are now seeing Microsoft leverage its monopoly into other markets. “Windows on the whole world” is how it was described by The Economist in 1997.1 “Windows Everywhere,” is how it is described by Microsoft. As its long list of acquisitions and strategic partnerships makes clear, Microsoft is leveraging its desktop monopoly – and its related profits – into other markets. Microsoft has invested billions of dollars in more than 50 partnerships and acquisitions over the past three years.
At one end of the spectrum, Microsoft is using its monopoly power to leverage Windows CE™ – a sort of “mini” Windows. With Windows CE, Microsoft plans to take control of the “set-top box” -- the access point for cable and digital TV, and the personal digital assistant -- the access point for mobile computing.0 And with its recent joint venture announcement with SEGA, Microsoft even plans to control the video game platform. No wonder last spring, Microsoft invested $1 billion in cable-network company Comcast, acquired WebTV Networks for an astonishing $425 million,0 and just last month invested $212 million in a partnership with Time Warner for set-top boxes.
At the other end of the spectrum, Microsoft is using its monopoly power to leverage Windows NT™ to control the computers used for enterprise and Internet computing.0 The Gartner group stated the costs of Microsoft’s Windows NT strategy best: “Microsoft’s strategy is to support its strategic server technologies on Windows NT only. As more users need support for a heterogeneous server environment, Microsoft’s strategy here appears to be meeting the needs of Microsoft, not users.”0 And the Software Publishers Association in a recently released report stated: “Windows 98™ is being phased out and replaced with Windows NT.0 As a result of Microsoft’s desktop monopoly, even those companies and consumers who choose not to use Windows NT as their network operating system will be forced to adopt Windows NT technologies and standards.”0
According to The Economist magazine, “NT will earn more, but Windows CE may become the world’s most ubiquitous operating system.”0 And in each case, Microsoft is using its desktop monopoly and predatory tactics to … control the standards, eliminate competing access points, lock consumers into Microsoft products, and purchase competing technologies. With over $12 billion of monopoly profits in the bank, there are few markets Microsoft can’t dominate.0
But it doesn’t stop there. Microsoft is now aggressively moving to use its monopoly power to control online content. As more and more Americans come online, the ability of Microsoft to favor its own content will have profound cultural, societal, consumer and economic implications.0 For your news go to MSNBC™; for financial services go to Microsoft Investor™; for travel services go to Microsoft Expedia™; for retail shopping go to the Microsoft Plaza™; to buy a car go to Microsoft Carpoint™; and to buy or sell a house go Microsoft Home Advisor™.0
Just this week, Microsoft announced its intention to gather all of these services into a single area, called the Microsoft Network™, to direct the way users access services on the Internet. And we know what happens when Microsoft dominates – no new entrants, no innovation.
Antitrust enforcement will not impact innovation, it will promote competition.
Mr. Chairman, Microsoft would have you believe the Justice Department’s lawsuit somehow impacts its ability to innovate. As a technologist, I see nothing on the record to support that claim. What Microsoft is really worried about – and what this lawsuit does – is impact its ability to execute.0 Windows 98 is about extending its monopoly leverage and about eliminating any possible competition from competing Internet platforms. Windows 98 is not about innovation. Its monopoly position will continue to drive innovation out of the market. Ultimately, consumers will pay the price.
So this case is not about whether Attorney General Reno should decide what goes into a computer operating system.0 It is about the revolutionary changes being brought about by digital technology. It is about competition, innovation, and consumer choice. It is about how one monopoly can be leveraged to eliminate new consumer technologies and services before they have a chance in the market. And it is about reaching for the goal of having 100 percent – not 40 percent – of Americans enjoying the benefits of Internet computing.
Mr. Chairman, Senator Leahy, members of the Committee. My name is Larry Ellison. I am the founder, Chairman & Chief Executive Officer of Oracle Corporation, the world’s second largest independent software company. I am also a member of the Board of Directors of Apple Computer Corporation.
Oracle Corporation is the leading supplier of software for enterprise information management with two major businesses: one aimed at providing the lowest cost information technology infrastructure, and the other to provide business and competitive advantage through high value applications. With annual revenues exceeding $7 billion, Oracle offers its database, tools and applications products, along with related consulting, education, and support services, in more than 140 countries around the world. Headquartered in Redwood Shores, California, Oracle is one of the first software companies to implement its model of enterprise software management through network computing - capable databases and products, and the first major software company to make full-featured products available electronically on the Internet. We are the only company capable of implementing end-to-end enterprise IT infrastructure and applications solutions on a global scale.
Thank you for the invitation to appear before you today to discuss competition in the digital age. I understand this is the third in a series of hearings you have held on this topic so the committee is well aware of the debate and allegations surrounding Microsoft’s business practices in the desktop computer market. The topics before you are not arcane legal issues or particularly complicated technical questions. These are important, high stakes policy issues which need to be fully debated in the public.
What I thought I would do today is talk about the impact of Microsoft’s monopoly on innovation. Second I would like to describe some of Microsoft’s recent moves which have been less well covered by the media – namely Microsoft’s intent to monopolize the Internet, online content, and consumer devices in the same way they monopolize the desktop. Lastly, I would like to emphatically state that enforcement of existing antitrust laws does not equate to sweeping new regulation of the software industry. It is simply not supportable to claim that compliance with the law threatens innovation.
Mr. Chairman, conventional wisdom would have you believe we have entered the information age. But with less than 3 percent of the world’s population using computers we have not. Actually, where we are today feels more like the space age ... supposedly we are in it, but very few of my neighbors have actually been to the moon.
When will we enter the information age? When accessing information is low cost, simple, and available to everyone around the globe. When markets for all goods and services operate at maximum efficiency through computerized brokers, much in the way financial markets operate at maximum efficiency today. When consumers can buy or sell these goods without regard to physical location. When children across the globe have access to the best educational opportunities. When information about health care or access to government services is readily available. These are, I think, just some of the benchmarks of the information age, but we are not there quite yet.
As we look to the future of competition in the digital age, we must state a fact about the present. In the United States, the majority of households do not own a personal computer. In fact, the adoption rate of PCs lags far behind other consumer electronics. It took only eight years for the television to reach 50 percent of U.S. households. Yet 17 years after its introduction, only 40 percent of U.S. households have personal computers, with many fewer actually connected online.6712
One reason for the slow adoption rate of personal computers is that the cost of computing is prohibitive for most Americans. PC use is closely tied to the education and income level of the household. About 70 percent of households that have an annual income of $75,000 or more have a PC. By contrast, only 25 percent of households that have an income below $30,000 have a PC.0 PC prices are starting to reach as low as $800, but many families still pay as much as $2000 for a multimedia PC, which is well beyond the reach of the average American family living on $34,000 per year.9606
Another reason is that personal computers are far too complex for most people. I don’t mean this to be pejorative, I mean this to be comparative. How many times have we heard individuals – friends, colleagues, relatives -- reject personal computers because they are too complicated?
Microsoft has successfully perpetuated the myth that their technology -- which has become more costly and more complicated -- somehow translates into better, more useful technology for the average user.0 In fact, I believe the true cost of the Microsoft monopoly rests in the 60 percent of Americans – in Utah, and Vermont, and Ohio, and Wisconsin -- who are being left behind.
Microsoft is a monopoly.
Mr. Chairman, let me be clear. Microsoft is a monopoly. It controls 97 percent of the desktop operating system market and a near identical percentage in desktop applications -- word processors, spread sheets, and presentation graphics.1434 It is well documented that Microsoft actively engages in anti-competitive tactics to protect and extend its monopoly into related markets.0
To anyone that doubts Microsoft’s monopoly status, I will state two irrefutable facts. First, by Microsoft’s own admission, the cost of the operating system has remained constant11091 while the cost of all other PC components has plummeted (see Appendix One).0
Even Mr. Gates acknowledged this point in testimony before this committee. He correctly indicated that the “cost of computing has decreased 10 million-fold since 1971.”11352 What he did not tell you is that Microsoft’s operating systems will cost you four times as much.0
Only a monopolist can elude the fundamental economics of the computer industry – more functionality at a lower price.
The second fact can be found in the profit margins Microsoft achieves through monopoly pricing. Microsoft’s net profit margin for fiscal year 1998 was 31 percent compared to the average net profit margin of seven percent for the entire S&P 500.0
But who really pays for the Microsoft monopoly? Consumers pay through the lack of innovation and choice. In market after market, we have seen what happens when Microsoft dominates. Pick a product. Operating systems. No new entrant, no innovation. Word processors. No new entrant, no innovation. The same is true for spreadsheets, presentation graphics, and desktop databases. There has been no new entrant and no innovation. In each case, award winning products were created by other great companies, copied by Microsoft feature for feature and tied to the monopoly operating system. Or, competitors were simply denied timely access to key technical specifications. The result is consumers are free to choose a Microsoft PC from Dell, a Microsoft PC from Compaq, a Microsoft PC from Gateway ... you get the point. Feels to me a little like a Soviet supermarket.
Fortunately, the future of computing is not the desktop, it’s the Internet and that is why these proceedings are so important. As Internet computing continues to mature, consumers will be able to access information using any kind of device, not just a personal computer but a cable set top box, a television, a personal digital assistant (PDA), or a telephone.
Many of us in the computer industry are working to make access to the Internet easier and more affordable for the average family. Netscape’s Navigator™, Sun’s Java™, and Oracle’s Network Computing Architecture™ are three examples of such new technologies. What ties us together is a commitment to open standards and operating system independence.
Microsoft knows these new technologies threaten its monopoly desktop operating system and is seeking ways to crush them before they mature. Its play book is fairly straightforward:
Gain control of the standards and interfaces needed to access the Internet;
Protect its operating system by integrating its web browser, thus extending the reach of their monopoly;
Make proprietary changes to the Java programming language in order to lock users onto the Windows platform; and
Use its monopoly profits to purchase competitive technologies or buy itself into a controlling position in new markets.
Microsoft has disguised these predatory practices as “innovative,” obfuscated their tactics with technical jargon, and forestalled competition just long enough to lock consumers into their proprietary standards.0
After all, for Microsoft, the “browser war” had nothing to do with selling more or fewer copies of its browser, Internet Explorer™. It had everything to do with the threat Netscape’s browser posed to Microsoft’s monopoly operating system. Netscape’s browser offered a more useful platform for developers, a more user friendly interface for consumers and most important, an avenue around Microsoft’s monopoly lock on the desktop. So, Microsoft used its monopoly to crush this threat.0
And because the browser is now free, and tightly tied to Microsoft’s operating system, innovation will cease in this part of the market. I predict that five years from now we will have virtually the same Internet browsing technology we have today. We might have a more attractive user interface or perhaps a few more features and functions, but without competition – and without the possibility for economic return on R&D – there will be no great leap forward. This is not a particularly bold prediction because we have seen this movie before and know how it ends. No new entrant. No innovation.
Beyond the browser, Microsoft’s moves into other markets.
Mr. Chairman, we are now seeing Microsoft leverage its monopoly into other markets. “Windows on the whole world” is how it was described by The Economist in 1997.1 “Windows Everywhere,” is how it is described by Microsoft. As its long list of acquisitions and strategic partnerships makes clear, Microsoft is leveraging its desktop monopoly – and its related profits – into other markets. Microsoft has invested billions of dollars in more than 50 partnerships and acquisitions over the past three years.
At one end of the spectrum, Microsoft is using its monopoly power to leverage Windows CE™ – a sort of “mini” Windows. With Windows CE, Microsoft plans to take control of the “set-top box” -- the access point for cable and digital TV, and the personal digital assistant -- the access point for mobile computing.0 And with its recent joint venture announcement with SEGA, Microsoft even plans to control the video game platform. No wonder last spring, Microsoft invested $1 billion in cable-network company Comcast, acquired WebTV Networks for an astonishing $425 million,0 and just last month invested $212 million in a partnership with Time Warner for set-top boxes.
At the other end of the spectrum, Microsoft is using its monopoly power to leverage Windows NT™ to control the computers used for enterprise and Internet computing.0 The Gartner group stated the costs of Microsoft’s Windows NT strategy best: “Microsoft’s strategy is to support its strategic server technologies on Windows NT only. As more users need support for a heterogeneous server environment, Microsoft’s strategy here appears to be meeting the needs of Microsoft, not users.”0 And the Software Publishers Association in a recently released report stated: “Windows 98™ is being phased out and replaced with Windows NT.0 As a result of Microsoft’s desktop monopoly, even those companies and consumers who choose not to use Windows NT as their network operating system will be forced to adopt Windows NT technologies and standards.”0
According to The Economist magazine, “NT will earn more, but Windows CE may become the world’s most ubiquitous operating system.”0 And in each case, Microsoft is using its desktop monopoly and predatory tactics to … control the standards, eliminate competing access points, lock consumers into Microsoft products, and purchase competing technologies. With over $12 billion of monopoly profits in the bank, there are few markets Microsoft can’t dominate.0
But it doesn’t stop there. Microsoft is now aggressively moving to use its monopoly power to control online content. As more and more Americans come online, the ability of Microsoft to favor its own content will have profound cultural, societal, consumer and economic implications.0 For your news go to MSNBC™; for financial services go to Microsoft Investor™; for travel services go to Microsoft Expedia™; for retail shopping go to the Microsoft Plaza™; to buy a car go to Microsoft Carpoint™; and to buy or sell a house go Microsoft Home Advisor™.0
Just this week, Microsoft announced its intention to gather all of these services into a single area, called the Microsoft Network™, to direct the way users access services on the Internet. And we know what happens when Microsoft dominates – no new entrants, no innovation.
Antitrust enforcement will not impact innovation, it will promote competition.
Mr. Chairman, Microsoft would have you believe the Justice Department’s lawsuit somehow impacts its ability to innovate. As a technologist, I see nothing on the record to support that claim. What Microsoft is really worried about – and what this lawsuit does – is impact its ability to execute.0 Windows 98 is about extending its monopoly leverage and about eliminating any possible competition from competing Internet platforms. Windows 98 is not about innovation. Its monopoly position will continue to drive innovation out of the market. Ultimately, consumers will pay the price.
So this case is not about whether Attorney General Reno should decide what goes into a computer operating system.0 It is about the revolutionary changes being brought about by digital technology. It is about competition, innovation, and consumer choice. It is about how one monopoly can be leveraged to eliminate new consumer technologies and services before they have a chance in the market. And it is about reaching for the goal of having 100 percent – not 40 percent – of Americans enjoying the benefits of Internet computing.