Programming Windows: Antitrust (Premium)

In 1969, the U.S. Department of Justice (DOJ) sued International Business Machines (IBM) for abusing its monopoly power in the computer industry. The charges would echo in future cases against Microsoft, which we will discuss here, and in more recent years against Amazon, Apple, Facebook, and Google. IBM, the DOJ said, illegally bundled software and hardware and used false product announcements—now called vaporware—to harm competitors. And as would be the case in subsequent tech industry antitrust cases, the IBM investigation was instigated by complaints made by a competitor, in this case Control Data Corporation (CDC).

IBM’s case is most well-known for its length: It didn’t end until 1982, when the then-new head of the DOJ’s antitrust division finally declared the case “without merit.” But in yet another parallel to future tech antitrust cases, IBM’s experiences deeply impacted the firm internally. It had already long ago unbundled its software from its hardware, and it competed much more cautiously than it did in the past. Indeed, the circumstances that led to IBM linking up with Microsoft to create a Disk Operating System for the first IBM PC were in a part a result of the behavioral changes that IBM had voluntarily enacted while its antitrust case was active.

As noted earlier, IBM eventually came to realize that its one-sided deal with Microsoft and its CEO Bill Gates was the Achilles Heel of its PC business: Microsoft was free to supply MS-DOS to any third party that copied the IBM PC, meaning that as the market exploded, Microsoft benefitted to a far greater degree than IBM did. So by the late 1980s, IBM began plotting to take control of the PC back, both with proprietary hardware that other PC makers couldn’t legally copy, and with a new generation Disk Operating System that it called OS/2. By that point, of course, Microsoft had already created Windows in response to the Graphical User Interface (GUI) craze in personal computing. And the two firms butted heads over which platform would be the standard going forward: Microsoft’s MS-DOS and Windows or IBM’s OS/2 and Presentation Manager (PM).

But it was a 1989 Microsoft and IBM announcement that marked the first time that any governmental regulatory body finally put Microsoft on its radar: The two firms publicly announced a cohesive operating system strategy in which they would collude to divvy up the market, with MS-DOS and Windows targeting only the low-end, and OS/2 and PM emerging as the platform that both would support for the future.

“Beginning in the second half of 1990, IBM and Microsoft plan to make their graphical applications available first on OS/2,” the announcement read. “Windows is not intended to be used as a [network] server, nor will future releases contain advanced OS/2 features such as distributed processing, the 32-bit flat memory model, threads, or long file names.”

The agreement, of course, was a farce: Microsoft engineers had already figured out how to bring at least some of those “advanced OS/2 features,” like the 32-bit memory model, to Windows, and the software giant was not-so-secretly plotting a Windows 3.0 release that would embarrass IBM and OS/2 and set up Microsoft’s coming explosive decade of success, growth, and dominance. The IBM and Microsoft relationship was on the rocks and would soon collapse, with Microsoft quietly slowing its OS/2 software development so that it could undermine its partner and bolster Windows.

But few outside of Microsoft’s inner circle knew this at the time. And when reports about the IBM/Microsoft reached the Federal Trade Commission (FTC), it stepped in by filing a series of questions with both companies about the agreement. “We think they are interested in whether our partnership entered into an agreement that had an anti-competitive effect,” Microsoft vice president William Neukom said uncertainly at the time. “We thought we were bringing information and guidance [to customers]. The FTC apparently looked at it and thought it manifested some sort of agreement that is somehow other than a free and open market.”

Microsoft’s critics—comprised mostly of competitors that were already watching their products succumb, in turn, to predatory offerings from the software giant—were delighted by the news. But they were also wary of retribution, as Gates and Microsoft wielded their power over the industry indiscriminately.

The problem, of course, was hubris.

Not completely without reason, Bill Gates felt that he was solely responsible for creating the personal computing market, which eventually triggered the largest non-wartime economic boom in U.S. history. Universally worshipped within his own company, Gates’ attitudes and opinions were handed down to Microsoft executives and employees of all stripes, many of whom had seen their adherence to his aggressive business tactics result in vast gains in personal wealth as Microsoft’s stock price soared. Bill Gates, in short, had a created a culture, a sometimes ugly and juvenile culture, driven mostly by men nearing middle age like him, who believed what he believed and behaved as he behaved.

And Bill Gates could behave badly.

Gates was often terrible to other people, and fond of the Steve Jobs school of feedback, where a product, technology, or other idea was either the greatest thing he had ever seen or the product of an obvious bozo. “Bill will always say, ‘That’s the stupidest thing I’ve ever heard.’ It’s not gentlemanly,” Steve Ballmer later noted of his predecessor in a 1990 interview.

And like Jobs, he had screwed his company’s other co-founder from the get-go in order to maximize his control of the company and his share of its fortunes. Gates forced Paul Allen to accept a 64-36 stock split when they created Microsoft. (Remember that it was Allen who had seen the issue of Popular Electronics with the Altair on the cover and had shown it to Gates. And that it was Allen who had hand-debugged their first BASIC when it wouldn’t load on a real Altair and had gotten them the gig in the first place.) Worse, Gates later tried to wrangle away more of Allen’s shares when the latter contracted Hodgkin’s disease in the early 1980s. The sickly Allen, Gates said, just “wasn’t working hard enough.”

An inveterate thief of others’ ideas, Bill Gates never invented anything notable and his technical prowess, touted endlessly by Microsoft executives and employees, was widely understood among his competitors to be quite overinflated. What Gates was good at was destroying those whose ideas he had stolen and then growing his own business as a result. Microsoft’s incredible successes in the 1990s were built on the bodies of many companies that had had good ideas of their own stolen by the software giant. The examples are almost endless, and by 1990 alone included such products as MS-DOS, Windows, BASIC, pen computing, and many others. Microsoft’s history of anticompetitive conduct is well documented.

Indeed, by the early 1990s, Gates and Microsoft were so infamous for this behavior that the field of potential partners and acquisitions had quickly dried up: No one was willing to open the kimono for Microsoft anymore, knowing full well that the software giant would simply copy their work or, worse, pretend to be planning to do so, killing their companies and their inventions prematurely. Other computing companies circled Microsoft warily, as they silently—or not so silently—begrudged this company and its mediocre products, and the success it had illegitimately attained, in their opinions.

(This behavior was so well-known, in fact, that it scuttled Gates’ dream of getting Microsoft into the interactive TV business in the early 1990s. No cable or telecommunications businesses would work with Microsoft, despite multiple attempts over several years. This focus was one reason that Gates had “missed” the Internet; he believed that interactive TV was the next big thing after PCs, and he was laser-focused on that market.)

As problematically, Gates also had far less respect for the U.S. government, for any government, really, than he had for the companies and their leaders who he felt could harm Microsoft. Where Gates would act decisively and coldly toward any competitor, he would brush off governmental questions and concerns with disdain. He was, after all, more powerful than the president of the United States, as he had one time publicly boasted to the horror of his wife, just as the full power of the U.S. government was coming down on his company. Hubris.

In March 1991, the FTC investigation of IBM and Microsoft finally became public. By that point, of course, the relationship between the two firms had already unraveled: Microsoft was proceeding with MS-DOS and Windows—and with a dark horse OS/2 competitor called NT—while IBM took control of OS/2, later delivering a series of surprisingly high-quality updates on its own.

“There’s no truth to what they’re saying,” Gates said of the FTC “inquiry,” as he called it. “This thing will come to an end without any problem.”

Thanks to its first interactions with Microsoft, the FTC had become alarmed by the software giant’s behavior. But Gates and company were working overtime to fool the FTC into believing that it had done nothing wrong.

The FTC was worried that Microsoft was offering low prices to PC makers that bundled its operating systems with its productivity applications, giving the latter an unfair advantage over competitors like Lotus, WordPerfect, and Ashton Tate. Microsoft claimed it had a so-called “Chinese Wall” within the company that prevented the employees in its operating systems groups from colluding with those working on its Office productivity applications. (That was a lie, and Microsoft officials later publicly denounced the claims, which it had originated, stating that of course the two groups worked together in order to deliver the most compelling solutions.)

The FTC was concerned that Microsoft engaged in vaporware announcements to forestall competitors that were working on actual products. Its competitors used the term “Fear, Uncertainty, and Doubt,” or FUD, to describe these announcements. But Microsoft feigned innocence: It had a lot of fingers in a lot of pies, it said, and was only trying to deliver what its customers wanted.

The FTC also saw that Microsoft’s DOS and Windows secretive licensing agreements were unfair to PC makers, as they played each company off the other. In a particularly onerous example, Microsoft demanded a per-PC royalty fee from PC makers, even on PCs that shipped with competing OSes, like DR-DOS, and contained no Microsoft software. Microsoft felt that it was free to charge whatever it wanted for its products, and that it could do so on a case-by-case basis, without needing a standardized pricing sheet.

“People don’t like a company as successful as our,” Gates whined of the complaints. But by 1991, Microsoft wasn’t just the biggest software maker in the world. It was bigger than the number two and three players, Lotus and Novell, combined. As Forbes in April 1991 asked, “Can anyone stop” Bill Gates?

As it turned out, no, at least not according to Microsoft. In November 1991, seemingly oblivious to how this comment would resonate with the FTC, customers, or partners, Microsoft’s Mike Maples stated at a press event that his job was “to get a fair share of the software applications market, and to me, that’s 100 percent.” The firm literally planned to hit 90 percent within the coming year, he said. He wasn’t joking.

Behind the scenes, the FTC was talking to Microsoft’s competitors. And as their business fell, one by one, to Microsoft’s offerings, they finally overcome their fears of Gates and started talking, finally started explaining how Microsoft would copy their features, lower their prices, and dangle partnership opportunities and then just copy their work outright. As Microsoft owned more and more of the stack, its software became the safe choice. Microsoft had become, in many ways, the new IBM. Success begat success.

And Microsoft’s string of successes would extend to the courtroom as well, at least at first. Most notably, the software giant won a years-old copyright infringement case brought against it by Apple, which in 1988 had sued Microsoft for copying the design of the Macintosh in Windows 2.03.

More explosively, when the FTC in 1993 finally voted whether to formally charge Microsoft with sweeping antitrust charges, the case ended with a whimper: The Commission deadlocked with a 2-2 vote, thanks to the recusal of one commissioner who claimed an unstated conflict of interest. A second vote on narrower charges also ended in a tie.

The news was greeted with cheers in Redmond. But it was a temporary condition: The FTC’s mountains of boxes of paperwork related to the Microsoft case were trucked over to its counterparts at the U.S. Department of Justice, which had likewise been petitioned by competitors and had become alarmed by Microsoft’s behavior. The DOJ, led by Janet Reno, had no conflicts of interest, and it quickly indicated to Microsoft that it would proceed with sweeping antitrust charges.

Microsoft blinked. A year into the DOJ investigation, it agreed to a consent decree in which it would address the concerns of competitors by limiting its ability to tie products to one another. And it dropped the provision of its MS-DOS and Windows licensing agreement for PC makers that required them to pay for Microsoft’s software even if they shipped PCs without it.

The consent decree provided Microsoft with an out, however: It could add new features to its products as long as they were truly integrated and not just added on to harm competitors.

“The provision was vaguely worded,” investigative reporter Ken Auletta notes in World War 3.0: Microsoft, the Government, and the Battle for the Internet. “Microsoft was allowed, for example, to develop new features, but not to sell or market them.” It was, he noted, a “distinction without difference” that would come back to haunt both Microsoft and its competitors as the Internet age unfolded.

There was some additional drama around the consent decree. After it was signed and the DOJ dropped its antitrust case, Federal District Court Judge Stanley Sporkin ruled that it was an “ineffective remedy,” leading to the odd circumstance of Microsoft and the DOJ joining forces to urge the U.S. Court of Appeals to overturn Sporkin’s ruling. It did just that, and in a spurt of anger, reinstated the decree, threw Sporkin off the case, and handed any future oversight to the case to Thomas Penfield Jackson.

It was a major victory for Microsoft. But that latter decision would have major ramifications for the software giant down the road as well.