Taming Microsoft

Microsoft wants to muscle its way to domination of markets in areas other than operating systems and office suites.

FOR good or bad, Microsoft makes news. Not surprising for a company that, with $40 billion of revenues in 2005, topped the league of global software publishers and stood way ahead of the second-ranker Oracle that earned just $12 billion in revenues. But Microsoft is by no means the giant in the information technology (IT) industry as a whole. That honour went to IBM with revenues of $96 billion, and there were others like Hewlett-Packard, Toshiba, Dell and Fujitsu that were ahead.

The point, however, is that Microsoft's net income exceeded all of those ahead of it in revenues in the IT industry. In fact, at $12.3 billion in 2003, its net income way exceeded IBM's $8.1 billion. That partly reflects the nature of the packaged software business. But it also reflects Microsoft's virtual monopoly in the operating systems market and the ubiquity of its Office software. This makes Microsoft more of a Big Brother than other IT companies, inviting scrutiny from anti-trust agencies and a hostile press. The point, however, is that Microsoft feeds these forces with behaviour that says that it wants to muscle its way to domination of markets in areas other than operating systems and office suites.

The most recent instance is the evidence that it wants to wipe clean rivals in the security software business. The company has just got beyond announcing its final Beta version of Windows Vista, the next generation of its operating system. But even before Vista's commercial release, Microsoft has come under attack for seeking to leverage the product to shut out rivals in markets for other software products, especially security software.

The charge against the company is a tiresome repeat of its battles with Netscape, RealNetworks and others. The principal issue, raised by independent security software providers Symantec and McAfee, is that Microsoft was not providing access to the kernel of its forthcoming operating system, necessary to develop products that can warn against possible virus attacks. In their view, the reason why Microsoft was holding back the crucial code was its desire to hack into the lucrative security software market by creating products like OneCare that come bundled with Vista.

Microsoft has indeed been building capabilities to tap the security software market estimated at $12 billion by consulting firm IDC. It has acquired a host of companies - Giant Company Software, Sybari Software, FrontBridge Technologies and Whale Communications - towards that end. When combined with the kernel lock-out, this suggests that as before Microsoft is using the fact that well above 90 per cent of the world's personal computers (PCs) run on its Windows operating software to build itself a position in the market for a wholly different software product.

The lock-out is ensured with PatchGuard, a software ostensibly geared to keeping hackers from entering the core of Windows and tinkering with the code. In the process, independent vendors of security software are deprived of their existing right to develop products that can secure users of the new Windows operating system.

Microsoft, as expected, claimed that its intention is only to ensure a secure environment for its customers. But there are a number of reasons to be sceptical. To start with, PatchGuard does not make the Windows kernel tamperproof. In fact, according to reports, software security analysts have found ways to sidestep PatchGuard and get to the kernel. If they can do it, so can the hackers. In that case, if Microsoft sticks with its decision to lock out rival security software vendors, the responsibility of guarding most of the world's PCs would lie with Microsoft alone. Given the known ingenuity of the world's many producers of malicious worms, this is hardly the best option for users. If Microsoft is concerned about securing its customers, it should encourage multiple players in the security software business.

Second, Microsoft had decided not to offer its users a choice of security software vendors (including itself) on the Vista welcome screen and not allow rival software products to turn off Microsoft Security Centre's warning system regarding potentially malicious attacks and security updates.

In sum, as McAfee sought to make out in a full-page advertisement in Financial Times, Microsoft was leveraging its operating system monopoly to break into the security software market and undermine rivals like itself and Symantec. This charge was believable since Microsoft had been accused of similar transgressions in the past, relating, for example, to Netscape's Navigator and RealNetworks' RealPlayer.

It was the Netscape episode that led to the marathon anti-trust trial that pitted the United States Justice Department against the company. As the then U.S. Assistant Attorney General Joel I. Klein had put it in the course of the anti-trust battle: "What cannot be tolerated - and what the antitrust laws forbid - is the barrage of illegal, anti-competitive practices that Microsoft uses to destroy its rivals and avoid competition."

All that is now history. The case, which dragged on for four years and threatened to lead to an enforced break up of Microsoft into two companies, finally ended up imposing only "moderate remedies". The law had taken a course that legitimised Microsoft's actions on the grounds that the complexities of software as technology and the speed of technological change in the industry made most conventional anti-trust guidelines irrelevant. It justified the gumption and arrogance of a company that entered into battles for supremacy, got bruised, but rose to fight back and win a settlement that validated its dominance.

This, of course, was in the country that was Microsoft's home where it was a symbol of national success. What Microsoft did not bargain for was the challenge it would face in its other large market: Europe. Taking cognisance of complaints from companies such as Sun Microsystems and RealNetworks, the European Commission launched an anti-trust case against Microsoft in December 1998, in the midst of the Federal anti-trust trial in the U.S. Five years later, in March 2004, the Commission found Microsoft guilty of leveraging its dominance in PC operating systems to enter and scorch competition in other markets such as servers and media players. It imposed an unprecedented anti-trust penalty of 497 million euros on the company, and ordered it to unbundle its Media Player from its operating system and disclose technical information relating to the operating system to rival companies.

Microsoft paid the penalty in protest and filed an appeal with the European Court of First Instance. That appeal is yet to be decided upon. Meanwhile, Microsoft dragged its feet on the disclosure requirement pleading lack of clarity with regard to what had to be disclosed. Though in the course of the negotiations Microsoft offered to reveal a "part" of the source code for Windows, the Commission was not satisfied and in July 2006 it imposed a fine of 280.5 million euros on account of Microsoft's failure to comply with the 2004 anti-trust ruling.

When imposing the fine, Neelie Kroes, the European Union competition commissioner, is reported to have stated: "It is now more than two years since the Commission's March 2004 decision that found Microsoft to be in violation of the E.U.'s anti-trust rules by abusing its dominant market position. The European Commission cannot allow such illegal conduct to continue indefinitely. No company is above the law."

The 280.5-million-euro fine was equivalent to a daily fine of 1.5 million euros for the period between December 14, 2005 and June 20, 2006, slightly below the 2 million-euro-a-day ceiling that the Commission had set earlier. But to signal its resolve to tame Microsoft it raised the ceiling for future fines to 3 million euros a day.

These signals are now softening the stance of the company. Not because the penalties matter for a cash-rich company with bloated net incomes. But because the market in Europe and elsewhere outside America is so large that, if ignored, the company's monopoly and profits may be threatened. As far back as March 2006, Neelie Kroes wrote to Microsoft raising a host of questions arising from the Commission's concerns about Vista. One set of those questions related to the possibility that Vista would bundle features that compete with products that are available separately from Microsoft and other companies, such as Internet search, digital rights management and software to create fixed document formats like PDF. That is, it would do more of what it tried with Media Player. Another set was concerned with the possibility that bothers Symantec and McAfee among others that Microsoft would not disclose the technical information needed to make Vista interoperable with competing products.

Once more it is officialdom from the E.U. rather than the U.S. that is forcing Microsoft to soften its arrogance. The company has announced changes to its Windows Vista operating system in response to concerns raised by anti-trust officials in Europe (and Korea). These changes seem significant on paper.

Users of Internet Explorer 7 would be allowed a choice of Search services. Features that would privilege Microsoft's XPS rival to the PDF would be altered.

Security software developers would be allowed to access the Vista kernel. And the company would ensure that Windows Security Centre does not send an alert to a computer user when a competing security console is installed on the PC and is sending the same alert.

These are major concessions on paper. But the E.U. has reserved the right to assess Vista after its release. As of now the Commission rather than the U.S. Justice Department with its remarkable anti-trust track record has emerged the protector of competition and the consumer.