Microsoft: The Next Chapter A Case Study on Microsoft’sCompetitive Practices and Business Strategy

Introduction Microsoft, one of the top software companies toemerge during the information age, continues to fight a long,drawn-out antitrust battle with European Union (EU) regulators.Microsoft settled part of its antitrust case with the United StatesDepartment of Justice (DOJ) and 20 state attorneys general in 2004;the company is still under oversight by the Department of Justiceuntil 2009. Observers note that maybe the EU can obtain justconcessions from the company that the U.S. DOJ could not and hasnot. More recently, “The [EU] Commission hit Microsoft with a $781m(497m euros) fi ne and again, later, with a fi ne of $440m (280.5meuros) for non compliance after Microsoft lost an appeal againstthe fi rst fi ne. The February fine covers the period of noncompliance since the second fi ne through to October 21, 2007.”Microsoft has appealed. (The Register, July 7, 2008). The venerablesoftware giant is at another critical turning point in itsdevelopment: it has to either adapt to the changing new globaltechnology environment where collaborative open-source softwaresuch as Linux play and team with the likes of Google, or continueto be hounded and fi ned by the EU. It appears Microsoft may becautiously opening up. The company has begun to make changes to itscurrent business model, embracing radical, innovative new thinking,incorporating other companies and technologies into its domains,and pursuing Yahoo! to better position itself in the searchbusiness. It has also joined a handful of U.S. companies who wishto dominate the market for “cloud computing”—a domain thatincorporates central processing to replace desktops, and that “. .. involves the centralized storage and processing of information—ashift that could reduce the role of desktop computers and theservers and other equipment run by many companies . . . .” Withregard to business ethics, a major question about Microsoftremains: will the approaches the company takes involve or attemptto dominate and control competitors? The Road Less TraveledMicrosoft has focused primarily on product development sinceJanuary 2005, making acquisitions of complementary businesses (orpotential future rivals) along the way. Its chief adversary overthe last year and a half has been the European Union, which issuedits original antitrust ruling in March 2004 and a more recent fi nefor noncompliance with the ruling in December 2005. Microsoft hasalso shifted its marketing focus, tangled with Google over a searchengine issue that is loosely reminiscent of the original antitrustclaim made by Netscape nearly a decade ago, struggled to buyYahoo!, and announced a looming change in business strategyalongside an administrative shake-up. Microsoft’s attempts to takeover Yahoo! have, to date, not succeeded. Both Goggle and Yahoo! donot appear as naive or vulnerable as Microsoft’s competitors in the1990s. Monopoly: The Battle with Europe The U.S. DOJ settled itsantitrust case against Microsoft in November 2001, and the stateattorneys general followed suit shortly thereafter. The settlementdictated that (1) customers must have a choice about what Windowscomponents are mandatory in any installation of the operatingsystem, and (2) Microsoft must disclose certain information toallow third-party developers to create software that betterinteroperates with Windows. The end of the DOJ’s pursuit ofMicrosoft essentially closed the door on further investigationsinto Microsoft’s business practices in the United States, andforced Microsoft’s high-profile competition to look elsewhere forsupport of their assertions of Microsoft’s monopolistic tendencies.IBM Corporation, Oracle Corporation, Sun Microsystems, RedHat,RealNetworks, Adobe Systems, and more recently Google have allentreated the European Union to use its authority to regulateMicrosoft on their behalf and for the protection of the softwaregiant’s myriad customers. The EU began its antitrust investigationof Microsoft in 1998 when it received a complaint from SunMicrosystems alleging that Microsoft was willfully concealinginformation that Sun required for its software to successfullyinteroperate with Microsoft Windows. Subsequently, the EU opened asecond unrelated investigation of Microsoft in 2001 when thecompany began shipping its operating system with freely attachedmedia player software that competed directly with rival offeringssuch as RealNetworks’ RealPlayer. After five years of investigatingMicrosoft’s tactics, the EU issued antitrust rulings in March 2004and again in 2008. The EU’s decision brought with it a $613 millionfi ne and required Microsoft to alter its business practices toincrease competition in two areas that satisfi ed both of theindependent investigations: (1) Microsoft must not ship Windowswith its own embedded media player, and (2) the company wasrequired to produce documentation to assist its rivals in writingWindows Of- fi ce productivity software. Meanwhile, Microsoftsettled out of court with Sun, Novell Networks, and RealNetworksfor a total of more than $3 billion so that each company wouldforego its related complaints in both the EU and the United States,which weakened the EU’s stance on the antitrust case. However, justover a year later, the EU began receiving complaints that thecompany still had not made any progress on either tenet of the 2004antitrust ruling. The commission threatened new fines, andMicrosoft made an effort to adhere to the terms of the ruling andto smooth its relationship with the EU. Microsoft began shippingits stripped-down version of Windows in Europe in 2005, satisfyingthe fi rst requirement of the EU ruling. However, a number ofmeetings and information transfers have ensued regarding thedocumentation requirement, which neither side has found mutuallysatisfactory. Microsoft chose to air the confl ict to the press,which consummated in July 2006 when the EU levied a $356 million fine against the software giant for failing to comply with the 2004ruling. The EU has threatened to fi ne Microsoft nearly $4 millioneach day until the company complies. Microsoft has a number ofpending appeals in the EU case, both of the original ruling and ofthe most recent noncompliance fi ne. A Shift in Business StrategyWhile Microsoft’s battle with the EU continued, Google fi led acomplaint with the U.S. DOJ and with the EU’s antitrust authoritiesin March 2006. The complaint alleged that Microsoft had designedits new Internet browser, Internet Explorer (IE) 7, to primarilyuse a Microsoft search engine, which would place Google at acompetitive disadvantage in the Internet search market. However,the DOJ found in May 2006 that the default settings in the browserwere not a competitive threat to Google. Industry analyst PaulThurrott describes the finding: In a court fi ling, the DOJ notedthat Microsoft had first briefed it about IE 7’s search box monthsago. The feature is easily modified to use any Internet searchengine, including that of Google, the DOJ said, “using a relativelystraightforward method for the user to select a different searchengine from the initial default.” Furthermore, the DOJ wrote,Microsoft’s actions with IE 7 are a far cry from theanticompetitive behavior that got the software giant into legal hotwater almost a decade ago. The reason? IE 7 respects changes thatthe user made prior to installing this version of the browser. Ifthe browser was previously using a search service from Google orYahoo by default, IE 7 will not change that choice to MSN Searchwhen the product is installed. IE 7 “only uses MSN Search if nodefault has been set.” The DOJ has “concluded [its] work on thismatter,” the fi ling reads. This behavior is wildly different fromthe fiercely anticompetitive and monopolistic tactics thatMicrosoft has used to thwart its enemies in the past. This changein direction provides direct evidence that a new school of thoughtis emerging within the old software giant. An atmosphere likened tothat of a startup software company is emerging within this largemultinational, one that values building trusting relationships withpartners. The company has even taken a renewed interest in itsmarketing initiatives by elevating its Chief Marketing Offi cerMich Matthews to directly report to CEO Steve Ballmer. A clearmotivator for increased marketing vigor can be directly attributedto the “evil empire” moniker attributed to Microsoft infree-software development and operating system circles, two of thecompany’s main competitive foes. Meanwhile, in late April 2006,Microsoft’s share price plummeted 11% in a single day after thecompany said it would spend $2.5 billion to compete against rivalgame consoles and search technology, and to develop onlinealternatives to the new versions of its Offi ce productivitysoftware and the next version of the Windows operating system,Windows Vista. As Microsoft pours funding into its research arm,the door to the next wave of Internet technology is upon it, andthe key to that door will be the Internet browser. Notes TheEconomist: “The extent to which web browsers are open to outsidefirms is important because they represent a platform for providingservices via the Internet, overshadowing the primacy of theoperating system as the platform for PCs. Whoever controls theseplatforms is in a position to determine what users can do—as wellas steer sales.” Service provision via the Internet is that nextwave, and innovation in that arena has already begun. Microsoft hasreluctantly come to the same conclusion, even if a little late. Thestakes are high in the markets where Microsoft and its closestcompetitors play. Google’s market share could approach 90% of thesearch market in the coming year. Microsoft’s sales of WindowsMobile platform products are projected at 40% of the globalsmartphone market by 2012, according to Eddie Wu, managing directorof Microsoft ODM embedded devices, Asia. It is not in Google’s orMicrosoft’s interest or competitive nature to allow unchartedmarkets and technology domains to be dominated without vigorousbattles. Google’s complaint against Microsoft is a result of theintegration of browser search technology. This technology willprovide access to a myriad of Internet services once itproliferates. Microsoft avoided regulatory hurdles with thatparticular complaint, but the EU is paying close attention to thefeatures that will be available in Windows Vista and has warnedthat embedding new, anticompetitive functions into that operatingsystem could violate further antitrust rules in Europe. With regardto the U.S. Department of Justice’s monopoly case and oversight ofMicrosoft’s practices, a spokesperson for the company announcedthat Judge Colleen Kollar-Kotelly’s order, issued at the end of2008, was extended through November 12, 2009. “The court’s actioncame in response to requests by a number of states involved in thecase to extend the consent decree by fi ve years.” MicrosoftChairman Bill Gates has always been a firm believer in the power ofinnovation, and strives to reinvent Microsoft ahead of disruptivetechnology curves. Microsoft’s current business model relies oncharging license fees for boxed or downloadable software, so thecompany may control its distribution and use. With the impendingparadigm shift to Web services, “cloud computing,” andvirtualisation technology, Gates noted in an internal corporatememo that “the coming services wave will be verydisruptive”—perhaps even to Microsoft itself. As both Gates and CEOSteve Ballmer also continue to chase Google in the Internet searchwar, they keep an eye on their rear view mirror at the EU’sregulatory and compliance arm that has proven more effective thanthe U.S. Department of Justice in constraining the softwaregiant.

Questions for Discussion

1. Why was Microsoft being pursued by the U.S.Department of Justice and then fined by the EU?

2. What ethic is Microsoft practicing— in the U.S. andnow globally? Do you agree with this ethic? Explain.

3. Is Google getting more of a “free pass” thanMicrosoft in its competitive practices to dominate the searchmarket? Explain.

4. Should Microsoft be legally and ethically constrainedas it competes with very aggressive competitors globally andlocally? State and defend your position.

5. Is the EU really competing against the U.S. when ittakes on Microsoft, or is it just competing against Microsoft?Explain your position.

6. Which stakeholders really stand to win and lose inMicrosoft’s quest to be number one in the technology markets itseeks to dominate? Explain and offer evidence.