One Fool's Revised Take on Microsoft[Fool on the Hill] March 27, 2000

An Investment Opinion

One Fool's Revised Take on Microsoft

By Yi-Hsin Chang (TMF Puck)
March 27, 2000

It appears that the U.S. Department of Justice's long, drawn-out antitrust case against Microsoft (Nasdaq: MSFT) is finally nearing an end. It was hard to stay engaged in the seemingly never-ending, bureaucratic process. But I must say that from the facts presented in the case as well as independent reports, my own view of Microsoft has changed significantly since I first commented on the case in June 1998.

As longtime Fools might recall, I was a fervent defender of Microsoft and argued that the government should not be interfering in the capitalistic free market. While I still believe that the government should generally allow markets to operate freely under the economic forces of supply and demand, I now think that Microsoft hasn't been playing fair and has attempted to quell competition by any means necessary. To make matters worse, Microsoft simply hasn't been much of an innovator. It has thrived by "borrowing" ideas from others and leveraging its dominance in operating systems.

The battle between Microsoft and Netscape for the Internet browser market keenly illustrates Microsoft's ruthless tactics and modus operandi. In June 1995, seven Microsoft executives visited Netscape and warned that "unless Netscape gave Microsoft a seat on its board and sold Microsoft a piece of its business, Microsoft would put Netscape out of business," reports Michael Lewis in his recent book The New New Thing.

Essentially, Microsoft threatened to withhold from Netscape its application programming interface (API) for the next release of Windows, in effect shutting Netscape out of developing compatible software for the operating system. Netscape decided not to play by Microsoft's rules, and in the end, lost the browser war to Microsoft and was acquired by America Online (NYSE: AOL).

Netscape co-founder Jim Clark experienced deja vu after the highly successful initial public offering (IPO) of Internet health care portal Healtheon (Nasdaq: HLTH), which he also founded. According to The New New Thing, Clark heard from a friend that Microsoft intended to invest $700 million in a new Atlanta-based company called WebMD. The upstart company's CEO had convinced many health care organizations to sign partnership contracts even though he didn't actually have a product. Clark knew that with Microsoft's financial backing, WebMD would become a major threat to Healtheon, so he flew to Atlanta and negotiated to acquire WebMD for 1.85 Healtheon shares per WebMD share. Microsoft ended up with 17% of the combined entity. Clark decided "it was better to pay protection money" than to resist "what he regarded as the evil empire," Lewis wrote in his book.

In short, Microsoft has used its Windows cash cow to out-muscle potential competitors. I previously thought Microsoft was simply doing what any company would do to grow its business and to fight off competition. Now I'm not so sure. It doesn't seem right to intimidate and threaten your competitors. It doesn't seem right to win at all costs. In any event, with diminishing competition, it's easy for a company like Microsoft to become complacent. Then it's the customers who lose out in terms of progress and innovation, not to mention inflated prices.

I don't pretend to know how to "break up" Microsoft or what types of concessions the government should be willing to accept. All I know is that after almost two years of watching this debate, hearing from more of the industry players, and examining how Microsoft operates, I am no longer a Microsoft defender. I for one am eager to see if, in fact, the Department of Justice or the courts will be able to tame the 800-pound gorilla.

What do you think? Share your thoughts on the Fool on the Hill message board.

Related Link:
Fool News, 3/27/00: Microsoft Moves Toward Settlement