(This essay offers a synopsis of the White Paper delivered to the U.S. Department of Justice by the Palo Alto, Calif., law firm of Wilson, Sonsini, Goodrich and Rosati, recommending government intervention against Microsoft Corp’s intent to acquire Intuit Inc.)
 
In the beginning of the PC market, IBM handed a virtual monopoly to Microsoft and Intel. Microsoft would supply the operating system—in this case, MS-DOS; Intel would supply the processor to power the computer, the 8086.
From this humble beginning, Microsoft quickly became the market leader in opera- ting systems for the IBM-PC (hereafter PC) and compatible computers. After a few years, from the profits earned by DOS, Microsoft used the revenues to enter the applications market. Competing against larger players such as WordPerfect Corp. (WordPerfect), Lotus Corp. (Lotus 1-2-3) and Ashton-Tate (DBase), Microsoft was definitely playing with a weak hand. Microsoft, no doubt, came to realize that it could not exercise control of DOS to give its applications a competitive advantage over the significant installed base of its competitors.
Along comes Windows! It didn’t happen overnight, and it took Microsoft a few tries, but in the spring of 1990, Windows 3.0 burst onto market. With Windows, Microsoft now had an operating environment that it controlled. Secondly, it had tied function- ality in the applications layer (API) that it could use to either embed in or link with the OS. Finally, Microsoft succeeded in migrating users from DOS to Windows. As a result, Microsoft got more control over the OS, added value to the OS, and forced independent application publishers to rewrite all of their applications for Windows and then again for OLE (Object-Linking and Embedding).
Once Microsoft had control of the operating system, the key technology for desktop computing, it quickly succeeded in monopolizing the desktop OS and desktop applications.
Microsoft achieved this by leveraging its control over Windows to control desktop applications. For example, Microsoft essentially duplicated an application from a market leader (for example, Lotus 1-2-3). It then broke the network of its installed base by providing file and keystroke compatibility to Windows. Microsoft based its own program, Excel, on unique components in the operating system to which it had early access. While Microsoft claimed Windows was an open architecture, it did have hidden functions that Microsoft leveraged for its own competitive advantage. As a result, Microsoft used its profits from its monopoly position with Windows to heavily promote the linkage features of its applications with its OS. In addition, with its profits, it leveraged an all out war with independent software vendors (ISVs). It is important to note that, without the profits from the OS, a protracted battle against ISVs would not have been possible.
Microsoft further exploited its leverage both horizontally and vertically. Horizon- tally, within the desktop application layer, it moved on to other applications (Micro- soft Word, Fox Pro, Access, PowerPoint, etc.) touting the advantages of vertical linkages to its OS. Microsoft has also employed horizontal leverage (in the appli- cations layer) by marketing a suite of applications at a low price point. Just as it did with DOS, Microsoft is funding application development and marketing of applications with profits made by the OS.
Vertically, Microsoft created a new standard, OLE, “borrowing” from HP’s New Wave, which displaced the existing standard DDE. Microsoft had achieved market power on both sides of the interface, in the OLE functionality of both its OS and its applications. By having access to OLE before its competitors, Microsoft guaranteed better integration between its own applications and the OS than any other ISV could provide. It also gave Microsoft an 18- to 36-month lead over its competitors because of its normal software development cycles following the receipt of new specifications.
This strategy has been enormously successful for Microsoft as they have captured an astounding 85 percent of OS market share. Similarly, despite having a tiny share of the pre-Windows market, by 1993 Microsoft commanded 85 percent of Windows applications sold. Although Microsoft’s share of desktop applications was initially tiny, it quickly achieved market power by linkage and leveraging.
 
Microsoft’s next goal is the intrabusiness server. As it did with the desktop, Microsoft will make every effort to quickly displace all of its competition (NetWare, Oracle, SyBase, etc.) by employing the same strategy of linkages and leverages. Microsoft will do this by employing the following strategies: establishing vertical linkages similar to those it used in desktop markets, establishing horizontal linkages from desktop to intrabusiness servers, and by establishing horizontal linkages from home-to-business servers to intrabusiness servers.
Microsoft has already started the domination of the intrabusiness server by creating a new server OS, Windows NT. NT leverages horizontally from the DOS/Windows client market. In addition, Microsoft has increasingly placed server functionality into both client’s Windows OS and its applications (Access, Excel, and Fox Pro).
Microsoft has applied vertical leverage as well. By vertically leveraging from the OS (NT) to the server (SQL Server), they could apply leverage down on Novell (a com- peting server-OS), and up against other application providers. Currently, competi- tor’s database applications run perfectly under NT; however, Microsoft has promised to break the interoperability between Windows and competitors’ applications so that only Windows applications will work best with the Microsoft SQL Server.
Microsoft also further enhances its power in the server applications layer by hori- zontally bundling these products into a suite (the Back Office) in the same way it bundled desktop applications into a suite. Also, as with the desktop applications, Microsoft will enforce a vertical leverage by making all server applications OLE enabled.
 
More and more, in this age of information, businesses will want to communicate with the user at home to sell products and services and to provide information. It is appa- rent that businesses that exploit this channel will have a strong advantage over com- petitors that do not. Hence, every business will seek entry.
Control of a home-to-business server market by a single company would reap enormous profit. The controlling company could exact tolls for financial and product transactions. Moreover, a company that controlled the home-to-business server market could leverage that control back to the intrabusiness market. Control of both sides of the server market (enterprise server and home-to-business) could place enormous power in the hands of a single company. Microsoft is close to having this power within its grasp.
Microsoft will offer access to its own on-line service, the Microsoft Network (Marvel), to everyone who buys a copy of Windows 95. In fact, Windows 95, upon detecting a modem in a person’s computer, will ask if you want to want to register to the service electronically. This gives Microsoft an incredible advantage over compe- titors such as CompuServe and America Online.
If allowed to purchase Intuit, Microsoft will take the leading home financial appli- cations, Quicken and TurboTax, and once again play its game of leverage. It will bundle these applications with its current applications suite. Competitors will not be able to match this move as Intuit’s applications are currently the industry leaders.
More ominously, Microsoft will integrate these applications with the OS and integrate them on Marvel. Microsoft will quickly dominate the home banking and eventually all home-to-business server products. Somewhat obviously, home banking has broad consumer appeal to everyone that has a bank account.
Domination of home banking provides Microsoft with the ideal platform from which to dominate other on-line services. Businesses that want to provide financial informa- tion to Quicken users, will by necessity, want to choose the server software for in- teracting with Microsoft’s on-line service. Once again, Microsoft will use its honed business skills to ensure that businesses choose Microsoft’s home-to-business server software.
(And let's not forget the recent multimedia joint venture between Microsoft and the newly founded Spielberg-Katzenberg-Geffen entertainment studio, DreamWorks SKG. —Ed.)
 
Microsoft will be able to use its market power and near exclusivity to reap tremen- dous profits. More ominously, Microsoft could demand control of all the content dis- tributed across its network. What content provider would be in a position to resist Microsoft’s demand for control of content in exchange for distribution? Once compe- ting publications are diminished, or gone, Microsoft could conceivably exercise “content control” over the information on the network. While this may seem far- fetched, consider that Microsoft Encarta is already outselling the Encyclopedia Britannica!
However difficult to imagine, it is conceivable that one single company could seize control of information transmission so as to constitute a threat to free society. Such a scenario is a realistic possibility—and with the current rate of Microsoft’s growth, perhaps a probable outcome. Only strong and definitive intervention by the US. Government can stop the emergence of Microsoft World™.
 
Mr. Chartier is a marketing consultant and graphic designer with an interest in the high-technology and communications industries. His views are his own, and only occasionally represent the sentiments of MacSense's editorial staff. Mr. Chartier welcomes comments by email at ubik@sonetis.com.
