GAME OF X V.2

The departure of Alex St. John did not stop the wheels of Microsoft from turning, but there was definitely something more ominous looming ahead. Before the hammer came down, however, Bill Gates did something that, to some, was a surprising move. In retrospect, it was not.

On August 6, 1997, Steve Jobs got up in front of an audience at MacWorld in Boston and gave a speech about “Meaningful Partners”. In that speech he announced that one of Apple’s new meaningful partners was Microsoft. It as a masterful speech that made it sound as if both Microsoft and Apple had finally learned to get along. The deal was that Microsoft would invest $150 million in non-voting stock and agree to keep Office on the Mac for the next five years, while Apple would drop its trademark infringement lawsuit over the Windows UI and the embedding of Internet Explorer as the default browser. The agreement also stipulated that Microsoft would continue to develop and ship for the Mac, not only Office, but future versions of Internet Explorer and other Microsoft tools.

On the surface this investment seemed to benefit Apple the most, because Apple was in financial trouble at the time, but Bill Gates was looking down the barrel of a Department of Justice action against Microsoft. As James Plamondon puts it, “Microsoft needed Apple for a couple of reasons. It needed Apple to defend itself against anti-trust suits. The existence of Apple proved that Microsoft didn’t have 100% of the market.” Apple was arguably only months from bankruptcy when Steve Jobs was brought back as CEO, and according to Plamondon, “First thing Steve Jobs did was hop on a plane, come talk to Bill Gates, Bill Gates invested $150 million in Apple, got them through the bad rent period.”

To some people, it looked like a philanthropic move by Gates, but in reality it was consistent with Microsoft’s long-term strategy, and in any case, $150 million was chump change to Microsoft at the time. And it didn’t mean that Microsoft intended to cede any market control to Apple or “play nice” when it came to platform dominance.

If helping Apple was a strategic move, it probably was no accident that it occurred while the wolves were circling, and Gates certainly knew that Microsoft was their target.

JUSTICE DEPARTMENT FILES ANTITRUST SUIT AGAINST MICROSOFT FOR UNLAWFULLY MONOPOLIZING COMPUTER SOFTWARE MARKETS

In a way, it all started with Bill Gates’ 1995 long and detailed “Internet Tidalwave” memo. Toward the beginning of the memo, he wrote:

“The Internet is at the forefront of all of this and developments on the Internet over the next several years will set the course of our industry for a long time to come. Perhaps you have already seen memos from me or others here about the importance of the Internet. I have gone through several stages of increasing my views of its importance. Now I assign the Internet the highest level of importance. In this memo I want to make clear that our focus on the Internet is crucial to every part of our business. The Internet is the most important single development to come along since the IBM PC was introduced in 1981.”

This was a call to arms for the entire company, and he outlined a strategy for going forward in the rest of the memo. (The whole memo is available. Just search “Internet Tidalwave). Once Microsoft realized the importance of the Internet, they were no longer competing solely with giant competitors like IBM, Apple, and Sun Microsystems. They were just a little late getting started, and Netscape had grabbed pole position, showing no indication that it would slow down.

Knowing Bill Gates

Cameron Myhrvold offers some insight into Bill Gates’ decision to help Apple. “This goes all the way back to the original story of Bill meeting IBM, and Bill saying, ‘Oh, you need an operating system. You should go talk to my friend at Digital Research.’ And then IBM goes down there and the guy had just bought an airplane and decided to blow the meeting off and fly his airplane. And then, they went back to Bill and said, ‘Well, we don’t want to work with those guys, so will you do it for us?’ And this is a story that nobody tells. And I’ve got to tell you that it predates me, so I don’t know if it’s true. It may not be true, but what I have heard is that, in discussions afterwards, somebody had said, ‘Oh did you know there’s a rumor that Digital Research is working on a BASIC compiler, and when Bill heard that, he said, ‘If they’re going to build a BASIC compiler, then we shouldn’t feel bad about getting into the operating system business.’ And that is what flipped the bit. Now again, I don’t know if that’s true. It could be that it never happened, but I’ll certainly tell you, knowing the personality of Bill, it’s a highly believable story. So then you fast forward to decisions like giving Apple the loan. What would the world be like if we hadn’t loaned them the money to keep them in business? What if we had canceled Office for the Mac? Pretty interesting.”

Any number of projects sprung up at Microsoft after Gates opened the door. Under Nathan Myrhvold and Rick Rashid, MSR was fully engaged in researching set-top boxes with the goal of delivering broadband connectivity into everyone’s living room. A content authoring system code-named “Blackbird” was in development to compete with HTML. However, the primary—and among the early projects, the only successful one—was Internet Explorer.

Microsoft was no stranger to lawsuits. Apple had previously filed a “look and feel” lawsuit against Microsoft that ultimately failed. As Plamondon observes, “We had a license to the user interface. We had a written license on paper, and then they tried to claim that the license didn’t really matter, and it totally got thrown out of court. It was absolutely without merit, but nonetheless, they rode that PR pony, and for two years they were able to beat us over the head with what an evil, nasty bastards we were.”

Microsoft had also been sued for dumping products on the market with unfairly low prices, and they were also sued for setting prices too high, prompting Plamondon to ask, “How can anyone choose the sweet spot in between those two … the Scylla and Charybdis there?”

It’s likely that none of the previous lawsuits caused as much consternation at Microsoft as the one that the DOJ filed in 1998. As previously described, DRG had done its best to drive the industry leader Netscape off a cliff using the marketing strategy of distributing IE for free, but that alone was not enough. Microsoft had also tried to make a deal with Netscape that would leave them free to make their Navigator browser for all platforms except Windows, leaving IE without any significant competition on its own platform. However, Netscape refused the deal, and Microsoft was faced with the real problem of getting people to leave a successful browser for one that was unproven and not yet up to the same standard.

Although Internet Explorer improved with each release, and began to gain 20-30% market share by late 1997, it was still way behind. The solution seemed to be to bundle IE with the upcoming Windows 98 and make sure it was the default browser for that operating system, and they tried to enforce contracts that would prevent hardware manufacturers from bundling any other browser. In essence, they tried their best to make the most of their clear operating system advantage to gain the upper hand on Netscape.

John Ludwig thinks that Microsoft’s strategy regarding IE was a mistake. “You just didn’t need to make it so blatantly obvious.” He was an advocate of including all available browsers, suggesting that they were going to end up on the machines anyway. To illustrate his point, he once went out and purchased 10 machines at retail and invited Paul Maritz to observe that every one of them already had a bunch of competitive browsers on it, even though Microsoft was insisting that IE be the default, and in some cases, the only browser to be sold with the machines. “And my point was, look, this horse is out of this barn. They’re already shipping other browsers. Don’t kid yourself that we have any control over that anymore… I think Microsoft made some decisions that needlessly inflamed the situation.”

St. John has suggested that the most damning part of the anti-trust suit was that Microsoft had used its muscle to try to force a smaller company out of business through its control of the operating system and financial advantages. But at Microsoft, the idea that Netscape was somehow a poor and defenseless adversary didn’t fly, in part because of statements by Netscape’s CEO, Mark Andreessen, who liked to say that Netscape would render Windows into “a poorly debugged set of device drivers.” This statement and others were broadcast through email to the engineers at Microsoft and sufficiently motivated them to banish any thought of Netscape being a weak adversary who would be easily vanquished. (In an interview with Wired years later, Andreessen admits that the quote was not his originally, but that he had gotten it from 3Com founder Bob Metcalfe.)

Because we can watch DVD movies on PCs, Eric Engstrom became a witness in the trials. “I was the person that put DVD playback on Windows, which seems ridiculous now, that that was even a fight, but it was a fight. Why wouldn’t a PC be able to watch movies? That was after Alex left the company, and that resulted in me ending up in the anti-trust trial. Media players and all that stuff, trying to fix it so people could watch a video on the internet without installing software. If you think about it today, it all just seems ridiculous.”

St. John disputed Engstroms account, saying, “Playing DVDs was NOT the reason Eric was a DOJ witness. He was in charge of killing Netscape, Real Networks and Apple at that point. Ballmer had basically said to him at that point, ‘Stop killing your managers and use that energy to take out these guys for me. You’re in charge already!’”

Reading the DOJ’s documents, however, it’s clear that the “browser wars” and Microsoft’s tactics against Netscape were at the crux of the matter.

“The DOJ trial had a huge impact because it distracted all the senior management team for a long time, and crippled the company because of its outcome. Really crippled it culturally. So my view was, when I look back, of course the culture was always evolving, but the things I remember vividly was a malaise after shipping Windows 95 and wave after wave of reorgs, followed by a kind of crippling DOJ trial. And I don’t think Microsoft was ever the same after that.”

By the time the DOJ announced its suit against Microsoft, St. John was already out of the picture, but that doesn’t mean he was ignorant of what was going on. “There’s no doubt that from ‘92 to at least ‘96-‘97 Microsoft was conquering the world, killing Apple, capturing everything it saw, its stock was splitting over and over again,” says St. John. “I definitely saw that going on. And Bill Gates wasn’t used to losing up to that point. Losing was not something that had ever happened to Microsoft.* And I think that had a big impact. What I’ve heard a lot from people was that the company was really dominated by adhering to the punitive restrictions of the DOJ settlement, and so there was a lot of fear of enforcement and paranoia that dominated the organization. So the first time you really saw Microsoft, instead of focusing on conquering the universe and feeling good about that, literally obsessed with reigning itself in in all the ways that it had been required to.”

*Plamondon adds this comment: “Yes, it had, actually -- a lot. It’s just that Microsoft was relentless, and kept picking itself up, dusting itself off, and rejoining the fray…until it won. That’s not the same as ‘never losing.’ Alex knows this; he simplified for effect.”