AGENDA: Microsoft’s real trial is trust - As Microsoft’s bitter legal battle with the US government drags on, Harriet Marsh reports on the likely knock-on effects for the software giant’s customer standing

In the US, two Bills look like guaranteeing a good Christmas for the country’s army of lawyers. But while the first, President Bill Clinton, continues his battle to fend off impeachment, it is the second, Microsoft chairman Bill Gates, who is gaining more media coverage as he finds his company in the dock facing allegations of uncompetitive business practices.

In the US, two Bills look like guaranteeing a good Christmas for

the country’s army of lawyers. But while the first, President Bill

Clinton, continues his battle to fend off impeachment, it is the second,

Microsoft chairman Bill Gates, who is gaining more media coverage as he

finds his company in the dock facing allegations of uncompetitive

business practices.



In the same US courtroom where Clinton’s nemesis Monica Lewinsky

testified this summer, Microsoft is now facing an anti-trust lawsuit by

the US government.



It is fighting charges over two main issues relating to control of the

World Wide Web.



The first is its practice of integrating its internet browser software,

Internet Explorer, with its Windows operating system, thus effectively

shutting out the main competitor, Netscape Navigator.



In addition, Microsoft faces accusations of applying pressure to America

On-line (AOL) to prevent the promotion of the Netscape browser on its

platform.



The lawsuit began in May and estimates suggest it will be January before

a decision is reached. If Microsoft loses, commentators believe the US

Justice Department may push for the company to be broken up into three

operating units, to distance Windows from Microsoft’s software and its

internet developments.



Alternatively, it may demand that Microsoft licenses Windows to its

rivals, turning the operating system into public property.



How big is too big?



Bill Gates and the Microsoft brand are legendary. But what are the

implications of this court case to the UK consumer?



Many observers in the UK believe that Microsoft will win. This view has

gained support since the recent announcement that AOL is to purchase

Netscape (see box).



’One of the arguments in Microsoft’s favour is that there is always one

giant in this marketplace. In the past it was IBM, now it is Microsoft,

but the future is hard to predict,’ says Tony Westbrook, editor-in-chief

of IT Week.



Alex Letts, president of Publicis Technology, an agency specialising in

technology clients other than Microsoft, believes that, should Microsoft

be broken up with Gates losing control of the Windows system, it would

be bad news for consumers.



’If that happened my belief is that Gates would kiss the Windows

operating system goodbye,’ says Letts. ’It would become an open system,

no company would want to develop it.’ Such a ruling would seem

unlikely.



A scan through the internet discussion groups devoted to the case

suggest that the potential benefits to the consumer if Microsoft is

broken up include lower prices and greater choice.



But some UK observers are doubtful. ’Microsoft’s pricing strategy is all

about getting maximum return while making if difficult for competitors

to enter the market,’ says Gary Barnett, an analyst at information

technology and telecoms research specialist Ovum. ’It is by keeping

prices low that it makes it harder for competitors to enter the

market.’



Barnett is equally sceptical about claims that Microsoft is damaging

competition: ’From the consumers’ perspective, I struggle to believe

that Microsoft’s activities have significantly reduced competition or

see a way that Microsoft could be forced to do business that would

increase consumer freedom.’



Letts believes Microsoft will win the case but he suspects that the case

may make Microsoft, a company known for continually innovating, more

cautious.



’The sword of Damocles hanging over Microsoft is that if it becomes too

dominant in other areas it will happen again. Microsoft is aggressive

and this will make it more cautious in the future.’ This, Letts

believes, could be advantageous for its competitors.



Microsoft is anxious to defend its history as a company known for the

development of new products which benefit its customers: ’The court case

is about Microsoft’s ability to innovate,’ says Oliver Roll, the

company’s director of product marketing. ’This is one of the primary

drivers of the brand.’



If the current case turns into a protracted struggle, the company and

founder Bill Gates may feel the impact on their brand image.



As Richard Branson is now discovering, even the most popular brand is

vulnerable to a sea-change in popular perceptions if consumers feel they

are being misled or abused.



Although Roll reports that Microsoft has done no research into UK

consumer perceptions, in the US Microsoft is blitzing TV screens with

new corporate ads which, significantly, make no mention of the company’s

products or Mr Gates. In the UK, advertising spend has held steady; in

the first three-quarters of 1997 it totalled pounds 6.06m, in the first

three quarters of 1998, it reached pounds 6.68.



So far, the brand image seems to be standing up. The US press report

that Americans - particularly the younger ones - are reluctant to

discredit Gates and Microsoft.



Anecdotal US evidence suggests Microsoft has been helped by a growing

’litigation fatigue’ among the public - a phenomenon which has helped

President Clinton.



Consumer support



Alex Batchelor, brand valuation director at Interbrand, believes brands

such as Microsoft, which offer clear benefits to consumers, are often

able to weather problems well.



’If, in consumers’ minds, the benefits associated with Microsoft’s

products are still clear, they will put up with a lot. However, if they

perceive they are being shamelessly exploited they will turn strongly

against whoever is doing that,’ Batchelor says.



’The danger for Microsoft is under-estimating how quickly the situation

can change.’ And the longer the case drags on, the greater the chances

it will hit consumer perceptions.



Indeed Microsoft, while frighteningly successful, is not omnipotent.



While the company does have a clear monopoly of desktop systems with its

Office application and the Windows operating system, it has still some

way to go before its gains control of the ’back office’ - the

marketplace which encompasses database systems and server software.



Letts believes Microsoft’s competitors fear that it will overtake them

in the back office arena, and it is this that is the real driving force

behind the court case.



’The core of this case is about front-office systems and applications

but the reason it is happening is that competitors are fearful Microsoft

will overtake them in the back office,’ he says. ’It is a deeply

self-interested attack by Microsoft’s competitors.’ But their concern is

understandable.



Microsoft continues to grow at a rate of 25% a year.



In the fast-developing computer arena, ’convergence’ is the new

buzzword.



New systems are under development which will enable consumers to access

the internet via the TV, and computers will fit into the palm of the

hand.



This convergent future may be driven by new operating systems: ’It is

almost certain that the operating system which drives convergence will

not be Windows,’ says Letts. ’And looked at from this perspective, Gates

can argue that he has no monopoly.’



AOL’S RIVAL COALITION



In a development which proves the free market can move faster than the

US legal system, two of Microsoft’s biggest rivals last week struck a

deal which could radically alter the wired-up world.



Ironically, the deal could also help get Microsoft’s Bill Gates off the

legal hook in his battle with the US government.



The deal saw America Online, a content and internet access provider,

purchase Netscape, famous for its internet browser, for dollars 4.2bn

(pounds 2.6bn).



AOL has a customer base of 13 million subscribers, while Netscape

attracts 20 million visitors a month to its web sites.



Netscape is the market-leading browser, although it has been steadily

losing market share to Microsoft’s Internet Explorer. Netscape is also

strong in providing servers for the business market, access which AOL

has long coveted.



Microsoft immediately latched on to the implications of the deal. A

spokesman said: ’Competition in the computer market can change

overnight, making government regulation unnecessary’.



At the same time, AOL has also signed a licensing agreement with Sun

Microsystems to gain access to its Java software, which can run on any

operating platform. This software is ’operating-system independent’,

meaning it can run on any computer platform, allowing users to bypass

Microsoft Windows.



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