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  Microsoft's Humbling by the Government was Unnecessary  

by Robert McGarvey, March, 2001
"I cannot imagine a more important case for the future of antitrust. If our victory is upheld, it will set the rules of the road for years to come. If it gets overturned, almost anything goes."

-Dan Rubinfeld, Department of Justice

The humbling of Microsoft by the Department of Justice (DOJ) is widely seen as setting an important ethical standard for businesses in the new economy. Regardless of the outcome of the appeal process, the DOJ hopes to set an ethical stake in the ground with this landmark decision: Abuse of commercial power, even in the abstract world of software and the Internet, will not be tolerated.

Unfortunately for the Department of Justice, life is not that simple. Business ethics are not established by edicts from the government. Instead, ethics in business are based upon what delivers the goods. In business there are no rewards for good intentions and precious few for good behaviour. As a result, the business behavior that delivers the greatest profits has the most dramatic impact on management's behavior. Important for Microsoft and the U.S. DOJ, this environment acts far more effectively than any legal judgement.

Ironically, Microsoft's business practices have set an example of what not to do. In the beginning, its behavior represented an acceptable use of business practice. However, in the drive to dominate the computer industry, its actions degenerated into unacceptable, monopolistic behavior. As the Internet economy unfolds, these actions are actually becoming counterproductive and a detriment to the company's continuing success.

It appears that Microsoft's mistakes were rather innocent, since it began its life in what was essentially the old economy of the 1970's. Back then, most businesses subscribed to the "industrial" model of business ethics.

Ethically, each corporation considered itself to be isolated, competing for survival against every other corporation in a hostile commercial environment. Such a view provided ethical justification for a variety of predatory practices toward "outsiders" - which even included suppliers, strategic partners, agents, and distributors. Consequently, trust between companies was very fleeting in this anarchic world, a factor that severely limited cooperation. The environment of this industrial furnace helped forge Microsoft's business practices.

But now the playing field is changing. The Internet has spawned vast new efficiencies, driving businesses into more collaborative, joint-destiny type relationships up and down the supply chain. So profound is this change that many observers are suggesting that the competition model is shifting from the company to the supply chain. This new collaborative reality is re-defining the formula for success in the new economy, and in the process dramatically effecting traditional business practices.

Supply chain integration not only provides huge efficiencies, but its deep integration allows partners to see into and through other organizations. As a consequence, management is often privy to their competitor's internal strengths and weakness, trade secrets, unique know-how, market positioning and other valuable information. Modern business ethics, which value network relationships, place new limits on the self-interested use of this information. Trust is now an important value. Without it, companies may be deliberately excluded from profitable networking opportunities.

Given this new cooperative environment, Microsoft's actions began to take on draconian monopolistic qualities. The catalyst for Microsoft's "over the top" actions took the form of Netscape's initial successes starting in 1994. Microsoft could see only too well that browsers had the power to change the PC environment, creating a new Internet-based business platform. Netscape was not only a new supplier, but also potentially a viable challenge to Microsoft's dominant position as gatekeeper in the new economy. So what did Microsoft do? It did what it was trained to do, what was expected of it in traditional business ethics: it pulled out all the stops to protect its positioning in the market.

Last year's U.S. DOJ victory against Microsoft centered on the government's ability to satisfy the court that Microsoft not only was a monopoly, but that it abused its monopolistic position. But what the courts did not consider is the speed at which things change in the new economy.

In today's electronic economy, Microsoft's monopoly was over almost from the moment the DOJ opened its case. The very presence of Netscape browsers and a new business-oriented Internet broke the Microsoft hegemony before Microsoft management had a chance to fully appreciate the insidious threat.

The Internet created Webspace, a new and vastly complex multi-dimensional commercial environment. Successful new software and businesses can now reside almost anywhere. Success no longer depends upon having an icon situated on the Window's screen. Microsoft's fear of Netscape was justified. In Webspace the PC is just a window, and Microsoft is just another, albeit significant, player.

So the antitrust ruling may have been correct, focusing as it did on the specific events of 1994 and 1995. Yet, the remedy, which presupposes an ongoing Microsoft monopoly, is clearly inappropriate. Microsoft's ability to force compliance is gone. Its behavior in the near future will be influenced far more by its need to fashion a place for itself in the new Internet economy, than in the DOJ's order to break up the company.

Having staked out its territory in the Internet, Microsoft is going to need a variety of partnerships and close working relationships with other companies to make its strategy work. Microsoft's success depends upon adapting to a more collaborative business environment - in effect, becoming a more trustworthy partner. It will not be easy for this former King of the Hill to adapt. But the motivation for any such adaptation will stem from the changing environment. The market will alter Microsoft's behavior far more profoundly than any DOJ antitrust remedies.

Robert McGarvey is Founder & Director of Strategic Performance at Beckett Advisors, Inc., a strategic marketing firm based in Los Angeles. He can be reached at robertM@beckettadvisors.com


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