The Daily Deal, November 7, 2001
Industry Insight Technology

A House Divided

by Susan Webber

'Breaking Windows' offers impressive analysis of a company whose ferociousness how outweighed its innovativeness - but its conclusion may be off the mark

Despite the pervasive sense that September 11 established a new reality, some things remain remarkably untouched. One is Microsoft's relentless quest for world domination. In fairness, now that America faces a protracted struggle, Microsoft may have toned down its bellicose rhetoric. Battle metaphors seem overblown today. But the scale of Microsoft's accomplishments and the ferocity with which it pursues its ambitions make it an interesting study. Even though Microsoft and its founder Bill Gates have been the subject of numerous books, David Bank in his "Breaking Windows: How Bill Gates Fumbled the Future of Microsoft", seeks a fresh approach.

The book is a "Rosencrantz and Guildenstern are Dead" of the Department of Justice's antitrust case, which now appears to be coming to an end. Bank, a Wall Street Journal reporter, delves into the behind-the-scenes struggle between the so-called Internet doves, who wanted to use the open standards of the Net as the platform for new software and services, and the Windows hawks, who saw the Internet as a threat to Microsoft's primacy and profits.

Banks uses his considerable knowledge of and access to the key players - and, most importantly, extensive analysis of the e-mails made public during the trial - to depict a Microsoft divided against itself and in considerable disarray. And he shows that these problems emanated from the top.

Microsoft, skilled at exploiting the commercial potential of its PC operating system monopoly, has become afraid to compete the old-fashioned way, by serving customers. Good features are sacrificed to the design imperative of locking customers in and integrating products tightly. At one point, Gates screams, "You're putting us on a level paying field! You're going to kill the company!"

Bank provides well-chosen vignettes and pithy commentary. The struggle over Internet strategy racked a company which, despite its staggering successes and profits, was already under strain.

Microsoft, with 40,000 employees, had outgrown its management. Projects became unwieldy, and in Microsoft speak, sometimes failed to converge on a finished product.

Gates and CEO Steve Ballmer let their ego needs undermine effective decision-making. Gates' distaste for foreclosing options kept turf wars unresolved. Technology partners and staff became demoralized over Microsoft's failure to "get" the Internet and many highly valued senior managers left. Microsoft's intransigence in the antitrust trials only made things worse. Bank says the debacle forced Gates to cede more power to Ballmer.

Strikingly, all Gates' visions of the future have Microsoft squarely at the center, the most ambitious being Windows as a utility, where customers are billed monthly for their "Wintone". Yet he seems incapable of seeing how these dreams carry the seeds of their own defeat. The government would doubtless regulate the pricing and profits of such a utility, or else, as with telcoms, require it to give competitors access.

Although Bank largely avoids the antitrust trial, his indictment of Microsoft's strategy raises related issues, most notably, that of consumer harm.

Conventional wisdom is that Microsoft was trounced at the antitrust trial but will fare better going forward, largely because consumers were not harmed by Microsoft's conduct. Yet Bank provides numerous counterexamples: Microsoft blocking the introduction of a below-$1000 PC by refusing to lower its software price; its success in achieving growing "dollars per desktop" despite falling hardware prices; its relentless focus on devising features that lock consumers into its products, instead of ones consumers want; Gates' efforts to slow innovation on the Internet.

Did David Boies, the celebrated government trial attorney, win the battle but lose the war by omitting this critical line of argument? Or did Microsoft's anti-consumer behavior manage to fall outside antitrust standards?

Despite Bank's impressive analysis, his conclusion is questionable. He claims Microsoft erred spectacularly in clinging to its core franchise, and feels confident that Microsoft can become a leading, if not dominant, provider of an even larger universe of Internet-based software and services.

But it is not clear how Microsoft might pursue this end. Managers served up the notion of dividing the company to foster innovation and competition. It ran counter to Gates' instincts and became anathema once it appeared the government might mandate it. Even Clayton Christensen, whose "The Innovator's Dilemma" catalogues how disruptive technologies defeat industry leaders, offers no other prescription.

Microsoft's forays into cable and interactive TV have not been terribly successful. In handhelds, its Pocket PC is a distant second to the Palm standard, but Palm is floundering, so losing that struggle may not be a bad outcome.

It is easy to deride decisions swayed by prejudice and emotion. Microsoft, however, has never been an innovator; indeed, it is a master of the come-from-behind game. Expecting it to change its stripes is not realistic. "Breaking Windows" overlooks the fact that a conservative choice, even if made out of fear, is not necessarily a bad one.