This
article appeared in The Wall Street Journal
on 2 July 2001.
Manager’s
Journal:
Microsoft Isn’t Out of the Woods Yet
By
David B. Yoffie and Mary Kwak. Mr. Yoffie is a Professor at Harvard
Business School, where Ms. Kwak is a research associate. They are
co-authors of Judo
Strategy (Harvard Business School Press, 2001).
Microsoft
chiefs Bill Gates and Steve Ballmer should be breathing sighs of
relief. The appeals court’s decision to overturn Judge Thomas Penfield
Jackson’s breakup order and remove him from further deliberations
is a major victory. The court also cleared Microsoft of charges
that it tried to monopolize the Web browser market and, perhaps
most importantly, rejected the argument that Microsoft’s practice
of bundling software products together is itself illegal. This ruling
appears to vindicate Microsoft’s .Net strategy of tying a growing
range of Internet functionality to its latest-generation operating
system, Windows XP.
But
Microsoft is not out of the woods, either legally or competitively.
The court agreed with Judge Jackson that Microsoft acted illegally
to preserve its monopoly power in the PC operating-system market.
Given this finding, the Department of Justice is not going to let
Microsoft completely off the hook. This decision is also likely
to embolden European Union Competition Commissioner Mario Monti,
who already has Microsoft in his sights. Last week, by rejecting
GE’s bid to take over Honeywell, Mr. Monti demonstrated his willingness
to take on the world’s most valuable company, even though the deal
had passed muster in the United States. Now it may be the runner-up’s
turn.
This
creates real management challenges going forward. Microsoft is a
much stronger company today than it was at the start of the browser
wars, but it faces much tougher competition. In the wake of the
appeals court ruling, Microsoft is going to have learn a new style
of play. The company’s traditional no-holds-barred, destroy-the
competition culture will no longer work.
In
the Web’s early days, Microsoft was viewed as a dinosaur that just
didn’t get it. Over the past five years, Microsoft has done a spectacular
job turning itself around. In its core business, Microsoft continues
to own close to 95% of the world’s PC operating-system market and
over 85% of the market for productivity applications. Together,
these businesses give Microsoft the world’s strongest balance sheet,
with $30 billion in cash and $3 billion in cash flow last quarter.
On the Internet, Microsoft has won the browser wars, with over 80%
share today, and it has built the most visited network of Web sites
in the world. It also has exciting new products in the wings, such
as Xbox, its Nintendo and Playstation2 competitor.
But
Microsoft’s strengths are also its weaknesses. Within the company,
Microsoft’s obsession with Windows threatens to stifle innovation.
One former Microsoft developer told us that the big exodus of talent
from the company over the past two years occurred because many developers
"wanted to go do the Internet full-bore, with no regard for
Windows and Office. Bill could just not see his way clear to letting
us do that—he wanted to increment from Windows and Office to the
Internet. We saw that as a path for failure."
Externally,
smarter competitors have found ways to attack Microsoft that take
advantage of the company’s diehard commitment to Windows. Palm Computing,
for example, seized the lead in hand-held computing by developing
a highly user-friendly operating system from scratch, while Microsoft
was hobbled by its desire to retain the clumsier Windows interface.
Although Palm has had some recent troubles, and Windows CE has gained
some ground, companies using the Palm operating system—including
Palm, Handspring, and Sony—continue to command over 80% of the market.
Similarly,
Microsoft faces a real challenge from Linux in enterprise computing.
The open-source operating system that runs 30% of the servers powering
the Internet, Linux has a loyal and growing following. Even Microsoft
devotees, such as Compaq and Dell, have jumped on the Linux bandwagon.
But
the company’s most dangerous rival may be AOL Time Warner. Five
years ago, Microsoft could buy AOL’s support to help defeat Netscape.
Today AOL is a behemoth, with higher revenues and six times as many
online subscribers as Microsoft. Just last week, AOL rejected Microsoft’s
demands to abandon RealNetworks, demonstrating that some old tactics
will no longer work.
The
biggest challenge created by last week’s decision is that Microsoft
won’t be able to attack AOL, Palm and Linux with the same vigor
the company employed to defeat Netscape, Apple and Novell. Exclusionary
contracts—Microsoft’s tactic in the browser wars—have been ruled
out of bounds. The legal status of bundling is still not entirely
resolved, despite the court’s suggestion that the nature of the
platform-software market may support a more permissive approach.
And although the judges showed little enthusiasm for what they termed
"radical structural relief," Microsoft will not escape
close legal scrutiny going forward.
With
the shadow of future antitrust action hanging over Microsoft’s every
move, Messrs. Gates and Ballmer must change the company’s culture
and make antitrust compliance second nature. It won’t be enough
to give every sales person a pamphlet and a lecture. Management
will have to get everyone in the organization to live the right
behavior through repeated training, role-playing and drills. Only
then will they instinctively do the right thing.
In
addition, Microsoft has to learn to sweat the small stuff. When
it comes to antitrust law, you have to toe the line 100% of the
time. As Cisco CEO John Chambers told the Journal last
year, "when you are a cute 30-pound chimpanzee, what people
would consider fun or acceptable behavior in your house is not acceptable
when you are a couple of hundred-pound gorilla."
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