Microsoft Isn’t Playing The Game

The market value of Microsoft Corp., which became a public company only 11 years ago, is $162 billion. Investors believe it’s worth nearly twice as much as AT&T - and more than General Motors, Boeing and Citicorp combined.

But a huge chunk of Microsoft’s value could soon disappear - not because the company is making poor products but because it has failed to understand that the fate of American companies often hinges on the power of American politicians, bureaucrats and judges.

In other words, it’s not enough to make good software, to market it cleverly and to stay a step ahead of your competitors. You have to play Washington’s game. Microsoft hasn’t done that, and the company and its shareholders - not to mention its customers - may pay a big price for this combination of naive inattention and arrogance.

Bill Gates, Microsoft’s CEO, has always believed that the role government should play in helping high-tech companies is to leave them alone. He’s right, but unfortunately, that’s not the way Washington works. Even more unfortunately, Gates has proceeded as if it were.

Microsoft’s current troubles with the Justice Department date back to July 1994, but it’s learned nothing since. This negligence is astounding. The company still has just four employees (including three professionals) in its Washington government affairs office. By contrast, IBM has 26 lobbyists, AT&T 45 and Motorola 21.

In the Washington game, if a company gets big enough, it’s a target. Fred S. McChesney, professor of law and economics at Cornell, has just written a new book on precisely this subject called “Money for Nothing: Politicians, Rent Extraction and Political Extortion.”

“The overriding lesson of the rent-extraction process,” McChesney writes, “is that politicians are interested in any stock of immobile capital or wealth from which they can extract a share.”

They get it, he writes, by “selling wealth protection.” It’s a racket that’s been practiced with telecommunications companies ever since the consent decree that broke up the Bell System in 1984, and President Clinton is elevating it to a high art, especially now that he has the line-item veto.

Companies have little choice but to pay the extortion money. They have to defend themselves - by making campaign contributions, hiring former politicians, engaging powerful law firms, cozying up to the press.

In that endeavor, Microsoft is a latecomer - and still an extremely reluctant player. In the software jungle, the company may be a tiger whose fangs drip blood, but on Washington’s mean streets, it’s little more than a pussycat.

And it’s getting mauled. This month, Thomas Penfield Jackson, a U.S. District judge, ordered Microsoft to stop requiring computer makers to install its new Internet browser along with its operating system, Windows 95. Jackson also appointed a “special master,” a Harvard Law School professor named Lawrence Lessig, to gather evidence and give advice.

My guess is that the legal nerd from Cambridge is big trouble for the software nerds from Redmond. While the Wall Street Journal says Lessig is a “political moderate,” it also notes that he thinks there is a role for government - perhaps a big one - in intervening to protect consumer choice.

Microsoft’s contention is that consumers benefit from wide-open markets, where competitors slug it out without the state’s interference. And in this new age, technology moves so quickly that no firm can establish monopoly power for long - and certainly can’t use it to push up prices.

Too bad Microsoft didn’t fight harder for those principles - and didn’t buy a little wealth protection. Instead, two years ago, it signed a consent decree. The government says it violated that decree, but Microsoft contends that its browser is “integrated” and so exempt.

Jackson’s ruling is only temporary, and big computer makers, including IBM and Compaq, say they’ll keep shipping machines with the browser anyway. (Hardly a surprise - it’s free!)

Jackson’s decision, which Microsoft is appealing, bodes ill for the company. Instead of simply ruling on the consent decree, the judge is turning this into another massive antitrust case.

What’s worse is that Joel Klein, the politically adept assistant attorney general, is now encouraged to keep dogging Microsoft’s steps. “The Justice Department is not going to let Microsoft leverage its monopoly power any more,” says Steve Newborn, a former antitrust enforcer at the Federal Trade Commission. “And that’s much more significant than this particular case.”

In 1990, Bill Joy, one of the founders of Sun Microsystems, predicted “that by 1997 a wonderful new technology would transform the computer industry, and that it would be the undoing of Microsoft’s dominance,” writes James Wallace in “Overdrive.”

“Joy was right about the technology, but wrong about Microsoft.” The company, big as it is, managed to change course quickly and respond to the Internet - in part by exploiting the popularity of its own operating system.

Consumers have benefited from this turnaround. Netscape, which dominated the browser market, now has competition - which is one reason the antitrust action lacks merit.

But merit isn’t really the point, nor is the quality of the software.

The point is that Microsoft has underestimated Washington. And companies that do that can see tens of billions of dollars disappear into thin air.

xxxx