MEMORANDUM


TO: MICROSOFT'S LAWYERS

FROM: PROCOMP

RE: WHAT YOUR OWN CLIENT FAILED TO TELL YOU

DATE: JUNE 1, 1999


Having watched the last seven months of the trial, witnessing your deft legal arguments swept away by the actions of your client outside the courtroom, one is reminded of those words immortalized by Paul Newman in the movie Cool Hand Luke, "What we have here is a failure to communicate." At times, it has been hard to explain who is doing a better job of rebutting the legal arguments you have been so aggressively pressing in the courtroom - the government or Bill Gates. Look at how Microsoft has so assiduously undercut its own defense.

1. The Internet Explorer browser is not an integrated feature of Windows.

Your client apparently has convinced you that consumers benefit from the integration by Microsoft of its Explorer browser into Windows. I suppose it's possible that you found James Allchin's videos touting the benefits of integration more convincing than did Judge Jackson. In any event, we thought that you should know that while trial was at recess, your client issued a new version of Explorer (IE 5.0) that is sold as a free-standing (i.e., non-integrated) product. Consumers can purchase this browser application on a CD-ROM and install it onto their Windows PC themselves. In a related development since the lawsuit was filed, it turns out that your client has represented to the U.S. Patent Office that "anyone with ordinary skill in the art would know that a browser and operating system are separate products." So much for integration. We suggest you not waste any more of the court's time with this argument.

Your client has obviously tried hard to convince you that it faces threats to its monopoly position from every front, and therefore has no monopoly power. Surprise! Based on a recent Newsweek editorial by Bill Gates ("Why the PC Will Not Die"), your client now appears to believe that its monopoly position will be preserved for years to come because it turns out that handheld devices are compliments for PCs, not substitutes. Therefore, sales of PCs loaded with their Windows operating system will continue to grow because, "the PC will also work in tandem with other cool devices" and no doubt these other devices will be loaded with Windows CE.

Your client's 90 percent plus market share in the PC operating systems market has not been enough to convince you that it has monopoly power. However, you should know that one sure sign of a monopolist is that it can abuse its customers with abandon because those customers have no place else to go. Anyone who has paid a visit to their local DMV is familiar with this fundamental truth. Based on Microsoft's treatment of IBM-one of its largest customers-it appears that Microsoft is not much different than the local DMV when it comes to customer relations. Garry Norris, an IBM executive who handled negotiations with Microsoft, will testify in detail to the threats made by Microsoft executive Joachim Kempin in response to IBM's promotion of applications that competed with Microsoft's office suite. Microsoft consistently charged IBM higher prices than more complacent OEMs because IBM competed against Microsoft products, and at one point Kempin told Norris that if he didn't like the terms he could, "buy it at retail." Sounds like customer service only a monopolist could deliver.

Remember when poor Dr. Schmalensee had to argue Windows sales and profits were recorded on slips of paper? While that was great entertainment for courthouse observers, you should probably know Mr. Gates released a book when the trial was in recess that indicated that, in fact, your client does use sophisticated state-of-the-art software to record and monitor every financial matter affecting the company. We recommend you provide the necessary information to Dr. Schmalensee so he can correct this matter during his rebuttal testimony.

Your client has suggested that U.S. v. Microsoft is an affront to their right to innovate. Microsoft's recent acquisitions activity underscores that when you say "innovate," you mean "acquire." Microsoft's strength lies in its ability to purchase technology it cannot produce and destroy competition. Some of Microsoft's most famous products such as PowerPoint and Internet Explorer were developed by others and bought by Microsoft. We recommend you commission new polls and focus group activity so you can adopt new themes that may be supported by reality.

Last, we wanted you to know you have developed the wrong impression of Mr. Gates. The legal team seems to be intimidated by Mr. Gates and other top executives. Or perhaps there is another reason why there is almost a total lack of coordination between Microsoft business executives and Microsoft lawyers. The truth is that Mr. Gates actually wants you to tell him the unvarnished truth about how Microsoft is faring in the courtroom. And he wants you to tell him as soon as possible. At least that is what he says in Chapter 10 of his new book.

So reserve your flight to Redmond immediately. Tell Mr. Gates that the old arguments from the first playbook didn't work. (Examples: Microsoft is not a monopoly, Microsoft was "set-up" by Netscape, Microsoft can do anything it wants with its products regardless of the law, the browser is not a separate product, the industry is dynamic and competitive so antitrust laws are not needed, etc., etc.) Tell Mr. Gates that in order to gain any goodwill with the Judge prior to the remedies phase of the trial, he will have to conduct a factually-based defense rather than a campaign of diversion.

We remain hopeful that competition and innovation will flourish in the software industry, that Microsoft will develop innovative new products, and that Microsoft's success or failure in the 21st Century will depend on the quality of its products, not whether it can illegally maintain, abuse and extend its monopoly.

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Just a thought about bonehead moves, monopolies and Dr. Pournelle's theory that IBM's screw-up on OS/2 immunizes Microsoft on Windows.

The SPECIFIC case, as least as far as I understand it, is not about Windows monopolizing operating systems. It's about Microsoft using Windows' monopoly to drive competitors out of the browser market. Netscape DIDN'T make the bonehead moves IBM made, yet Microsoft used its monopoly position in operating systems to try to destroy the company.

See, the problem with Microsoft is the same as it has been for years. Let's stipulate that Gates got his operating system monopoly fairly. A company can't then be allowed to use that monopoly to drive other competitors in other fields out of the business.

What if, tomorrow, some killer word-processing app appears that makes Word look like crap. The market starts moving to this new killer word-processing app. Then Microsoft reacts by bundling Microsoft Word into Windows and claims its just part of the operating system. Wouldn't that make you nervous?

What is unique about Microsoft and software that makes it different than any other anti-trust suit is the mutability of the product. Oil is oil. Cars are Cars. Airlines are airlines. But operating systems? It's whatever the operating system maker says it is, which is exactly what Microsoft is doing: changing the OS whenever a new killer app appears challenge its dominance.

There is only one solution--and it's been the only solution for five years: the OS side of Microsoft has to be hived from the apps side of Microsoft. The cross-fertilization of a monopoly OS and apps is a terrible danger.

OK Paul. At your suggestion I've reexamined my assumptions, and I come to the same conclusion: Microsoft is a criminal enterprise. The government should hunt it down and drive a stake through its heart.

Consider that competence/fatuity ratio you say you've observed in the computer industry over the last 20 years. That supports the notion that everyone in the industry is an idiot, or perhaps more charitably, that it is next to impossible to make sound business decisions for a industry based on a technology that is changing so fast it has no long term predictability. But your observation provides no evidence for the thesis that everyone is an idiot EXCEPT FOR MICROSOFT. And it is that rather far-fetched notion that one would have to believe in order to accept that Microsoft's monopoly is the result of winning in the marketplace fair and square.

I've always thought that Microsoft's own products provided the most concrete and obvious proof of the company's unfair business practices. Since its inception Microsoft has been selling shoddy, inferior software, not just "bad" in some abstract academic sense, but worse than preexisting commercially available alternatives. (Short list: Windows vs Mac, Internet Explorer versus Netscape Navigator, ActiveX versus Java, ...) The mere fact that Microsoft has risen to its current dominance provides pretty strong evidence that forces are at work other than open competition in a free market.