[ CASE 2

Microsoft: The Next Chapter

Introduction Microsoft, one of the top software companies to emerge during the information age, continues
to fight a long, drawn-out antitrust battle with European Union (EU) regulators. Microsoft settled part of its
antitrust case with the United States Department of Justice (DOJ) and 20 state att9rneys general in 2004; the
company is still under oversight by the Department of Justice until 2009. Observers note that maybe the EU can
obtain just concessions from the company that the U.S. DOJ could not and has not. More recently, "The [EU]
Commission hit Microsoft with a $781 m (497m euros) fine and again, later, with a fine of $440m (280.Sm euros)
for non compliance after Microsoft lost an appeal against the first fine. The February fine covers the period of
non compliance since the second fine through to October 21, 2007." Microsoft has appealed. (The Register, July
7, 2008). The venerable software giant is at another critical turning point in its development: it has to either adapt
to the changing new global technology environment where collaborative open-source software such as Linux play
and team with the likes of Google, or continue to be hounded and fined by the EU.
It appears Microsoft may be cautiously opening up. The company has begun to make changes to its current
business model, embracing radical, innovative new thinking, incorporating other companies and technologies into
its domains, and pursuing Yahoo! to better position itself in the search business. It has also joined a handful of U.S.
companies who wish to dominate the market for" cloud computing"-a domain that incorporates central processing
to replace desktops, and that " ... involves the centralized storage and processing of informatio!')-a shift that could
reduce the role of desktop computers and the servers and other equipment run by many companies .... " With
regard to business ethics, a major question about Microsoft remains: will the approaches the company takes
involve or attempt to dominate and control competitors?

The Road Less Traveled Microsoft has focused primarily on product development since January 2005, making
acquisitions of complementary businesses (or potential future rivals) along the way. Its chief adversary over the last
year and a half has been the European Union, which issued its original antitrust ruling in March 2004 and a more
recent fine for noncompliance with the ruling in December 2005. Microsoft has also shifted its marketing focus,
tangled with Google over a search engine issue that is loosely reminiscent of the original antitrust claim made by
Netscape nearly a decade ago, struggled to buy Yahoo!, and announced a looming change in business strategy
alongside an administrative shake-up. Microsoft's attempts to take over Yahoo! have, to date, not succeeded.
Both Goggle and Yahoo! do not appear as naive or vulnerable as Microsoft's competitors in the 1990s.

Monopoly: The Battle with Europe The U.S. DOJ settled its antitrust case against Microsoft in November
200 I , and the state attorneys general followed suit shortly thereafter. The settlement dictated that (I) customers
must have a choice about what Windows components are mandatory in any installation of the operating system,
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and (2) Microsoft must disclose certain information to allow third-party developers to create software that better
interoperates with Windows. The end of the DOJ's pursuit of Microsoft essentially closed the door on further
investigations into Microsoft's business practices in the United States, and forced Microsoft's high-profile compe-
tition to look elsewhere for support of their assertions of Microsoft's monopolistic tendencies. IBM Corporation,
Oracle Corporation, Sun Microsystems, RedHat, RealNetworks, Adobe Systems, and more recently Google have
all entreated the European Union to use its authority to regulate Microsoft on their behalf and for the protection
of the software giant's myriad customers.
The EU began its antitrust investigation of Microsoft in 1998 when it received a complaint from Sun
Microsystems alleging that Microsoft was willfully concealing information that Sun required for its software to
successfully interoperate with Microsoft Windows. Subsequently, the EU opened a second unrelated investigation
of Microsoft in 200 I when the company began shipping its operating system with freely attached media player
software that competed directly with rival offerings such as RealNetworks' RealPlayer.
After five years of investigating Microsoft's tactics, the EU issued antitrust rulings in March 2004 and again in
2008. The EU's decision brought with it a $613 million fine and required Microsoft to alter its business practices
to increase competition in two areas that satisfied both of the independent investigations: (I) Microsoft must not
ship Windows with its own embedded media player, and (2) the company was required to produce documen-
tation to assist its rivals in writing Windows Office productivity software. ;
Meanwhile, Microsoft settled out of court with Sun, Novell Networks, and RealNetworks for a total of more
than $3 billion so that each company would forego its related complaints in both the EU and the United States,
which weakened the EU's stance on the antitrust case. However, just over a year later, the EU began receiving
complaints that the company still had not made any progress on either tenet of the 2004 antitrust ruling. The
commission threatened new fines, and Microsoft made an effort to adhere to the terms of the ruling and to
smooth its relationship with the EU. ·
Microsoft began shipping its stripped-down version of Windows in Europe in 2005, satisfying the first
requirement of the EU ruling. However, a number of meetings and information transfers have ensued regarding
the documentation requirement, which neither side has found mutually satisfactory. Microsoft chose to air the
conflict to the press, which consummated in July 2006 when the EU levied a $356 million fine against the software
giant for failing to comply with the 2004 ruling. J"he EU has threatened to fine Microsoft nearly $4 million each
day until the company complies. Microsoft has a number of pending appeals in the EU case, both of the original
ruling and of the most recent noncompliance fine.

A Shift in Business Strategy While Microsoft's battle with the EU continued, Google filed a complaint with
the U.S. DOJ and with the EU's antitrust authorities in March 2006. The complaint alleged that Microsoft had
designed its new Internet browser, Internet Explorer (IE) 7, to primarily use a Microsoft search engine, which
would place Google at a competitive disadvantage in the lnterqet search market. However, the DOJ found in
May 2006 that the default settings in the browser were not a competitive threat to Google. Industry analyst Paul
Thurrott describes the finding:
In a court filing, the DOJ noted that Microsoft had first briefed it about IE Ts search box months ago. The
feature is easily modified to use any Internet search engine, including that of Google, the DOJ said, "using
a relatively straightforward method for the user to select a different search engine from the initial default."
Furthermore, the DOJ wrote, Microsoft's actions with IE 7 are a far cry from the anticompetitive behavior
that got the software giant into legal hot water almost a decade ago. The reason? IE 7 respects changes that
the user made prior to installing this version of the browser. If the browser was previously using a search
service from Google or Yahoo by default, IE 7 will not change that choice to MSN Search when the product
is installed. IE 7 "only uses MSN Search if no default has been set." The DOJ has "concluded [its] work on this
matter," the filing reads.
This behavior is wildly different from the fiercely anticompetitive and monopolistic tactics that Microsoft has
used to thwart its enemies in the past. This change in direction provides direct evidence that a new school of
thought is emerging within the old software giant.,An atmosphere likened to that of a startup software company
is emerging within this large multinational, one that values building trusting relationships with partners. The

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282 Business Ethics: Concepts and Cases

company has even taken a renewed interest in its marketing initiatjves by elevating its Chief Marketing Officer
Mich Matthews to directly report to CEO Steve Ballmer. A clear motivator for increased marketing vigor can
be directly attributed to the "evil empire" moniker attributed to Microsoft in free-software development and
operating system circles, t:No of the company's main competitive foes.
Meanwhile, in late April 2006, Microsoft's share price plummeted 11% in a single day after the company said
it would spend $2.5 billion to compete against rival game consoles and search technology, and to develop online
alternatives to the new versions of its Office productivity software and the next version of the Windows operating
system, Windows Vista. As Microsoft pours funding into its research arm, the door to the next wave of Internet
technology is upon it, and the key to that door will be the Internet browser. Notes The Economist: "The extent
to which web browsers are open to outside firms is important because they represent a platform for providing
services via the Internet, overshadowing the primacy of the operating system ·as the platform for PCs. Whoever
controls these platforms is in a position to determine what users can do--as well as steer sales." Service provision
via the Internet is that next wave, and innovation in th~t arena has already begun. Microsoft has reluctantly come
to the same conclusion, even if a little late.
The stakes are high in the markets where Microsoft and its closest competitors play. Google's market share
could approach 90% of the search market in the coming year. Microsoft's sales of Windows Mobile platform
products are projected at 40% of the global smartphone market by 2012, according to Eddie Wu, managing
director of Microsoft ODM embedded devices, Asia. It is not in Google's or Microsoft's interest or competitive
nature to allow uncharted markets and technology domains to be dominated without vigorous battles.
Google's complaint against Microsoft is a result of the integration of browser search technology. This
technology will provide access to a myriad df Internet services once it proliferates. Microsoft avoided regulatory
hurdles with that particular complaint, but th_e EU is paying close attention to the features that will be available in
Windows Vista and has warned that embedding new; anticompetitive functions into that operating.system could
violate further antitrust- rules in Europe.
With regard to the U.S. Department of Justice's monopoly case and oversight of Microsoft's practices, a
spokesperson for the company announcei::1 that Judge Colleen Kollar-Kotelly's order, issued at the end of_ 2008,
was extended through November 12, 2009. "The court's action came in response to requests by a number of
states involved in the case to extend the consent decree by five years."
Microsoft Chairman Bill Gates has always been a firm believer in the power of innovation, and strives to
reinvent Microsoft ahead of disruptive_ technology curves. Microsoft's current business model relies on charging
license fees for boxed or downloadable software, so the company may control its distribution and use. With the
impending paradigm shift to Web services, "cloud computing," and virtualisation technology, Gates noted.in an
internal corporate memo that "the 5oming services wave _will be very disruptive"-perhaps even to Microsoft
itself. As both Gates and CEO Steve Ballmer also continue to chase Google in the Internet search war, they keep
an eye on their rear view mirror at the EU's regulatory and compliance arm that has proven more effective than·
the U.S. Department of Justice in constraining the s~ftware giantJ