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Transcript of Senate hearing
01:Copyright ; 1998 Federal Document Clearing House, Inc.
02:Federal Document Clearing House
03:TRANSCRIPT
20:March 03, 1998
30:COMMITTEE HEARING
35:
40:U.S. SENATOR ORRIN HATCH (R-UT)
50:CHAIRMAN
60:SENATE JUDICIARY COMMITTEE
65:WASHINGTON, D.C.
70: HOLDS HEARING ON COMPETITION AND ANTITRUST
ISSUES IN THE SOFTWARE INDUSTRY
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.STX
U.S. SENATE COMMITTEE ON THE JUDICIARY HOLDS HEARINGS ON
MARKET POWER AND STRUCTURAL CHANGE IN THE SOFTWARE
INDUSTRY
MARCH 3, 1998
SPEAKERS: U.S. SENATOR ORRIN G. HATCH (R-UT), CHAIRMAN
U.S. SENATOR STROM THURMOND (R-SC)
U.S. SENATOR CHARLES E. GRASSLEY (R-IA)
U.S. SENATOR ARLEN SPECTER (R-PA)
U.S. SENATOR FRED THOMPSON (R-TN)
U.S. SENATOR JON KYL (R-AZ)
U.S. SENATOR MIKE DEWINE (R-OH)
U.S. SENATOR JOHN ASHCROFT (R-MO)
U.S. SENATOR SPENCER ABRAHAM (R-MI)
U.S. SENATOR JEFF SESSIONS (R-AL)
U.S. SENATOR PATRICK J. LEAHY (D-VT), RANKING
U.S. SENATOR EDWARD M. KENNEDY (D-MA)
U.S. SENATOR JOSEPH R. BIDEN, JR. (D-DE)
U.S. SENATOR HERBERT KOHL (D-WI)
U.S. SENATOR DIANNE FEINSTEIN (D-CA)
U.S. SENATOR RUSSELL D. FEINGOLD (D-WI)
U.S. SENATOR RICHARD J. DURBIN (D-IL)
U.S. SENATOR ROBERT TORRICELLI (D-NJ)
STEWART ALSOP, VENTURE PARTNER, NEW ENTERPRISE
ASSOCIATES
JIM BARKSDALE, PRESIDENT AND CEO, NETSCAPE
COMMUNICATIONS
DOUG BURGUM, CHAIRMAN, PRESIDENT AND CEO, GREAT
PLAINS SOFTWARE
MICHAEL DELL, CHAIRMAN AND CEO, DELL
COMPUTER CORPORATION
BILL GATES, CHAIRMAN AND CEO, MICROSOFT CORPORATION
SCOTT MCNEALY, PRESIDENT AND CEO, SUN MICROSYSTEMS
[*]
HATCH: Good morning, and welcome to our hearing today on market
power and structural change in the software industry. This hearing is
the second in a series of hearings I plan to have on the competition,
innovation and public policy in the digital age.
Now I hope that today's hearing in particular offers an
opportunity for industry leaders to inform the committee firsthand
about some of the more important policy issues affecting the so-called
digital revolution, which promises to fundamentally change our
economy, businesses and daily lives.
At the outset, I would like to thank our distinguished panel of
witnesses for taking the time to be with us today.
There are, to be sure, a range of issues that we will explore
today, and as we go forward, I think there is a single basic question
underlying our inquiry: Is there a danger the monopoly power is or
could be used to stifle innovation in the U.S. software industry
today, and perhaps more importantly, looking forward?
While this examination involves a range of different issues and
companies, any credible and thorough review inescapably involves the
industry leader. I want to make clear at the outset that neither this
hearing nor any aspect of this committee's inquiry into these matters
are intended to serve as an arena for criticizing or attacking any
single company.
There are some hard questions here, and for that matter, some
questions that in my view need to be answered. And I am delighted
that Mr. Gates, whom, as he knows, I genuinely admire and respect, is
here to present his views. For the reality is that the future of
innovation in the software industry depends in large part on the
power, practices, and arguably the success of Microsoft.
Some will note that Microsoft's sales make up just a fraction of
the overall computing and software industry's revenues. Yet Microsoft
has been and will continue to be front and center of the software
industry in the digital revolution generally. This is relevant to our
hearing today for two reasons.
On the one hand, Microsoft has been one of the most important
success stories in the history of our U.S. economy. Not only has it
created a tremendous amount of wealth both within and outside of
Microsoft, but it has also established industry standards and thereby
played a critical role in spurring innovation across the spectrum of
software applications.
This cycle has driven much of the growth in the computer,
personal computer industry itself. PC users, high tech employees and
shareholders alike owe much of their success and their successes to
the success of Microsoft.
By the same token, Microsoft's breathtaking growth, not just in
financial terms, but also in terms of the scope and market power of
its business, has for many raised serious questions about the future
of competition and innovation in the software industry. One software
executive, probably responding in part to bruises he may have received
in the marketplace, has said that, quote, "The question of what to do
about Microsoft is going to be a central public policy issue for the
next 20 years." Unquote.
Now whether or not this overstates the matter, many respected
industry figures and observers believe that with Microsoft's
tremendous success has come such a vast leverage -- a vast amount of
leverage and power over the software industry and the personal
computing industry generally, that Microsoft can literally dictate
which markets it will control and which it will not.
Perhaps more importantly, some believe that this power is in the
process of expanding significantly as Microsoft extends its control
into Internet-related matters.
It is worth emphasizing that in a competitive business
environment, there will always be winners and losers. There is in my
view at least, absolutely nothing wrong with a company enjoying
tremendous growth and amassing tremendous wealth and market power,
though it may come at a rival's expense.
Most of our witnesses today have been part of successful business
ventures and have obtained tremendous wealth. Two of the witnesses we
will hear from today, Mr. Barksdale, CEO of Netscape, and Mr. McNealy,
CEO of Sun Microsystems, are direct competitors of Microsoft.
I think all of our panelists will agree that our antitrust laws
are designed to protect consumers, not competitors. But I hope they
will also agree that at least over the long run, consumers can be
harmed when one firm is able to use its current power to prevent the
successful establishment of competing new technologies that drive
innovation forward.
HATCH: Where this is the case, where a single firm both is able
to exploit its market power to prevent competition and demonstrates an
avid willingness to do so, there may come a point where potential
innovators will be cut off before they even start, where people choose
to focus their time and energies to compete elsewhere and where we
come to depend on a single firm for innovation.
Certainly, the possibility that we could reach such a point with
respect to the most important sector of the U.S. economy merits this
committee's attention.
Whether we have yet approached such a situation is far from
clear. But that we should be examining the issue is absolutely
certain.
In closing, I would like to extend my thanks to my good friend
from Vermont, our ranking member, and to the chairman and ranking
member of the Antitrust Subcommittee, who have all been working
together with me in a dedicated, bipartisan fashion and whose
insights, questions, critiques and support have greatly contributed to
our joint effort to begin to come to come to grips with these terribly
difficult but important questions.
What we're going to do is we'll now turn to the ranking member
and then we will also turn to the chairman of the Antitrust
Subcommittee and the ranking member of the Antitrust Subcommittee for
opening statements. And then we will turn to our witnesses for their
opening statements.
Senator Leahy.
LEAHY: Thank you, Mr. Chairman. And I thank you for having this
hearing. I think walking over here from the Russell Building this
morning and looking at the lines outside made me realize either the
weather was worse here in Washington than we thought or there truly is
interest. And I suspect it's the latter.
We know that our computer software industry is the envy of the
world. This is truly the American success story. It's grown more
than twice as fast as our overall economy. It's supported phenomenal
job growth.
Software innovations have also been the fulcrum for productivity
gains throughout our economy. We should be here for only one reason,
and that's to keep it vibrant and innovative; not just today and
tomorrow, but way into the next century.
So we have to ask where do we go today? Our first principles in
this oversight hearing should be promoting innovation and competition
and consumer choice.
Many software companies have blossomed and flourished in a
climate of open competition, and this is the climate we want and we
should preserve it so that the young programmers and engineers and
inventors developing the next killer ap in their garages or in grad
school or in their apartments have a chance to test the merit of their
ideas in the market and then to compete for a share of that market.
That's how we can protect long-term consumer choice and
technological innovation and still maintain the U.S. software industry
as the world's leader. Now I spoke in earlier hearings about the
proper role of government in encouraging competition without stifling
innovation. I've long sought ways to adapt our laws to the fast
changing technology of the information age while honoring these first
principles.
I'm proud of the law that Senator Thurmond and I worked to enact
in 1993 -- the first high technology legislation signed by President
Clinton. It clarified our antitrust laws and allowed companies to
work together on research and production ventures. Because we know
that there are times when American companies need to pool their
resources and enter into these kind of strategic alliances to convert
scientific discoveries into commercial products and to compete
effectively.
Now the law is helping them do that. The United States is the
cradle of the Internet and software industry. When the United States
takes steps, especially if they're steps that don't make sense to
regulate the Internet, the world watches.
Whenever we intervene, we need to do it right. We have to be
careful to do it right. And that's not always been the Congress'
inclination. For example, just a couple of years ago, the Congress
rushed to pass the so-called Communications Decency Act. There was an
overreaching effort to control speech content on the Internet; an
effort, of course, that the Supreme Court found unconstitutional,
because the Supreme Court followed first principles and applied the
First Amendment with full force to this relatively new communications
medium.
LEAHY: Similarly, as we examine whether the evolving structure
of certain practices in the software industry have anti-competitive
effects, we should look first for policy guidances to longstanding
anti-trust principles.
There are over 60 million users of the Internet throughout the
world. When I'm at my home in Vermont, in my office, or if on
vacation or traveling or anywhere else, I can use a palm-top and get
on the Internet and I can interact with anybody in the world. This
morning, I had -- I got up this morning, I had messages from a friend
in Sri Lanka as well as a child in California. I had -- from
everywhere.
But today we're going to hear from the leaders of the competing
forces in the browser war that's captured so much of our attention.
Should we be concerned that even if consumers get the benefit of free
browsers in the short-term, they're going to suffer in the long run?
Giving away free browsers does not generate much revenue or financial
incentive for additional investment and for continuing innovation with
this critical tool for maximizing use of the Web.
In skirmishes like this, there can be victims. And the Web
itself is suffering collateral damage. More and more I've seen
popular Websites that are only accessible using Internet Explorer.
The Microsoft Gaming Zone is a good example. I've also seen many
sites that are tagged as being better viewed with Netscape Navigator
or with Internet Explorer.
In fact, based on a rough search conducted just yesterday, there
are 351,957 Websites enhanced for Internet Explorer. There are
692,491 enhanced for Netscape Navigator. Those are approximate
numbers.
(LAUGHTER)
Now, these, these notices have always disturbed me since they
amount to fences on the Internet -- they can end up stifling the free
flow of information. So, I want to hear from the leaders of this
industry, the best people to speak for the implications of this
partitioning of the Internet. And let me say that the Leahy home page
will resist surrendering as long as it can.
And we have to explore whether direct access to the Internet by
keyboard and televisions could compete with a desktop or laptop PC.
Netscape and Novell, Oracle, Sun Microsystems are collaborating on
Java software, on new programming techniques, on network computers
that may give users with a $200 keyboard and an Internet link all the
computing power of tomorrow's PCs. Are there barriers to that
emerging competition? Is the market structure unduly sustaining one
technology over the other?
Our antitrust laws are at their core consumer protection laws.
They're predicated on the notion that competition benefits consumers.
Those benefits include better service and cheaper prices, but they
also include more choice in good and services, both short term and
long term.
The software industry is effervescent with innovation. I don't
want to see us recklessly shake the bottle and end up losing the fizz.
We don't want to strangle the most innovative industry to emerge with
the American economy since the telephone.
And it takes a little insight to ruminate about the things that
lie at your feet, but it takes both wisdom and insight to know what
direction to take with your next steps. It may take some self-
restraint, but our challenge in Congress is to follow first
principles, not first impulses. And this hearing could provide a
window on how the software industry operates, can put in perspective
the structural conditions and marketing practices that have generated
so much controversy and it should be an evenhanded hearing, as I know
it will be, it should not be a hearing singling out any one industry,
but allowing all the industries that have done so much in this area to
speak and to be heard and to be heard fairly. And I know, Mr.
Chairman, that you will ensure that that happens.
HATCH: I intend to do so.
Senator DeWine.
DEWINE: Mr. Chairman, thank you very...
HATCH: Our chairman of the Antitrust Subcommittee.
DEWINE: Thank you, Mr. Chairman.
Gauging from the crowd that is both in the room and outside the
room and the tremendous amount of interest expressed by the media, Mr.
Chairman,
I don't think there's any doubt as to the timeliness nor the
appropriateness of this hearing.
DEWINE: Over 100 years ago, Senator John Sherman, senator from
the state of Ohio, introduced a revolutionary bill that bears his
name, the Sherman Antitrust Act. That bill and later bills have been
the foundation of antitrust law ever since.
The Sherman Act was passed when telecommunications was in its
infancy. Today we find ourselves embroiled in a debate over whether a
century-old antitrust law is applicable in the information age, and
whether it's agile enough to respond to a global marketplace where a
computer product could be obsolete in weeks or months, and today's
market leader may be tomorrow's also ran.
We would, however, I think be mistaken if we focused today, Mr.
Chairman, simply on antitrust issues, or the concerns of one specific
company or about one specific company. In fact, it has often been
noted, as you have noted yourself, the antitrust laws exist to protect
competition, not competitors. Or to put it another way, what we are
about today really are consumers.
Accordingly, our focus should also be on competition and
innovation in the software industry and the benefits that continued
competition can bring to the American consumer. Specifically, our
duty today is to examine the competitive environment of your industry,
our panelists, and evaluate whether or not the federal government
should consider taking action to help protect competition.
And let me be clear. None of us -- none of us -- wants to see
your creative energies stifled or your talents pent up by excessive
regulation. We all know that unbridled competition and innovation are
the nutrients that have fed dynamic growth in your very industry.
What we want to do is to ensure that every competitor has an
equal opportunity to bring their products to the marketplace where
American consumers can choose the winner by voting with their dollars.
Only then will we have competition, and only then will American
consumers be assured of the benefits of competition -- continued
research and development, continued innovation and cost reductions,
and continued improvements in product quality.
Your industry is in the midst of a major change. It's shifting
from stand-alone PCs to network computing and communication. The
promise of the Internet is breathtaking in its ability to both
disseminate knowledge and to enhance commerce. The question is how to
keep the door open to the Internet to ensure that no one, no one
corporation becomes the gatekeeper, whether that pathway to the
Internet is with Java, Internet Explorer or Netscape Navigator, no one
-- no one -- should hold the key. The door must be open to everyone
to ensure that innovation, competition and creativity, the hallmarks
of your industry, survive and prosper.
Thank you very much, Mr. Chairman.
HATCH: Thank you, Senator. We'll now turn to the ranking member
on the Antitrust Subcommittee, Senator Kohl.
KOHL: Thank you, Mr. Chairman. Mr. Chairman, you've assembled a
very impressive panel of witnesses, and this promises to be a
productive hearing. Let me make a few brief observations about the
software industry and the role of antitrust enforcement.
First, the people on our panel today abound in the inventiveness
and the energy of the American experience. This is what business is
all about -- folks who know that growing your market, creating value
for your shareholders and offering consumers better products than your
competitors is critical to success. Companies that innovate,
diversify and open new markets should be rewarded and not punished for
their efforts. Hard-nosed competition within the bounds of the law is
what the American economic system is all about. All of the companies
represented here are certainly hard-nosed competitors that have made
tremendous contributions to our economy and to the quality of life for
Americans. And no one more than you, Mr. Gates.
But, Mr. Gates, as you know, no one, no matter how powerful or
how successful, is above the law. You have nearly 90 percent of the
market for operating systems, clearly a monopoly, and probably a legal
one, and yet you refuse to concede it. We all understand the reasons
why you refuse to concede it.
KOHL: We all understand the reasons why you refuse to concede
it. You are concerned about public perceptions and an emboldened
Justice Department. But with profit margins of 30 percent or more,
you have a huge incentive to maintain and extend that monopoly. As a
business man with first hand experience in market share and
profitability, I can admire the kind of dominance and that level of
profit, and I do.
But, we need to explore today whether you and your company have
crossed the line, or on the other hand, whether this is just a carping
of disgruntled rivals -- something that we on the Antitrust
Subcommittee hear about all the time. Having said that, while this
committee is good at raising antitrust issues, it is not always good
at resolving them. So, I commend Chairman Hatch for holding this
hearing today, but I do not favor a full-blown investigation.
I put my faith in the courts, the Justice Department, the
computer industry, and the antitrust laws, which from Standard Oil -
at the turn of the century - to AT&T in the middle of the century to
the Internet today, have served so well for so many years. Thank you,
Mr. Chairman.
HATCH: Thank you, Senator Kohl. Now, most of our witnesses
today need no introduction. So, let me just say we're extremely
fortunate to have before this committee the world's leaders in this
hi-tech industry. We're pleased to hear from Mr. Bill Gates, CEO of
Microsoft Corporation; Mr. Scott McNealy, CEO of Sun Microsystems; Mr.
Jim Barksdale, CEO of Netscape Communications; Mr. Michael Dell, CEO
of Dell Computer Corporation; and Mr. Doug Burgum, CEO or Great Plains
Software.
Our last panelist is Mr. Stuart Alsop, a venture partner at New
Enterprise Associates and a respected long-time commentator on the hi-
tech industry. Just this last week, the San Jose "Mercury News"
captioned him a hi-tech Buddha. I'll just forward that...
(UNKNOWN): Appropriate pose is something like this?
HATCH: We can do without that in the Judiciary Committee. We
have some low-tech Buddhas on the Judiciary Committee is all I can
say. We're going to begin with Mr. Gates and we'll just go across the
table. Mr. Gates, we would like you to stay within five minutes. I'm
certainly not going to be tough on the time, but we'd like you to do
that, if you can, all the way down the line, so we'll have enough time
for questions and interchange among you, which I think will probably
be as important as anything.
Mr. Gates?
GATES: Mr. Chairman, members of the committee, thank you for
this chance to present my thoughts on competition in the software
industry. At the outset, I want to say what a pleasure it is to be
back in the Congress. I had the privilege to serve as a House page
for several months in 1972. It was an exciting opportunity for a 15 -
year-old.
Four years after that experience, I decided government was a
great field -- just not my field. Instead, I began work in my dorm
room on Microsoft Basic, which led to the creation of Microsoft. At
the same time, there was a great American company, which was a leader
in computer technology and seen by competitors and the government as a
threat.
People said that any startup who tried to take on this Colossus
was doomed to failure. There were those who wanted regulation because
they feared this company had a lock on the ideas that would unleash
the information age. But the people who feared IBM were wrong. We
learned then what we never should have doubted -- that technology is
ever-changing; that innovation depends on freedom to move constantly
from one frontier to the next.
We should all hope today that there is a congressional page
somewhere in these halls who has the germ of a new idea that can
become a great American success story.
GATES: My basic message this morning is this: The technological
future of this country is incredibly bright. The breakthroughs
Americans are working on are nothing less than astonishing. I am
proud to be part of the PC industry, which has taken a low-cost, high-
volume approach to computing. This is very different than the rest of
the computer industry, and it's led to having hundreds of millions of
people enjoy the benefits of computing.
The PC industry has produced more new products and services at
affordable prices, created more economic opportunity and empowered
more people than any other industry. I am proud to be part of an
industry that's proving again that freedom and innovation are what
keep America ahead in the world of global markets.
One sign of healthy industry competition is innovation. That's
why each of us sitting at this table devotes so much to research and
development. At Microsoft we are spending 2.6 billion in R&D this
year, compared to $350 million just six years ago.
The rapid adoption of the Internet into our everyday lives is the
most exciting example of innovation and the ongoing march of progress
in this industry. Overnight, my company and many others reinvented
themselves in order to meet customer demand.
All operating systems, including IBM's, Sun's, Apples' and many
others are including Internet browsing capabilities. Microsoft is in
a court battle to test its right whether we can support these open
Internet standards in its Windows system.
The beauty of the Internet is its openness. It cannot be
controlled or dominated or cut off because it is simply a constantly
changing series of linkages. It is such a creative living medium that
no one yet fully comprehends its opportunities. I'm convinced it will
be an economic boon to this industry and to our nation.
Another sign of a healthy competitive industry is lower prices.
The statistics show that the cost of computing has decreased 10
million-fold since 1971. That's the equivalent of getting a Boeing
747 for the price of a pizza. Consumers see the results of this
innovation and falling prices in software today.
In 1990, a consumer would have spent over a thousand dollars to
buy typical productivity software. Today, the average consumer can
get much, much better packages in a vastly improved form for only
$299.
One test of a healthy industry is the creation of jobs. Our
industry is the fastest growing segment of the economy. Over two
million employees are at work in the U.S. as a result of the software
industry. By 2005 that number will grow to 3.5 million.
Another test of healthy competition is the creation of new
companies. Consider this: The number of American software companies
has more than doubled to 44,000 since 1990. Venture capital
investment in new technology is at an all-time high -- $12 billion
invested last year alone.
Not all companies succeed. Some fail to embrace change. This is
the way technology in the free market works. The software industry's
success has not been driven by government regulation, but by freedom
and the basic human desire to learn, to innovate and to excel.
In the end, the software industry, which contributed over 100
billion to the national economy last year, is an open economic
opportunity
for any entrepreneur in America.
This opportunity extends from college room buddies creating
a new application to a company like IBM, which is nearly 10
times the size of Microsoft. What started in garages and small
offices roughly 20 years ago as computer and software start-ups, are
profoundly improving the lives of Americans today.
Perhaps our most important task is to make sure that everyone,
rich or poor, has access to the latest technology. My wife and I have
created a
foundation that will help make sure that anyone who can reach a public
library can reach the Internet.
GATES: The question this committee asks, will the success of
this industry continue, will the United States continuing -- continue
its breath-taking technological advances, I believe can be answered
resoundingly yes, if innovation is not restricted by government.
Mr. Chairman, I believe the American people are bursting with a
natural curiosity and energy that will keep this revolution going well
into the next century, and I believe all Americans will benefit from
this continued economic growth and prosperity.
Thank you again for this opportunity.
HATCH: Thank you, Mr. Gates. We'll turn to you, Mr. McNealy.
MCNEALY: Thank you, Mr. Chairman, members of the committee. I
appreciate this opportunity. Sun is quite a successful company, about
25,000 employees after 16 years and about at a week. We've made money
every year, we've grown every year, we're spending over $1 billion in
R&D. We're not here asking for any help.
We don't need any help. We're quite successful out in the
marketplace. So you might ask, what are you doing here? Well,
Senator Hatch asked me. I didn't know how to say no.
And secondly, I trust that our industry experience has some
relevance in the antitrust discussion. So with that, I'd like to
state that first of all, this is not one company versus another,
another CEO versus another.
This is about protecting consumer choice in the marketplace,
protecting innovation and basically about enforcing the laws of the
land, at least as I understand them. I also believe in the economic
principles on which this country was founded -- free enterprise,
consumer choice, free and open competition, minimal government
intervention and also, by the way, I believe in winners and losers,
and especially the freedom to fail. I think that's what this is all
about.
So we're not here asking for new regulations. Let's state that
-- no new regulations, no new laws. What we want today is enforcement
of the laws that are already on the books, and in this case, the
antitrust laws.
And although they've been slow to take effect at times in our
history, they've been quite important, the antitrust laws, and
actually quite successful in preserving choice in the marketplace.
They have a role to play today, perhaps more so than ever before. So
in this context, I would like to make a few points, even if some of
them are blindingly obvious.
First of all, Microsoft has a monopoly in PC operating systems
controlling over 85 percent of the world's PCs and over 95 percent of
all PCs being shipped today. That's fundamentally clear. There is no
competition, there is no choice in PC operating systems.
As a result, Microsoft is the gateway of choice to the Internet.
We know the wonderful Internet and what it brings. And it's, if you
will, the gateway to the digital society that we're all so excited
about.
The Internet, by the way, has been an environment where software
innovation has been unfettered by proprietary control. It's been --
it's where standards are open and people are free to innovate. We
can't afford to have this closed up and made proprietary, and by
owning the entry points to the Internet and electronic marketplace,
Microsoft has the power today to exercise predatory and exclusionary
control over the very means by which we access this Internet.
It's a lot like General Motors having the ability to dictate what
type of gasoline you put in your car or what interstate you can drive
on or even how you get on the interstate.
My second point. A lot of people argue software is different,
and you know, can argue technically. It isn't different. And in
fact, it's no different from any of the other industries that have
faced antitrust scrutiny and action in the past -- railroads, oil,
telecommunications, all the rest of it. And none of those have been
damaged by government intervention or scrutiny from an antitrust
perspective. Software is as essential as these other industries and
it's the building block of tomorrow's economy, not just today.
It is the written and spoken language of the digital age. In
fact, only IBM has come close to having this kind of monopoly power in
the past, and it was really kind of an accident of IBM as they granted
Microsoft this monopoly power and kind of passed it on.
MCNEALY: In fact, domination by one led directly to domination
by the other. That's well chronicled in our industry. But, there's a
big difference. When IBM was dominant in the industry, very few of us
touched computers. Today, everybody does. Think in the last 30 years
how many more of us are touching computer technology everyday.
Everyone of these cameras probably has a microprocessor in it. So,
it's very, very different.
And as Microsoft seeks to leverage its current monopolies into
large business computers, broadcasting, entertainment, newspapers,
cable TV, travel services, Internet services, database services, home
banking, and so on, it has power that IBM -- even at its zenith --
never had.
This leads to my third point. The rules of behavior are, by law,
and should be different for monopolies. These are not my rules. I
didn't make them up, but they are different. Competitive companies
are subject to market discipline, monopolists are not. And they must
be scrutinized for unfair and abusive practices. Left unchecked,
monopolists can and will successfully engage in illegal, predatory and
exclusionary practices.
Only a monopolist could study a competitor and destroy its
business by giving away products. Only a monopolist could promise
favored placement on computer screens and menus for companies that
agree not to use its competitors products. Only a monopolist could
purchase, rather than develop promising new technology, such as Web
TV, for $425 million and ability to play music or run full-motion
video on a PC.
Ask your staff how hard it has been to get competitors to go on
the record against Microsoft. Ask venture capitalists how willing
they'd be to fund a start-up to produce a new PC operating system or
word processor or any other product where Microsoft dominates.
Fourth, I have a quick question. Has Microsoft's monopoly power
yielded advancements in individual wealth, job creation, personal
productivity? Of course. But, so did AT&T, Standard Oil, and every
other monopoly. That's a great argument, but it just doesn't hold
water.
The real question is how much more could've been achieved without
the dead hand of monopoly? Microsoft's monopoly has led to fewer
chase choices, raised costs, and stifled innovation in desktop
operating systems and personal productivity tools. It threatens many
more areas. Do we want one Internet browser? Do we want one on-ramp
to the Internet?
Mr. Chairman, finally, I fundamentally believe that the
regulation of the software industry would be bad. We're not asking
for that. I hope it never occurs. But, I do expect and hope that the
law will be enforced -- including antitrust laws. If not, I fear
regulation, and the longer monopoly power goes unscrutinized and
unchecked, the more people will be willing to contemplate such an
undesirable course.
We cannot afford to regulate this industry. We simply need
enforcement of laws that already exist. Strong action is needed and I
hope the committee will encourage the relevant law enforcement
agencies, including the DOJ and the FTC, to scrutinize monopolies
every where and to enforce our antitrust laws fairly and vigorously.
Thank you.
HATCH : Thank you, Mr. McNealy. Mr. Barksdale, we'll turn to
you.
BARKSDALE: Thank you, Mr. Chairman, it's a great honor and
pleasure to be here, and thank you for inviting us -- all the senators
on the committee. I will, if you don't mind, since we seem to have
run over the last couple, I will submit my written oral remarks and
just make a couple of comments.
HATCH: We will put all written statements in the record, thank
you.
BARKSDALE: I would like to, then, just make a couple points that
would, I think, summarize where we are. I read with great interest
this morning Mr. Gates' interview yesterday with the "Washington
Post." He makes two points. One -- he's not a monopolist; and two --
therefore, he shouldn't be penalized by government and thereby cut
innovative processes. And I absolutely agree with Mr. Gates -- nobody
wants Microsoft to be inhibited from their marvelous innovation and
other things they do so well.
And certainly nobody here on this panel is a greater admirer of
Mr. Gates or his company than I am. So, let me make that clear. But
let me ask a couple questions here. Talk about being a monopoly -- I
want to - if you don't mind, ask -- can I ask the audience one
question and get a little quick poll? This looks like an absolute
cross-section of the American economy to me.
(LAUGHTER)
About 90 percent...
HATCH: There's a lot of expensive shoes out there -- is all I
can see.
(UNKNOWN): On this side or that side, Mr. Barksdale?
BARKSDALE: How many -- I would like a show of hands -- how many
people in this audience, all right, use PCs -- not Macintoshes -- now
that's only about 3 percent of the shipments. How many of you use
Intel-based PCs in this audience? Raise your hands.
BARKSDALE: All right -- of that group -- no, keep your hands up.
(LAUGHTER)
Do what I tell you to do.
(LAUGHTER)
Of that group who use PCs, how many of you use a PC without
Microsoft's operating system? Gentlemen, that's a monopoly. That's a
lot.
That's 100 percent. Didn't even have to turn around, and as Mr.
Kohl says, there is no doubt. And by the way, there's nothing wrong
with being a monopoly. I don't -- everybody hates monopoly unless
they got one.
So I do give them great credit for their creativity and how hard
they worked, and nobody would take that away from them. But as a
monopolist in the PC operating system market, they have to play by
different set of rules; rules that will not stifle innovation, but
different rules.
That's way the law is, because a monopolist cannot use their
market power to enhance and extend their monopoly into other product
areas or to protect their monopoly through unfair anti-competitive
practices. That is the law. Now there is an issue in front of the
court here and I don't want to go through that, but I'll make a couple
points.
Of the people in the room, how many of them use Netscape
Navigator?
God bless you.
(LAUGHTER)
How many people in the room use Internet Explorer?
The objective of the first question, the monopoly, is to capture
all those hands you saw on the second question. As Mr. Allchin says,
an executive of Microsoft, in the e-mail submitted in this court
hearing, we're never going to catch Netscape at this rate. We have to
use our leverage, our Windows market share.
Gentlemen, that's what monopolists do. And therefore, it needs
to be checked somewhere or another. The least possible intervention
to be sure. Nobody wants more regulations, as Mr. McNealy says. The
best way to regulate is to have competition now and enforce the laws
and you won't need regulation, I don't believe.
But we do ask that Microsoft be held accountable for some of
their actions; action that's intimidate PC OEM manufacturers to use
their products and exclusively or exclusionary practices that prevent
them from using my products as indicated from the exhibits from Compaq
computer in the same legal proceeding; actions that then move their
users further out to the Internet with their proprietary products like
Expedia, and then lastly, stopping innovation.
How does innovation work? Well, many ways. We learn from
others, we use what others tell us, we include them in our products.
Bob Herbold, chief operating officer of Microsoft, last month was
quoted as saying, Mr. Herbold, if you wanted to compete in this market
how would you do it?
First, he said you would fight a losing battle. Or you can build
a product and sell out to Microsoft or another big company. Or, if I
were a betting man, "hey" -- that's a quote, "hey, you wouldn't start
it in the first place." That's not the way to encourage innovation.
That kind of attitude is not going to create the next Bill Gates.
That's kind of attitude that a monopolist uses to penalize and punish
true, valid competition and the laws are set up to protect competition
-- not my company, his company or anybody else's, but to protect the
right of the consumer to choose.
And lastly, I guess, if we don't mind this it is going to take
away this choice. Like the movie recently, "Wag the Dog" -- it was
about Washington or something...
(LAUGHTER)
... they open up and they said why does the dog wag his tail?
Because he has more sense. Why would the tail wag the dog? Only if
it has more sense. Only if the dog lets it. We're letting the tail
wag the dog.
Thank you very much.
HATCH: Thank you, Mr. Barksdale. Mr. Dell, we'll turn to you.
DELL: Mr. Chairman, members of the committee, I am Michael Dell,
chairman and chief executive officer of Dell Computer Corporation, and
I'm pleased to be invited to testify today on the competitive
conditions in the computer marketplace.
I'd like to discuss two key points today. First, the computer
systems industry is intensely competitive. And second, the
standardization of software and hardware has been a positive, even
necessary, development.
Since my viewpoint has been shaped by my history in the industry,
which is the history of Dell Computer Corporation, I would like to
begin by providing a brief overview of our company.
DELL: Dell Computer was founded in 1984 on a concept which was
unconventional at the time -- to design and sell custom-made computers
directly to end users, bypassing the dominant method of computer
distribution, which was to sell mass produced computers through retail
stores.
Since then, we have further developed the concept of built-to-
order, and it underlies nearly all of our business activities. These
include computer systems built one at a time, factory-installed
software and the factory integration of hardware and peripherals. We
also tailor our after-sales services to the customer's business size
and special requests.
This approach enables us to establish direct relationships with
our customers. We currently have more than 125,000 contacts with our
customers every week by telephone or in person. In addition, more
than one million customers and potential customers contact us each
week over the Internet at www.dell.com. Through these direct
relationships, we're able to efficiently gauge customer demand for our
products. And because those products are built to order, we can also
determine customer demand for individual components, including
hardware and software.
Today, Dell has annual revenues of $12 billion and about six
percent global market share. We're headquartered in Round Rock,
Texas, near Austin. We employ slightly more than 16,000 people
worldwide, with nearly 12,000 of them located in the greater Austin
area.
Mr. Chairman, my experience with Dell has shown me that the most
powerful competitive force in our industry is evolving customer
demand. And the companies that are successful are those that are able
to stay closest to customer needs. The trend toward standardization
in both hardware and software within our business has been market
driven. Standardization has been one of the reasons that Dell's been
able to grow rapidly, alongside much older and more established
companies such as IBM and Hewlett-Packard.
Standards simplify the computing environment and establish a
common hardware and software platform, making it easier for systems to
work together and to exchange information. Standards also simplify
product development and service, thereby reducing our costs. Just as
important, standards have clarified computing technology for the
average user. By driving down overall costs, standards have increased
the penetration of computers into the consumer and business
mainstream.
Mr. Chairman, Dell has achieved dramatic growth in a highly
competitive environment by dealing directly with our customers and
efficiently delivering Dell-designed systems built to order. We
believe the trend toward standardization has helped both Dell and our
customers. I thank the chairman and the committee for the opportunity
to share these thoughts with you today.
HATCH: Thank you, Mr. Dell. We'll turn to you, Mr. Burgum.
BURGUM: Good morning, Mr. Chairman and members of the committee.
My name is Doug Burgum. It's a pleasure to appear before you on
behalf of the more 600 employees of Great Plains Software and our
7,000 business partners.
The issue before the committee today is very important to the
future of our industry, and it's an honor to be here to contribute to
your deliberations as part of this distinguished panel. My comments
will cover three quick points.
First, let me provide a brief overview of our company in the
industry where we compete. Great Plains Software is one of the
leading providers of business application software for mid-sized
businesses. Our products automate the accounting and operational
functions of businesses and provide managers with strategic financial
information.
All of our products and services are sold, implemented and
supported by our extensive network of independent business partners.
In addition, many of these partners develop add-on software
applications that integrate with our products.
Great Plains Software is built upon the mission to improve the
life and business success of partners and customers by providing
superior business application software, services and tools. We were
founded in Fargo, North Dakota in 1981, and we have more than 40,000
customers in over 60 countries.
Great Plains Software competes in the mid-market segment of
business application software industry. We serve businesses with one
million to $250 million in annual revenues.
BURGUM: We have many competitors large and small, both here and
abroad. The mid-market segment has been and continues to be
fragmented and highly competitive. We compete in terms of product
functionality, price, the speed and costs of implementation, product
quality, ease of use and the quality and responsiveness of our
service.
Second, I would like to describe the role played in the software
industry by Great Plains Software and the thousands of other
independent software vendors from every state in the union.
Great Plans Software and thousands like us write applications for
the various hardware architectures operating systems and databases.
These companies are generally referred to as independent software
vendors, or ISVs.
The hardware operating systems and databases used by ISVs are
called platform technologies. Collectively, these platform
technologies form a tool set that allow software companies like ours
to create specific solutions for customers. Companies like Great
Plains Software are independent because they are not owned or
controlled by the companies that provide the platform technologies
such as the other members on our panel.
Independent software vendors are free to choose the platform
technologies they deem best for their applications. Often, an
independent software vendor assumes the risk of making a platform
decision long before it is known whether that technology will become a
market standard. Over time, applications will move toward those
technologies that offer an ISV the most selling opportunities.
The relationship between independent software vendors and the
platform providers is often a paradox. Independent software vendors
want to write the multiple platforms to hedge their technology bets.
And the platform providers want to attract as many independent
software vendors solutions as possible to achieve broad market
acceptance of their platforms.
Both application providers and the platform providers must
continue to innovate and improve, otherwise there will be companies
that take their place.
Third, I would like to discuss the technology platforms Great
Plains uses and how those platforms have evolved and changed over
time. On several occasions during the life of Great Plains Software,
we have migrated our products to new platforms so we could deliver
greater value to our customers and provide a larger market opportunity
for our partners and ourselves.
The key platform technologies we have supported over the past 16
years include Apple II, Apple III, Apple Macintosh, PC DOS, Windows
95, Novell Network, Lotus Notes, Windows NT and now the Internet.
Great Plains Software's platform choices have always been based
on market demand and customer needs. As platforms continue to evolve,
as they most certainly will, our open product architecture enables us
to embrace the platforms that best serve the needs of our customers
regardless of which company provides those technologies.
Our experience in this dynamic industry has shown that the
leading platform of today may not be the leading platform provider
tomorrow.
In conclusion, Mr. Chairman and members of the committee, let me
share that I grew up in Arthur (ph), North Dakota -- a rural town of
about 400. Fifteen years ago, I mortgaged farm land inherited from my
father and quite literally bet the farm on a fledgling software start-
up. You can understand why this industry is a special one to me. It
has provided opportunities for personal and professional growth for
our employees and partners and allowed Great Plains Software and
software companies like us to create jobs by serving customers
anywhere in the world, regardless of where we're from.
As an independent software vendor, we take our independence
seriously. We are free to choose the technologies that are best
for our customers. This independence and freedom will continue to be
a key part not only of our success, but the success of every software
vendor across America.
Thank you very much for inviting me and letting me be part of the
deliberations today.
HATCH: Thank you, Mr. Burgum.
We'll turn to you, Mr. Alsop.
ALSOP: Mr. Chairman, members of the committee, ladies and
gentlemen, I come here in a somewhat different capacity than my
colleagues from the computer industry. I'm an investor in small
companies and my full time job is a partner with a venture capital
firm. I'm a long time commentator on an analyst to the computer
industry and I'm an individual who has used computers aggressively to
benefit my personal and professional lives.
I'm a citizen of the United States and proud of the record of
success that our economic and governmental system has created,
particularly, in being inclusive of many cultures and many points of
view and in being successful at providing a framework for individual
merit and accomplishment.
I'm proud to have participated over the past 20 years in the
remarkable innovation and growth in the computer industry and believe
that it is a key piece of evidence demonstrating the value of the
American system.
ALSOP: I am constantly amazed by what the software industry has
delivered to people, to me and to people like me. I'm amazed that I
can use computers to communicate, produce, calculate, entertain,
research and discover, in ways that were not available to, much less
contemplated by my parents and their generation.
I have impersonally empowered by the technology developed by the
software industry, and am thankful to have lived in the time when this
technology became available. I have been observing Microsoft
Corporation's role in the technology industry for the past 15 years,
and have learned to admire and have respect for the company's approach
to business and to its customers.
I do not believe that Microsoft Corporation has knowingly
violated the rules of engagement in our commercial sector in order to
gain its current position of tremendous power and influence in the
technology industry. But it has, through aggressive business
practices, through adherence to a consistent set of principles about
what is good for its customers, and through a long running series of
strategic errors made by its competitors, managed to gain a monopoly
position in the market for personal computer operating systems
software.
I believe that it is willing and capable of using that market
position to both protect its monopoly and operating systems software
as well as to extend its market position in adjacent markets for
applications software and for programming tools.
I believe strongly that it is a legitimate and proper activity
for this committee and for other elements of our federal government to
review the power that Microsoft exercises in the technology industry,
and to develop a consistent and predictable policy regarding that
power. Whether that policy is to either remain completely uninvolved
in overseeing Microsoft's business practices at one end, or to
regulate its practices at the other end, or another position somewhere
in-between those two extremes.
I believe that it is not in the best interest of our society to
have a single commercial organization, no matter how honorable or
legitimate or well-meaning, to have control over such a crucial
interface as that between the operating system and the software that
depends on the operating system, either to control the hardware or the
applications software. And I believe that Microsoft is now in a
position to become the sole vendor of operating systems software for
digital computing devices worldwide within the next 10 to 20 years.
At the same time, I believe that it is dangerous and potentially
disastrous to invite governmental regulation of the interfaces between
different elements of the technology that we are adopting at such a
remarkable rate. I have some personal history in this regard.
When my mother heard that I'd been invited to testify before this
committee, she recalled that she had traveled with my uncle when he
was called to testify before the House Un-American Activities
Committee, and later, the Senate Armed Services Committee hearings on
the same subject chaired by Senator Joseph McCarthy in the early
1950s. My uncle and my father made their personal reputations in
part, by challenging that destructive demagoguery.
I want to be very clear that I am not comparing the activities of
those committees ...
HATCH: Well, that's certainly a relief is all I can say.
ALSOP: ... to this.
(LAUGHTER)
ALSOP: But I did draw up ...
LEAHY: Chairman and I were taking notes ...
(LAUGHTER)
ALSOP: Well, we'll review those notes later. I want to be clear
that I also grew up in a time when the government proved itself
incapable of judicious or expeditious regulation of the economy as a
whole, or even of individual industries. And I learned to distrust a
centralized government's ability to regulate self or to act in the
best interests of its constituency over the long-term.
But the question remains: If Microsoft is a monopoly and we
decide that we do not want an unregulated monopoly controlling these
important interfaces, what can we do about it within the constraints
of our system and our culture of mostly unrestrained competition in
entrepreneurship?
Unlike Mr. McNealy, I do not believe that the solution to this
problem lies in existing precedence in the area of antitrust
legislation and law. Existing antitrust legislation was designed to
respond to structural changes caused by the industrial revolution 100
years ago, which involved large-scale manufacturing, railroads, oil &
gas exploration, and so forth.
ALSOP: The issue we face here is as new as the technologies that
underlie it. The personal computer has challenged corporations
ability to control computing resources centrally, empowering
individuals and breaking down hierarchies. Communications
technologies have made it nearly impossible for centralized
governments to control access to information.
The Internet and the World Wide Web have suddenly removed the
structural costs of gaining access to and managing information in a
fashion unprecedented in human experience. I believe that the
solution to this problem lies in finding a way to level the playing
field without regulating the activity of any of the players on that
field. I believe that the solution will likely be a combination of
the model adopted for the Internet where the players agree to play by
a common set of rules and that adopted for the telephone industries or
air travel industries, for example, where the players agree to some
form of oversight by one or more federal agencies.
I suspect that the federal government must ultimately play a
role. If that is true, I hope that that role is the most minimal one
possible and that the government will exceed my own very modest
personal expectations.
Thank you for the opportunity to share these thoughts with you
and to participate in this hearing.
HATCH: Well thank you, Mr. Alsop.
I want to thank each of you for being here today. This is very
important, as far as I can view it and I think everybody else as well.
At the outset, let me point out that while our discussion today
has bearing on legal or antitrust policy grounds (ph), this is
essentially a fact-finding hearing which is why we have invited
industry leaders as opposed to attorneys or legal or policy experts in
this area. Not that you are not, but we're more interested in the
facts here today.
Having said that, I would like to draw one distinction just as a
matter of clarification. There is nothing inherently wrong or
improper with a company having monopoly power, which is generally
understood as the power to raise prices above competitive levels or to
exclude competitors from the market.
What courts have found improper, however, is improper use of
monopoly power either to maintain a monopoly or to exclude competition
or to obtain a new monopoly. So, that I want to make clear at the
outset.
Let me begin with you, Mr. Gates.
Recognizing that there is nothing illegal or even improper about
being a monopoly, let me ask you -- with over 90 percent market share,
do you seriously dispute the proposition that Microsoft windows has
monopoly power -- at least the PC operating system or desk top market?
GATES: The products that Microsoft makes have a very short life
time in terms of their attractiveness to customers. In the span of
the term of a senator, we create a product, it becomes a very popular
product and then that product has no demand whatsoever.
And so, when we did MS DOS version one, it was a very, very
popular product. We knew when we built that product that customers
would expect more. And the only question was -- would we replace that
product or would someone else come along to do it?
In many cases, we have started from scratch in building these
operating systems with absolutely no code transferring from one to the
other. So the only thing in common between say what we started in DOS
and what we have today in Windows NT, is simply the ingenuity of
Microsoft engineers and their ability to listen to customers.
Outside of this room, you'll hear from even members of this panel
about how their products will replace Windows. How Jobs' (ph) O/S
(ph) will supersede Windows, how the browser will turn into an
operating system and make the operating system worthless.
You'll hear from IBM about their plans and operating systems. So
there is competition. The fact that we've kept our prices very low
around about 3.0 percent of the price of the PC is because of the
competition. The fact that we've increased R&D and we're constantly
listening to customers is based on that.
Now we have a track record of hiring very smart people. We have
a track record of listening to our customers and doing new products.
But if your question is can any Microsoft product endure the future
competition, anything we offer today? The answer is absolutely no.
HATCH: All right. So your testimony is that Microsoft, with
more than 90 percent of the market for personal computer operating
systems, does not have a monopoly in the market and that the
established rules that apply to monopolies do not apply to Microsoft?
GATES: Senator, I'm here to tell you what Microsoft does to
serve its customers. And our strength does not come through any
particular product. I'm not going to say things about legal issues
that I'm not an expert on. But I know very well that we're a company
that looks out there and realizes that we've got to keep changing,
we've got to keep doing new things.
For example, if we hadn't recognized the Internet was coming
along and moved very quickly to do things there, certainly we would
have been replaced. We, at many times in our history, even when we
had, in a very high market share, we had IBM put together groups whose
total focus was to eliminate the position of our operating system.
This is a market where no one can restrict output. Any company
can produce the entire demand for the world's operating systems in the
course of a day. These operating systems are based on ideas. And no
company owns the factory for ideas. In fact, particularly with the
Internet and our embrace of more and more open standards, the ability
to interoperate a wide variety of devices, whether they use Mr.
McNealy's operating system, HP's operating systems, IBM's operating
system, palmtop operating systems, or dozens of new efforts that are
well funded and proceeding today, there is competition here.
HATCH: Let me turn to you, Mr. Alsop. Do you think Microsoft
has a monopoly in the PC operating system market?
ALSOP: Mr. Chairman, as I said in my opening remarks, I do
believe that Microsoft has a monopoly position in that.
HATCH: Is there a genuine threat, as Mr. Gates suggests, that
Windows could be displaced?
ALSOP: I understand where Mr. Gates acquired that perspective,
because Microsoft was successful in toppling a company that was widely
considered to be dominant and unbeatable, which was IBM. IBM lost its
position of influence and power, despite still being a large and well
respected company, because of a fundamental shift in the technology,
one that couldn't have been forecast by the people at IBM or to some
degree by virtually anybody in the technology industry at the time.
And so what Mr. Gates is maintaining, I believe, is that there is
always the possibility of that happening again. So you have to ask,
what would it take to dislodge Microsoft's monopoly on the desktop
operating system? And you'd have to say that something would come
along, something that we can't perceive right now or recognize, not
just that we can't perceive or recognize, but that Microsoft
specifically would view as a threat and would resist that would
replace the desktop computer as the primary form of computing and lead
to another shift in the technology that would create another new
company.
That's very hard to contemplate. I'm personally not smart enough
to see what that shift might be. And, you know, as human beings, I
think we have to deal with what we have right now. So the issue is,
we have 250 million computers installed worldwide, and the vast
majority of those computers are running Microsoft software. And in
that case, Microsoft has a monopoly over the desktop operating system.
HATCH: Do you think it's important that the laws that typically
apply to companies with monopoly power, laws that forbid, for example,
monopolists from engaging in exclusionary practices, or from unfairly
leveraging its monopoly power into other markets, apply to Microsoft
as well? And if so, why?
ALSOP: I would. I would start by observing that I am not -- I'm
the furthest thing from an expert in antitrust law and capable of
embarrassing myself in public on this topic. So I would say on the
surface that the antitrust laws apply to any company that has the kind
of share of market that Microsoft maintains in desktop operating
systems for personal computers.
ALSOP: I'm not smart enough to say that I know how to apply
those laws. I suspect, as I said in my opening statement, that we may
need some new precedent in this situation.
HATCH: Well, let me ask this question. Maybe -- you know, in
addition to the exclusive licensing practices and the ISP channel, I
am troubled by reports that Microsoft allegedly used pressure tactics
to force or at least induce computer makers to promote Microsoft's
Explorer over Netscape's Navigator.
Let me ask you this, Mr. Dell.
In your opening statement, you say that your direct relationships
with consumers allow you to gauge efficiently customer demand and that
your objective is to sell computers directly to end users, build them
one at a time and customized to the individual consumers preferences.
Now, as I understand it, Netscape has the market lead in the
browser market. And in fact, currently is the most widely used
software application ever written for Windows.
Consequently, as you might expect, I was surprised to learn that
you in fact do not offer individual retail consumers even the option
of getting Netscape actually loaded on to a PC. Why is that?
DELL: Mr. Chairman, we offer a wide variety of software
packages...
HATCH: Let me just add one other question that I think might
help clarify what I mean.
Does this have anything to do with your Microsoft license or with
maintaining a favorable relationship with Microsoft?
DELL: Mr. Chairman, we have never entered into agreements that
have bound us to exclude other vendors, nor will we. We offer a
variety of software packages to our customers based on demand and
economics in offering those. In the case of Netscape's browser, we
offer that and load that for companies that request it. It's been our
experience that the demand for the Netscape browser among our consumer
customers has not been sufficient to date, nor have the incentives to
our company or shareholders been sufficient to date that would suggest
that we would offer this to our customers.
But we're certainly not bound by any agreement, not to offer it.
HATCH: Well, that's interesting but could you explain why when
committee staff called Dell's 1-800 number, five different sales
representatives -- George, Brad (ph), Jason, Bubby (ph) and Jeff...
(LAUGHTER)
... told them that Dell cannot distribute Netscape because of
Dell's licensing agreement with Microsoft. And let me just say
another interesting thing we found, was that your sales
representatives would not mention Netscape at all unless we
specifically asked for it. Nor, could we find the option of buying
Navigator mentioned anywhere on your Website.
Now, you say that your business is driven by gauging the
responding to consumer demand. And your Website says that you
currently get $4 million per day from your 1-800 and Internet ordering
services. Yet, your people wouldn't even offer the choice of an
alternative to Microsoft's Web browser in these services.
Now, how do you know what your customers want, if you don't
explain their choices in the first place?
DELL: Mr. Chairman, we offer Netscape's browser as a software
package that can be purchased along with our machines as an add on.
We do not offer loaded in the factory, but customers may buy the
software from us and load it on the machine themselves.
As you may be also aware, Mr. Chairman, Netscape's browser -- as
are many other software packages -- widely available and effectively,
freely available on the Internet. So, we do not feel necessarily
compelled to offer things to our customers which they can readily find
freely available through a number of other sources.
We work to accurately gauge customer demand in aggregate. So,
for example, if we find that an increasing percentage of customers
would like to buy a particular type of software -- and we sell several
hundred, several thousand different kinds of software from hundreds of
companies, we will in fact offer that.
DELL: And we do sell Netscape's software to consumers with our
PCs.
HATCH: OK. Mr. Gates, I would like just briefly to pick up on
an issue where our hearing last fall left off. As you know, I raised
the question of exclusive licensing with Internet service providers or
ISPs, and your license with EarthLink (ph) is a particular example.
Now, I know my raising this EarthLink (ph) license troubled you. But
I think that subsequent events have proven this to be a fairly
important issue worthy of examination.
I was concerned that Microsoft was using its desktop dominance to
induce a major distribution channel for browsers not to distribute
alternative browsers. And although your general counsel wrote me
after last fall's hearing and stated that, quote, "the implication at
the hearing that Microsoft's agreement with EarthLink was somehow
directed at locking out competing software is plainly refuted by the
facts." Unquote.
As you know, I continue to believe that such licensing provisions
seemed designed precisely to lock out alternative browsers from one of
the most important distribution channels. Now I was therefore pleased
when in response to our continued inquiries, Microsoft sent us a
letter last Friday indicating that it was agreeing in large part to
remove these ISP licensing restrictions worldwide.
Mr. Gates, you and I have spoken about this together, and I think
it is a very positive step that you have taken. I want to compliment
you for it. I would like to ask you today whether there are perhaps
other steps you would be willing to take to pacify those who are
concerned about seemingly exclusive licensing agreements, and would
you be willing, for example, to remove any terms and agreements with
content providers that, like your ISP agreements, might limit their
freedom to promote or advertise browsers other than Microsoft's? And
I see my time is up, so, if you could answer that.
GATES: Well, I appreciate a chance to set the record straight on
this. And I want to go through a number of facts, because I think
there have been a lot of false things that have been circulated that
it's important to have the record straight.
When we provide Windows, one of the things we make it easy for
people to do is to sign up to the Internet. So we have what's called
a referral service, and we do contracts with 12 of the over 6,000
Internet service providers, to let them connect people up that way.
Today's less than 3 percent of people who connect up to the
Internet do it through that ISP connection.
Now, when we refer a customer to an ISP, we did ask that when
that referral is done, that they not immediately switch that person to
Netscape. We didn't feel that for that three percent it was at all
unusual that where we do that referral that we ask them not to switch
them to another browser as part of that initial contact. Of course,
those people could always go out and switch their browser. There's no
product that's easier to switch in the world today than a browser. It
takes about five seconds to go up and click and go get the Netscape
browser or the Microsoft browser or any other browser that's out there
on the Internet.
We agreed to waive even that condition that that referred
customer would not be immediately switched to Netscape because it
became a focus, and it was taking away from the key principle that's
important to Microsoft. That principle is the ability to support open
Internet standards in our Windows operating systems.
As far as Internet content providers go, let me be very clear
about that. There is nothing that restricts anybody who has content
relationships with us from developing sites that exploit any browser
out there on the marketplace. Those people are free to do as they
choose in terms of developing sites, and they have lots of ways they
can promote the other sites that they do.
And so, here we have a case where we were encouraging the market
to move up to support the open standards, the latest HTML standards,
that our browser was out in front of providing.
GATES: And we gave incentives -- we weren't paid by them -- they
didn't pay us, but we gave them incentives in terms of exposure in the
channel guide in order to encourage them to exploit those new
standards, which they did and that was a good thing to have people
moving up and taking advantage of that new HTML. But they are not
restricted from supporting any browser extensions. Nor are they
restricted from doing promotion related to those things.
HATCH: Well, now, I just have to button this down and then, of
course we'll turn to our ranking member, who has allowed me to do
this. Are you telling me that none of the content providers who have
channels on Microsoft's active desktop are limited in any way from
promoting or advertising content that they have developed for
alternative browsers?
GATES: Well, I'm sure you understand that the -- the channel
guide takes you to a unique URL, and just in the same way that the
Netscape equivalent takes you to a unique URL. On the page site that
the channel guide directs you to, that site has an icon which is a --
you know, supports Internet Explorer icon.
So on that page, of these content providers, the percentage of
traffic they are getting through those pages is less than .1 percent
of their overall traffic. So it is true on that one page, which is
the one we refer to, which they're not -- you know, they're not at all
restricted from signing up and doing...
HATCH: But are they restricted by your licensing agreement from
doing this or do they consider themselves restricted or do you
consider them restricted?
GATES: I said that on this page that they get...
HATCH: You're talking about URLs, but I'm talking about in any
way, not particularly just the page.
GATES: They have -- they have many ways they can promote other
extensions that they do.
HATCH: Well, let me just say this. I do hope that you and I can
continue to talk over the coming weeks about some of the fine points
in your changes to the ISP licenses. And perhaps some other areas
where you might be willing to abandon licensing provisions that have
exclusionary effects. And instead of getting into that here now, I
think -- well, I'll just turn to the ranking member. I apologize for
taking a little big longer than I should have.
LEAHY: Thank you, Mr. Chairman. While it's an interesting
hearing, I mean, look at the turnout in our own committee. Senator
Murray from another committee is here. Senator Conrad and Dorgan were
here before. Mrs. (ph) Dorgan is here. Now, Senator Gorton was here.
So we are interested. And I note in your testimony that there
seems to be one principle you all agree upon. That is that intrusive
government regulation is not the answer. I wonder if that would be
the same view if we were having this hearing a year from now?
Mr. McNealy and Mr. Barksdale, let me ask you this. If the
Justice Department's ongoing enforcement actions against Microsoft are
unsuccessful, are you going to be back in here asking for some new
antitrust laws?
BARKSDALE: It's not my intention, no, sir. We win or lose in
this case or -- if we lose, we lose. I have no intention of either
taking private action against Microsoft or coming back here for laws.
I don't think that process would work.
LEAHY: Mr. McNealy?
MCNEALY: I don't believe we need new laws, just enforcement of
the current laws.
LEAHY: If it's just a matter of enforcement, let me ask -- then
follow up on that. Mr. McNealy why didn't you bring an antitrust
claim against, what you call anticompetitive conduct, yourself?
MCNEALY: Why don't I?
LEAHY: Yes.
MCNEALY: We're investigating that opportunity and looking for
the right kind of case to build, if that so presents itself. But we
do not have, at this stage, a case to bring right now.
LEAHY: And I gather from your earlier answer, Mr. Barksdale, you
were not looking for such an opportunity?
BARKSDALE: No sir, I don't think my company could afford it.
LEAHY: Let me ask you this, Netscape's Website, Netcenter, it's
the default destination on the Navigator browser, just as Microsoft's
home page is the default destination for Internet Explorer.
Now, I've seen statistics that Netcenter draws more than six
million visitors per day, about 14 million unique visitors per month.
Haven't gone back to check how many people look at my Website, I'm
nothing but jealous.
(LAUGHTER)
I want to tell you. But...
BARKSDALE: I've looked at your Website.
LEAHY: What's that?
BARKSDALE: I've looked at your Website, sir.
(LAUGHTER)
Now you got to...
BARKSDALE: It's very good too, I might add.
LEAHY: Oh, thank you.
(LAUGHTER)
According to press reports, one of the ways that Netscape will
make money from Netcenter is by getting a cut of each electronic
transaction generated from its site by content and service providers
could be reached through your site. Is that correct?
BARKSDALE: We haven't done that to any degree yet. We are
interested in that idea and we looked for ways to do it. It's not
proven that it's an effective way to do it. But certainly if it
works, we would attempt to do that.
LEAHY: Now, Mr. Gates, when you talked about some of the
innovation software being like a Senate term after -- that within that
period of the six years then people are tired of it and looking for
something else. I hope you know it's a chill that went right across
this whole thing.
(LAUGHTER)
And some of us thought that hit a little bit too close to home.
But you...
GATES: Well, you'll get re-elected.
(LAUGHTER)
LEAHY: Well, we have to reinvent. But does Microsoft also plan
to generate revenues from transactions that you generate through your
Website?
It's all on the same thing as asked Mr. Barksdale.
GATES: We will not be charging any type of transaction fee
whatsoever for people who use our platform software. In particular,
people who use Windows, Windows NT and Internet Explorer.
If we actually build the site that is in a new area, like we have
the site called, Expedia, that will be involved in collecting some of
the commissions for those transactions. But relative to the browser
itself and the operating system, the answer is no.
LEAHY: Well, let me ask you about this because in preparing for
this, I looked at something your chief technology officer, Nathan
Myhrvold, is quoted as saying that Microsoft wants to charge a vig
(ph) or vigorous, for each use of the Internet through access by
Internet Explorer.
In "Business Week," you say we have no scheme, never had had one,
no will have the ability to charge tolls for people using the
Internet, Windows doesn't give it. Is that -- are both these
statements consistent?
GATES: Yes, I think that's another thing it's great to set
straight. What Nathan said is that he didn't see any way for someone
to get a transaction fee like that, and it was not our plan.
What -- further in that dialogue, they said well if you charged a
fixed fee for your software, you know, if you pay, say, $100 to buy a
Windows update, and somebody runs a certain number of transactions
through that, couldn't you impute and say oh it's a million
transactions, you paid $100 to buy the software, wouldn't that be like
a transaction fee?
And if you'll look at the exact quote it says that the primary
business will be charging a one-time fee. So, I think that's very
misleading. Let me...
LEAHY: But you do have something...
GATES: Very clear again, we have no plan to use our platform
software to create any kind of gateway or charge any type of
transaction fee. We don't think that would be a good business
practice. It's not consistent the way we're pursuing the Internet.
LEAHY: So you have -- do you have no plans in to get revenue
from transactions that generated the Microsoft site?
GATES: When people come to a site of ours like Expedia.com or
some of the other sites we're building if once they choose to come to
that site, they want to, say, buy an airplane ticket then we will
collect a transaction fee.
But people who use the Microsoft browser will in no way through
the use of that browser, the Windows platform, be subject to any type
of transaction fee.
LEAHY: So, it would be only if they're using your commercial
sites?
GATES: If they choose to go there and do a transaction.
LEAHY: Let's say there is a -- as if Expedia, let's say they go
on to an airline. Just call it Fly Away Airlines. Fly Away charges
for a ticket. You can go directly to Fly Away Airlines, pick your
seat, but the use your browser to get there.
LEAHY: Now, you would not be -- he plans to collect from Fly
Away forgetting the person to Fly Away's site.
GATES: That's right. If you use our browser to go somewhere,
you can type in any address. You can go anywhere you want. And when
you go there, it's totally up to you to choose, and in no way does
Microsoft collect because of that. Only if you choose to go to a site
where we've created a site that does that type of work would we, in
any way, be involved in a transaction fee.
LEAHY: Well, let me ask you this question, then I will ask it
also to Mr. Barksdale. When I go on the sites, and I must admit,
during the weekend, I was checking a whole lot more than I even
normally do, just getting ready for this, but, some sites are tagged
as, "Better viewed with Internet Explorer;" some as, "Better viewed
with Netscape's Navigator." And, you battle for share. I'm just
wondering, do we end up having the Web divided up between these two?
Or you know, do you have Websites partitioned between the two leading
browsers until one or the other of you wins a browser war or some
company that we're not even thinking about now comes in and does it?
Is this going to happen? Are we going to find Websites
partitioned between the two of you? Mr. Gates.
GATES: There's a great standards group managed by MIT called the
W3C (ph) group run by Tim Burners Lee (ph). And, that group is
defining the extensions for how web sites present themselves, so-
called, HTML. They're doing very, very good work, and Microsoft is
very involved in making suggestions and making sure we support
everything that that committee provides.
And so we've been the most aggressive in terms of supporting
those standards. For example, they came up with a standard called,
"Picks" (ph), that allows you to filter out unwanted sites, including
pornographic sites. And we've been supporting that for a very long
time. That type of use of the standards group is the best way to make
sure that we don't get fragmentation. And all we're asking for is the
ability to be able to support those Internet standards in our
operating system.
This idea of tagging it with the "best-viewed by" acts -- that's
a practice that Netscape started. As you noted, they have over twice
as many sites that do that. The ideal is that if the standards got
rich enough, you wouldn't have to see that kind of tagging.
LEAHY: Mr. Barksdale, how would you respond on that?
BARKSDALE: Well, there have been time-to-time where we and other
browser manufacturers have been ahead of the standards, which have
been pushing on the same groups that Mr. Gates is mentioning, the W3C
(ph) and others, standards bodies. And in the current instant that he
is referring to, we are both divergent. But the fact is, that
standard has not been established yet, and as soon as it is, we have
made a firm guarantee and commitment to our customers that we support
standards that are approved.
But, sometimes we do get out and lead a little bit, and that has
generally been very good for the industry and very good for the
Internet. I think that, if you look at any divergent, just between
our two companies, over the last three years say, where we were not
supporting exactly identical ones, it was always a case where we were
both, one or the other, not ahead of the standards body. But the way
the Internet works, within a matter of months, you'd better get back
together because you can't bifurcate the Internet for very long and
serve these customers.
So, the W3C (ph), when they rule on it, we'll adopt the standard,
and I'm sure, or I imagine, Mr. Gates will. And then, when we do
that, we will support those new standards. It's not in our best
interest to be running standards that are incompatible with Microsoft.
LEAHY: Well, let me follow this a little bit further because you
also have how you get on channel bars on there. And neither one of
you have one of my favorites -- it's a Grateful Dead site. But that's
neither here nor there.
(LAUGHTER)
But, before you give a content provider or services a prime spot
on your channel bars, do they have to agree to anything in particular
with you, Mr. Barksdale?
BARKSDALE: Generally, they have to agree to -- if they're
presented in that fashion, they pay us a fee, either one-time or
continuing. Or, there are some other value trade where maybe they
give us promotion or advertising in return for that, and so there may
be a bartering. But those are items that are paid for. That's how we
make money on our Website.
LEAHY: Are they then barred from paying for placement on a
competing browser's channel bar?
BARKSDALE: No, sir.
LEAHY: And Mr. Gates, what about you, sir?
GATES: Well, as I said earlier, people who are on that channel
bar can do web sites that take advantage of anyone's browser. The --
when we do our channel guide, we haven't done it as a moneymaking
activity. We don't charge people to do that. We had really ...
LEAHY: But do you have any restrictions on them from going on
another ...
GATES: No, we don't.
HATCH: Senator, ...
LEAHY: I didn't mean to cut off your answer. I was just
wondering.
GATES: No, that's OK.
HATCH: Senator Dewine is next, but he's graciously allowed me to
just button down this last thing that you and I were chatting about,
Mr. Gates. And that is that, and it's back to the ISP response you
gave. Exclusive licenses with ISPs seemed very important to Microsoft
Executive Brad Chase (ph). As you will recall, his memo of April 4,
1996 entitled, quote, "Winning the Internet Platform Battle," --
unquote -- made a top strategic priority of signing quote, "exclusive
licensing of Internet Explorer to those ISPs who make up 50 percent of
Internet access." Unquote.
And indeed, you appear to actually to have met this objective
last fall when Microsoft issued a press release proclaiming that it
had obtained or gotten the top ten ISPs, not to mention AOL, to agree
to make the Internet Explorer their default browser.
Now, I also doubt that these exclusive licensing provisions have
been meaningless when it comes to which browsers are being shipped
through the ISP distribution channel. One ISP has told us, for
example, that the terms of its license with Microsoft had a very
direct and significant impact in excluding alternative browsers. And
today's "Wall Street Journal" reports that Internet firms say, these
contract terms quote, "have prompted a sharp drop in their
distribution of Netscape's software." Unquote.
So I think my concern appears to be quite justified. Do you have
any comment about that?
GATES: Well, let's, let's dig into this a little bit.
HATCH: Sure.
GATES: When we came out with our first Internet browser support,
that was part of Windows 95, and it was our very first version, and so
we labeled that capability Internet Explorer 1.0. Now, that went out
with every copy of Windows 95 that went on PC systems. Now, at that
time, our browser had not caught up with all the rich features that
others had, and nobody chose to use that browser.
Then we moved on, did some big improvements in our version 2 of
those capabilities, and we were leapfrogged. So once again, no matter
what relationships we had with OEMs, ISPs, ICPs (ph) -- people didn't
choose that browser because it is so easy to pick the browser you want
to pick. It was only with the version 3.0 of this work where we won
the majority of the reviews that then, people started to switch to our
browser.
With our latest release last fall, we won 19 out of 20 of the top
reviews. And there now, we have gained some shareholder, although we
do not have majority share.
As far as the ISPs go, let's be very clear about that. Somebody
who uses these ISPs has the ability, in five seconds, to switch their
browser whenever they want. Let's take in particular, the EarthLink
case, which is the document that we were somewhat surprised to have
you bring up in the last hearing.
EarthLink is distributing Netscape software widely, and only
about 40 percent of its customers use Microsoft Internet Explorer.
And so, this issue, we want to make sure its not distracting from our
main principle. Our main principle is innovation. And so, in order
to avoid this being a distracting issue, we have agreed in reviewing
our activities, that we're going to drop anything people find
objectionable in terms of how we do these ISP agreements.
GATES: But it's only three percent of the sign-ups. So I am
still somewhat surprised it became the focus of so much attention.
HATCH: Mr. Barksdale, do you have any comments about that?
BARKSDALE: Yes...
HATCH: Now, by the way, I think if anybody differs on this panel
with what another person is saying, just raise your hand. I'm sure
the senators who are questioning would allow you to comment.
BARKSDALE: I would say that basically what Mr. Gates is saying
there is just not the way it works. The fact is they worked very hard
to get exclusive licenses. We've never used those because we're
subject, much more, to market forces than they are.
And in a market-force environment, you go ask for an exclusive,
the guy's likely to tell you to take walk. Microsoft, because of
other positions in their business are able to force some people to do
things that are not necessarily in their best interests.
GATES: No, these are not...
BARKSDALE: Excuse me, Mr. Gates. I'll let him finish his
statement. I mean -- go ahead, Bill.
GATES: No, go ahead.
HATCH: Why don't you finish, Mr. Barksdale, and then we'll come
back to Mr. Gates, and then I'm...
BARKSDALE: If they weren't a problem for Microsoft, they would
not have changed 40 licenses the day before this hearing.
HATCH: Mr. Gates.
GATES: Actually, we -- well, we changed the licenses in Europe a
few weeks ago as part of a business review. The licenses are not
exclusive. I mean, let's be very clear about that.
BARKSDALE: They're exclusionary.
GATES: They do ask that when a customer is referred, that the
person not promote the Netscape browser, and that became
controversial. I don't think it's a fairly unusual thing. When you
refer a customer to someone, you ask them not to switch them over to
the competitive product. But that became a focus of attention and so
we've gotten rid of that. That's, you know, completely behind us.
HATCH: Well, what do you say to the ISPs who say that it was
actually their exclusive contracts with Microsoft that affected a
browser market share?
GATES: Our market share rise is perfectly correlated with the
timing with which we came out with a product which was widely
recognized by the market as a better product. And the agreements are
not exclusive. That's a key point. These ISPs, the people who use
those ISPs can switch their browser within five seconds. It's a very,
very easy thing to do.
The fact that we have a product that is widely reviewed as
positive, that's allowed us to gain share with users. And there has
been a shift. We do not have majority browser share at this point,
but we've gained a lot.
HATCH: Thank you. Senator DeWine, we'll turn to you.
DEWINE: Thank you, Mr. Chairman. Mr. Dell, let me follow up if
I could, with a line of questioning that the chairman started, and I
guess we all had maybe the same idea. My staff made some calls of
your folks as well and pretty much got the same result. I would like
to read, as we say in the political field, some of the verbatims back
from this because I think it gives you a little flavor and I want to
ask you a couple of questions.
We made a call March 2nd, 2:00 p.m., Dell representative told us
that we could not get Netscape Navigator from Dell. When we asked why
we can't get Netscape, the representative said, quote, "because we are
research and development partners with Microsoft." 2:20 p.m., March
2nd, made another call, Dell representative said that Netscape
Navigator was not available. When asked why, he said, "You know, I'm
not quite sure. It has something to do with Microsoft."
(LAUGHTER)
2:50 p.m., March 2nd. Dell rep said we can't sell you Netscape
Navigator because of Microsoft. When I asked what meant, your
representative said, "We're with Microsoft." I'm sure there's
something written in there.
And in another call we made, 2:00 p.m., a Dell rep said that
"Only Internet Explorer 3.0 was available through Dell." This rep
said, "I personally wish we could sell Netscape. I prefer it to
Internet Explorer." We will keep that person's name confidential
(LAUGHTER)
I'm still confused, seriously. I'm still confused. And there
does seem, frankly, some confusion between your sales reps and you.
Could you help us understand exactly what your relationship is with
Microsoft? You know, does Dell sell computers with Navigator or not?
DEWINE: And, I think, what's particularly hard to understand as
my understanding is that Netscape has better than 50 percent of the
browser market. Why wouldn't it be just good business practice to up
front offer this? Why isn't this something that would be in service
to your customers and consumers that you would want to do?
DELL: Senator, I think there's a few key points. First of all,
we do offer Netscape Navigator software to our large customers who
demand...
DEWINE: Your large customers?
DELL: ...large customers who demand it and, in fact, we load
Netscape...
DEWINE: Who demand it?
DELL: Who request it.
DEWINE: OK. I get it.
DELL: That we load -- Senator...
DEWINE: Oh, I just want to make sure -- large demand.
DELL: We load software for our large customers who request that
we load a specific (OFF-MIKE) software for them. We negotiate
vigorously with all of our vendors to obtain the best terms that we
possibly can for our company and our customers and our shareholders.
And based on the terms that we have negotiated, we believe that it is
in our best interest to offer those products that are going to offer
us the greatest margins.
So, we offer a variety of products to our customers and the
incentives that have been put in place for us to sell one product or
another are going to dictate our actions. As well, the customers
demand and ease of access to these products is going to dictate our
actions.
For example, in the case of a browser, it is quite easy for a
customer to obtain the Netscape Navigator browser. So this is not
necessarily an element of ease of getting the product or access to the
product because any user can easily be inundated by the access to this
browser whether or not it comes from Dell on their machine.
DEWINE: OK. Let me turn to Mr. McNealy and Mr. Barksdale.
Windows is by far the most popular operating system for PCs today.
First, I'd like to know if you think that's always going to be the
case. Is that going -- is that where it's going to stay? And then
I'd like to ask you why with all the talent in your industry, if you
answer is that's the way it's going to stay, do you really believe
with all the talent in the industry that no one will be able to build
a system that can supplant windows?
BARKSDALE: Well, if I can go first.
DEWINE: Either one of you.
BARKSDALE: Yes.
DEWINE: Or both of you.
BARKSDALE: I don't see it as a likely occurrence in my lifetime,
but then, I'm a little older than some of these people here. I don't
see it possible because of the vast number of people who develop
software to run on Windows and have programed those programs to run
with Windows. They are
not likely to change because another platform comes along.
The possibilities do exist. I wouldn't deny that and in that
regard, I suppose, I agree with Mr. Alsop. it's just not a likely
occurrence. I would also point out that it's not worth the
investment. No venture capitalist that I know of is going to back me
to go build another operating system to compete with Microsoft. It's
just a losing game, as Mr. Herbold said, you wouldn't -- a betting man
(OFF-MIKE) wouldn't bet on it.
So, it's not likely to happen. Many other factors were network
-- economics at work in our industry as well as large scale economies
in the software industry in particular that make that an unlikely
course.
Now things change, things move, a hundred years from now, who
knows? By the way, I was struck by the fact in response, Mr. Gates, to
the question about whether or not it was a monopoly he talked about
how short lived the products were and we all understand that. That
doesn't negate whether or not it's a monopoly though. Even if it went
away six months from now, it is a monopoly today.
DEWINE: Mr. McNealy, your son is working with IBM and Oracle and
Netscape and you're investing an awful lot of money. You wouldn't do
this really unless you thought you had a shot at supplanting Windows,
would you?
MCNEALY: We aren't really targeted at going after the desktop PC
operating system world with a similar strategy. We call it the fat
client environment. We just don't believe there's -- it's clear the
best product doesn't win. Apple had a better product and lost just
because at some point unit volumes become so large.
The desk top operating system has kind of become the written and
spoken language of computing and to switch, it's hard enough to switch
from English 1.0 to 2.0 here in this computer world, but to go from
English to Dutch, which is kind of like what you're asked to do in
terms of changing your file formats, user interfaces all your
application releases, all the rest of it, the switching costs are too
huge.
MCNEALY: So I'm sort of in the same camp as Mr. Barksdale. I
just don't see where people will switch the basic operating
environment that they have and it's a very, very durable monopoly from
that perspective. It'd be just about as easy to change the national
language of the United States of America.
So it is -- switching costs are very high. We are off working
very aggressively in other markets, servers, thin client computing,
embedded computing and those markets where Microsoft does not have a
monopoly today.
Our worry is that they leverage into those markets through tie-
ins, through acquisitions, through pricing advantages where they can
raise prices as they are today. They are raising prices on Windows
98, they have raised prices as of January 1st on servers and I have
customers who told me their cost of Microsoft server software has
doubled as of January 1st.
And then, they go out and dump at zero cost, in fact, less than
zero cost when they give away real estate on their very valuable
desktop operating systems, they are pricing things like browsers at
below cost, at below zero dollars. In fact, they're giving you
advantages to resell it. So we see some very predatory pricing
practices and very -- pricing practices that only monopolists could
engage in.
DEWINE: I want to give Mr. Gates a chance to respond if he
wishes. Do you want to respond to that in any way?
GATES: Sure.
DEWINE: Briefly, because our time is short, but I want to give
you the chance to do that.
GATES: At least outside of this room, Mr. McNealy has a plan to
replace PCs. He talks about how fat clients -- nobody should buy fat
clients and thin clients will totally replace PCs. And let me be
clear his network...
MCNEALY: I never said totally.
GATES: OK, not totally. There will still be a few old ones in
the closet somewhere. He's promoting the vision of computing that is
a perfectly valid thing. This is a very competitive business. And I
don't think it's fair to just come into this room and say no, you
know, Mr. McNealy's Java OS has no chance of displacing Windows.
That's simply not true.
Unless we lower the cost of ownership, unless we simplify the
product, we will be replaced by Java OS or many other people who are
working on similar concepts, including IBM, who is very, very strong
there. So there certainly is competition for that desktop and Sun has
some very great ambitions. I can go through with you many, many
customers who today are looking at whether they should buy Sun Network
Computers or PCs.
DEWINE: Mr. McNealy, let me move to one more question and take
then you can take your time and answer both if you could -- you could
respond. Your testimony, you have said that antitrust enforcers must
be particularly vigilant about efforts to forestall innovation through
anti-competitive acquisitions of innovative start-up firms. Can you
give us some real specific real life examples of this type of anti-
competitive acquisition that you have referenced in your written
statement that we read?
MCNEALY: I can't give you the details of exactly what companies
have been bought, but there's a list as long as your arm of start-up
R&D that has been bought up by Microsoft to basically leverage their
Windows monopoly. WebTV is the most famous example you've seen, which
was bought at a market value that I think was quite stunning to the
industry. We in fact were looking to be a minority investor and a
partner with them and in fact had our servers in as the back end, it
was a very important customer and we saw as a very important strategic
customer down the road. That became kind of difficult to sell our
computers into a Microsoft company after the acquisition. There's
many, many cases like that going forward.
So -- I guess the point I would like to make is yes, Java OS has
a chance, but it doesn't have a chance if Microsoft is allowed to
leverage their Windows monopoly and prevent us from going out and
taking a real good shot at the market with a better and newer
paradigm.
MCNEALY: Innovation must happen and it must be allowed to
happen, and we can't -- and all we're asking for -- we're not asking
for any help. I don't need any extra R&D. We have got some
brilliant folks there doing R&D. We don't need any help in the
marketplace.
We just don't want a monopoly position in one part of the market
to prevent us from getting a fair shot at the marketplace. If it
fails, if thin-client Java computing fails on its own merits, that's
fine. But if it fails because of illegal predatory and exclusionary
tactics, from a monopoly position, that's a loss to all consumers.
DEWINE: Mr. Alsop, you wanted to make a comment. I can see you
raising your hand down there.
ALSOP: Yes. Just to -- I want to comment on both issues that
are going on here. First, I do want to help Bill out here and say
that Scott has referred to the PC as ridiculous, I believe was the
word that he used, and had positioned the Java OS has a replacement
for the PC in his public comments previously.
But the important point to understand here, when we're talking
about Windows as an operating system and as a monopoly in the desktop,
is that we want Windows to be a monopoly in the desktop.
There is a very strong need and desire to have single operating
system running on all computers worldwide. It enhances the ability to
develop a kind of application software that Doug's company does. It
enhances the ability to sell low-cost machines, as Michael's company
does.
This is a fundamental desire that people have and the process
that we've been through over the past 10 to 15 years is essentially a
competitive process that established the Microsoft Windows operating
system as the single standard for desktop computers. I'm not sure
even Scott would disagree...
MCNEALY: I couldn't disagree more...
ALSOP: ...that there's a desire to have a single standard. I
think his disagreement is that he prefer it to be his standard rather
than Bill's standard.
MCNEALY: That is -- that is very inaccurate, and from my
perspective, in the sense that I'm not asking for a single product,
we're asking for a single interface standard.
Microsoft is a single product setting the standards. And by the
way, if there was no other browser out there and Explorer was the only
browser, I guarantee you, they wouldn't even know what the WC3 (ph)
was. They would not work with the standards, but they'd just go out
and innovate.
They're not working on Windows through the standards bodies, they
just go launch Windows 98, Windows 99, NT4.05.0. They certainly don't
check in with us to make sure we're comfortable with the interfaces
they are implementing. And the whole idea -- the statement that we
would want one standard is kind of like saying we want one automobile
-- one automobile manufacturer -- and we want them to set the
standards and decide where -- no, we want the break pedal to the left
of the accelerator. We want a car to a certain size. We want bumpers
all equal height. We want common lighting systems, all the rest of
it. We don't want one automobile manufacturer.
And today, there is only one, and quite dominant, supplier of the
desktop operating environment, irregardless of where the standards
come from. And that's Microsoft, and I think that's a very dangerous
position.
DEWINE: Let me continue to follow up on that and say that the
process that you're seeing going on here, I believe, is one where
Microsoft is learning how to adjust to what I think Mr. McNealy
referred to as a different set of rules. Well, that might have been
Mr. Barksdale.
Microsoft has a dominant monopolistic position in desktop
operating systems and its beginning to discover that it has to operate
by a different set of rules than those rules which got it into that
position. So when Mr. Gates talks about adjusting his licensing
agreements with ISPs or adjusting his licensing agreements with OEMs,
like Dell Computer, I think the company is going through a learning
process of understanding how to act essentially like a monopoly; one
that's expected to operate by a different set of rules.
So when you ask the questions that you've been asking of Mr.
Gates, you have to understand that he got into the position he got
into by being competitive, by drawing up exclusive business
relationships with companies by using all of the facilities of the
competitive environment to put Microsoft into a position of dominance.
But now the expectations are different, and that's kind of what's
going on right now. Thank you, Mr. Chairman.
HATCH: Thank you, Senator DeWine. We're going to go to Senator
Kennedy and after Senator Kennedy we're going to -- since Senator
Thurmond has to go to his committee, we're going to turn to him. So
Senator Kennedy.
KENNEDY: Thank you, very much. And thank all the members of the
panel. And Mr. Gates has been in the bullseye all of the morning and
we appreciate the position that you're in, but he's been enormously
helpful over the course of the morning. Now let me ask you, Mr.
Gates, we've heard these -- use of these -- expressions, stifling
competition, intimidation, undermining innovation.
KENNEDY: We've heard these -- use of these -- expressions,
stifling competition, intimidation, undermining innovation. What are
we to gather that all the rest of this panel here you indicate that
you've been able to survive because you hire smart people and that it
only -- anyone can produce an operating system in a day and it only
takes a few seconds to change from the browser.
Are their complaints -- is this just sour apples? Do we have
other leaders in this industry that are targeting you? Is this just
because they can't put out and beat what the competition is? I mean,
what should be -- how should we evaluate these kinds of comments that
they have been making with regards to the situation that we have?
I mean, it's rather unique in terms of the American economy to
find an industry that has the kind of description no matter how you
want to shade from side to the other the dominant position obviously
that you've had and done it very creatively so. Don't want to take it
away. I mean, it's been magical what you've been able to achieve and
accomplish in terms of these operating systems.
But when you hear the leaders on here and it isn't with all
respect many of the leaders that are here but we're in a state that --
Massachusetts where we have a lot of innovation, small companies that
are working in this area. This kind of similar kinds of reactions
that we have heard today. What is it? What do you say? They just
can't measure up? They're not -- they don't hire as many smart people
as you do? They're not as smart? What do we say and should we be
concerned about it?
GATES: Let's be very clear, Senator. The number of successes in
the PC industry are quite large and these are companies that work
together to create a fantastic industry. I think it would be fair to
let, after my comments, let Michael Dell comment about how he thinks
the industry works or Doug Burgum to talk about from a software
developers point of view.
If you take the large and small software -- large and small
companies in this industry, if you took a poll, they would say that
the PC industry and what Microsoft has done in that industry is
fantastic -- providing things that at very low cost, listening to
their input, putting things out there.
Now, when you assemble a panel and you get Sun, who doesn't
believe in the PC approach, has chosen not to offer Windows NT to its
customers, of course that's a competitor. If you weren't hearing
competitors saying these things then you might have something to worry
about.
But as it is, you know, there is a lot of competition in this
industry. I don't think the kind of comments you're hearing from
these competitors are much different than if you called in the leaders
in other industries.
I think the unique thing about this industry is the type of
partnerships that exist. When we do a developer conference to talk
about our new products we even invite our competitors to come. Our
latest conference where we showed off NT 5.0, Sun sent 30 people to
that conference, Netscape sent 15 people to that conference.
If you go through the leaders, whether it's Compaq or HP or all
those companies, you will find that we have a great relationship with
them. I went and got some figures on Massachusetts and the job growth
in Massachusetts in the software industry has been very impressive, 20
percent over the last year.
The creation of new software companies in Massachusetts has been
incredible. A majority of those companies are our partners we are
working with to let them take advantage of PC technology.
KENNEDY: Well, the -- suppose the question is whether they would
have grown faster in a more competitive situation? I mean, that's the
question which many of them have raised with us is whether -- no one
is taking away the extraordinary success that you've had, but the
question is, is the use of your authority and power now being used in
a way that it is going to stifle competition and ensure that the best
in terms of innovativeness is going to reach the consumer? That's
what we're asking.
Let me ask you, do you think that there is any legitimacy in
terms of a role to oversee your company in terms of how it works
within the markets
to find out whether it is, in any event, stifling competition or
involved in any predatory practices?
KENNEDY: Do you think there is any role for antitrust
considerations in the industry itself? There are some that have said
that, in this particular industry, antitrust might have applied in the
past, but it doesn't apply to this industry. Do you think that there
is any role, should there be any concern, particularly with regards to
your own operation?
GATES: We make -- Microsoft is in complete agreement, I think,
with Mr. McNealy and Mr. Barksdale, that the laws shouldn't be
changed. They shouldn't be changed to be different in any way. And
they certainly, in our view, do apply to our industry. And Microsoft
is very careful in what it does to make sure our success comes from
great products.
We have no disagreement with people who say the antitrust rules
apply to us and to our industry in a broad way.
KENNEDY: Let me just ask, in "Newsweek" this past week, there is
this quote that Microsoft's chief operating officer, Bob Herbold let
slip a comment about Microsoft's wider strategy, asked how small
software companies could compete on products that Microsoft wants to
fold into Windows. Herbold said, they could either fight a losing
battle, sell out to Microsoft, or a larger company, or not go into
business to begin with.
Now, I don't -- your reaction?
GATES: When I decided to create Microsoft, I did not call up IBM
and say, "IBM, do you think there's any chance for me to create an
operating system that sells hundreds of millions of copies?" The
interesting thing is, if you ask us, if you ask Bob Herbold or
somebody from Microsoft, we assume that we're coming into work every
day, working very hard, doing great R&D. We assume that we're going
to be able to maintain our leadership. We can only do that by
listening to customers and hire the right people.
So when you ask Mr. Herbold, should you take on Microsoft head
on, and create a new operating system, if that's how you're going to
whether to do it, I'd suggest you're probably not the kind of
entrepreneur that's going to make that happen.
KENNEDY: I'd ask the other members of the panel -- they heard
that quote. Should we be concerned with that kind of ..."
BARKSDALE: I would make an additional comment, Senator Kennedy.
Because Bill is right in that -- Mr. Gates is right in that regard.
You wouldn't call in to tell them you're going to compete with them.
That'd probably be a wasted phone call. And that's not the way a real
entrepreneur would do it.
But I'd go back two years ago when Mr. Gates, answering a
question in "Financial Times," said, "Netscape's model is selling
their browser. We give it away. Once it goes to zero, what does
Netscape's model look like?"
A year later, the number two man in Microsoft, Steve Ballmer,
said a very similar thing in "Forbes" magazine of, you know, Netscape
has come along. Now we include a free product in ours. What happens
to Netscape?
This year, Mr. Herbold in January -- they all seem to happen
around January, I don't know why it is -- makes a comment not
directly, certainly related, to Netscape but we're sort of one of the
people that would be in that category. And it strikes me that three
years, three successive executives said basically the same thing.
That is very predatory conduct for a monopolist. They have targeted
us. They have done almost everything they can think of to put us out
of business, and to their great surprise and to the compliment of my
team and my customers, we're doing quite well, thank you.
HATCH: Mr. McNealy.
MCNEALY: Mr. Senator, thank you. You know, I asked a question
earlier, "Why am I here?" And sometimes I wonder why you would go up
against probably the most dangerous and powerful industrialist of our
age, and actually stand up here in front of all...
(LAUGHTER)
I mean, I've never seen so many cameras in my life. And, I think
...
HATCH: What we have, I want you to know, we
(LAUGHTER)
LEAHY: Trust me, there have been others who have had the fun of
sitting there.
MCNEALY: Yes. Well, you know, a lot of my employees are asking
me, what do you, you know, why deal with this issue? Well, it's
interesting to note and I think it's a very little known fact, but if
you go out and do the analysis -- every computer company on the
planet, today, that we think of as a computer systems company, is
reselling Microsoft technology, except one, and that's us. I thing
SGI (ph) maybe, not yet, but they are going to. They've announced
their plans to move in that direction.
So we're down to basically -- it's a very lonely seat here. So
there aren't a lot of -- you asked a question, who else is out there,
you know, making noise about this? In the computer systems business,
there's nobody else. I mean, how do you go and complain about your
key supplier in a public manner? It's very, very difficult to get
people to go on record.
MCNEALY: I think we're in a very, very difficult situation where
we're going to lose, we're going to lose choice. We're |
