Microsoft

STRATFOR.COM's Weekly Global Intelligence Update - 1 May 2000
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By The Internet's Most Intelligent Source of International News &
Analysis http://www.stratfor.com/
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STRATFOR.COM Weekly Global Intelligence Update
1 May 2000

The Geopolitics of Microsoft

Summary

By moving to break up Microsoft, the U.S. Justice Department is tackling
the domestic challenge that the company poses to anti- trust law. It is
unclear whether the company will simply acquiesce. As important, the
breakup of Microsoft could be a setback for the United States abroad. An
unintended consequence of the company's success has been the way it has
magnified American power overseas, from the cultural sphere to the
dominance of information.

Analysis

On Friday, the U.S. Justice Department turned over its next card in the
Microsoft anti-trust case. Having already won a ruling in federal court
judging the company guilty of violating anti-trust laws, the Justice
Department asked that Microsoft be broken up. The government proposed
dividing the company into two parts: one owning the Windows operating
system and the other owning everything else, from Office Suite to
Microsoft Mouse.

Unless Microsoft simply - and stunningly - agrees to the breakup, there
will be years of litigation ahead and a major clash between U.S.
domestic policy, on one side, and the country's foreign policy, on the
other. The Justice Department may not be considering it, but an
unintended consequence of the company's success has been the
magnification of American power. It has helped spread American culture,
the use of the English language as the new lingua franca and given the
country unparalleled dominance in computing around the world.

Why Microsoft Succeeded

First, a little context. There are many reasons for Microsoft's
preeminence in the marketplace, from its coup in convincing IBM not to
insist on exclusivity on MS-DOS to brilliant marketing strategies to
extraordinary luck. But we believe that there was one fundamental reason
for its triumph over rivals like Apple. From the beginning, Microsoft
understood that the most valuable part of a computing system was neither
hardware nor software. It was the user's own data.

Protecting and guaranteeing access to that data was more important than
maximum computing efficiency. Microsoft created an operating system that
was fully backward-compatible; a file created in DOS in 1984 can still
be accessed on a Windows 2000 platform, and the data can still be read
by today's software. Microsoft's evolution meant that upgrading never
entailed losing data. This was something that Apple didn't understand.
By shifting to the Mac, Apple introduced a system that was much better
than before - but one that either couldn't use older data or would need
a time-consuming conversion process. Apple failed to understand that the
data was far more valuable than the computer.

Microsoft's strategic decision made Microsoft and Intel - together known
as Wintel - the center of gravity of business computing. And this, in
turn, set in motion another process. As businesses clung to Wintel
platforms in order to maintain unfettered access to data, Microsoft
introduced a suite of applications known as Office. Integrating
spreadsheets, word processors and other programs in a single package,
Microsoft Office was no better and in some ways worse than competitors
like Word Perfect or Lotus.

But the Redmond, Wash., software maker wielded one important advantage.
Since everyone wanted to use its operating system, computer
manufacturers needed to deal with Microsoft. In dealing with Microsoft,
they frequently found that they could get better deals on the operating
system if they also purchased Microsoft Office. Computer manufacturers
started to offer the Office suite as part of the bundle of software they
delivered. This was one of the early signs of monopoly, in which
Microsoft used its position as the primary supplier of operating systems
to also sell its Office suite.

An interesting phenomenon took place. In the early to mid-1990s, several
word processing packages were in use. The multiplicity of operating
systems created a serious problem for users attempting to exchange
information. A document created in one word processing package sometimes
couldn't be opened by another. Sometimes, it was opened but the data
formatting was lost or distorted. Sometimes the user's whole system
locked up. Microsoft Word was on a lot of people's machines, even if
they were using other packages. The universality of Word on the PC made
it the most reliable system for the transmission of word processing
files. The chances were that the recipient also had Word and that the
file would be readable.

Just as DOS and Windows were not the optimal operating systems, Office
may not have been the optimal office suite. But in the same sense that
DOS and Windows gave users stable access to their own data, Microsoft
Office provided a stable platform for the exchange of files between
users. The ubiquity of Office was due to Microsoft's position as the
universal operating system and in that sense it represented an
exploitation of an advantage. On the other hand, without a single,
stable standard that could be assured over time and space, the potential
of the computer could not be exploited. Microsoft accurately calculated
that creating this universal standard compensated for a system that
crashed with an appalling frequency. This paradox, of course, forms the
basis of the anti-trust case.

The PC and Power

Microsoft's triumph in the marketplace materially impacted American
global power. The universal penetration of the Wintel platform has
created tremendous opportunities for American cultural imperialism.

Leaving the Internet aside, the preeminence of the Microsoft standard
has refocused cultures around the world. As the PC penetrates the world,
entire classes of worker are emerging to service, maintain and program
for it. There are simply no non- American alternatives to Windows.
Obviously, this means a further penetration of the English language,
spreading ever deeper into the technical classes. It is not possible to
fully master the complexities of programming for Windows without, to
some degree, mastering English.

But it is more than simply a matter of English. As the PC becomes the
global standard and economies become increasingly dependent on it, the
economies of nations around the world increasingly key on what the U.S.
computing industry in general - and what Microsoft in particular - is
doing. This increases American power. The ability of other countries to
completely isolate themselves from the world - consider China under Mao
- declines dramatically when they require a constant flow of technology
to maintain their systems.

Indeed, as Microsoft becomes the file transfer pivot, the ability of
Russians and Chinese to exchange files means that they must turn to a
third party, the United States, for the technology to do so. Whatever
programming they might be doing, their dependence on a stable,
compatible operating system and applications for file transfer creates a
system of dependency that the United States has not fully exploited but
which might well be exploitable.

Microsoft has given the United States a strategic asset that can be
leveraged in a wide variety of areas, from military to economic.
Controlling the universal operating system should not be underestimated
in importance. It may prove more important than oil.

Microsoft also provided the United States with an ideological weapon. If
we dial back to the 1970s, when the country was in the grip of
stagflation, there was a great deal of argument in favor of "industrial
policy." Japan, for one, had pursued a coordinated industrial policy,
where government and industry combined to create a strategic plan for
the economy. Many Americans were attracted to the idea because the
assumption was that rational planning was good. The Japanese were doing
rational planning; the Japanese were doing well, so we should follow
suit with rational planning.

The United States failed to plan. The Europeans and Japanese succeeded.
The result was that Microsoft, unplanned and unanticipated, came out of
nowhere. Along with Microsoft, and in the generation following it, came
waves of start-ups revolutionizing the entire computing industry. The
Japanese planners, who had decided that Artificial Intelligence (AI) was
the wave of the future along with microchips, fell flat on their face.
AI failed miserably and microchips became commodities. Since the
Japanese had carefully planned, they had failed to hedge their bets. The
results are plain to see: Microsoft demonstrated the virtue of the
unplanned economy.

Finally, Microsoft provides a business presence that can compete with
European and Japanese behemoths. These economies, recent trends not
withstanding, remain dominated by massive, inefficient,
government-linked companies, which nevertheless have to be dealt with by
U.S. business. The problem of the U.S. model is that it creates highly
efficient, but small and competitive entities that cannot speak with the
same coherent voice as a Siemens or Ericson. Microsoft is a rare
exception. When it talks, everyone listens. That gives the U.S. a
weight that it lacks because of its idiosyncratic, if amazingly
efficient, business model.

We therefore face a paradox. On the one hand, there is little doubt but
that Microsoft is a monopoly. It can be reasonably argued that it played
by the rules, but the outcome is a monopoly, and U.S. anti-trust law
was designed to prevent monopolies regardless of how they came about
(finding of fault notwithstanding) on the theory that monopolies harm
economic efficiency. The clear thrust is to break up Microsoft.

However, the very thing that poses a domestic challenge has created an
international opportunity. Microsoft's very monopoly position enhances
U.S. power globally. In extreme conditions, dependence on Microsoft
could be decisive in compelling foreign countries to submit to the
United States. If information is power, whatever country provides the
means for managing information is in a uniquely powerful position. To be
quite cynical, the ability of the U.S. computing industry to draw off
the best and brightest programmers from foreign countries not only
strengthens the U.S. position economically, but undermines the
strategic capabilities of potential economic and military competitors.
This is one of many examples of how the dynamism of U.S. computing
enhances U.S. power.

Microsoft has become a domestic problem. It is an international asset.
U.S. anti-trust policy is made in the Justice Department. U.S. military
strategy is created by the Defense Department. Foreign trade is handled
by Commerce. This fragmentation of policy making is supposed to be
reconciled by the president. It may be necessary to break up Microsoft
but it would seem that there are considerations beyond the portfolio of
the government agency that is intent on breaking up the company.