|< Company Profiles / Microsoft||
A Corporate Profile
Corporate Watch UK
1. The company
Industry Area: Computers – software and
The key to understanding just about everything
in the information economy is a technological axiom called Moore's law,
named for Gordon Moore, one of the co-founders of Intel. Simply put,
Moore's law states that measured against its price, the performance
of semiconductor technology doubles every 18 months or so1.
This should have resulted in a vibrant industry with competitors racing
to stay one step ahead in adapting new technology and securing consumer
loyalty. One thing the industry hadn't banked on was Microsoft. As its
founder, Bill Gates, says: “well, you know, capitalism has these
strange things, where some people have all these resources2.”
To say Microsoft is a large corporation is to describe Ariel Sharon as a large man – a gross understatement. They are huge. Microsoft (and probably also Sharon) takes up 18.3 million square feet of office building space alone3.
Microsoft is ranked 15th in the world's top 500 companies and its operating software has driven 93% of the world's desktop computers since 19914. At its peak, the company had a market value roughly equal to the gross domestic product of Spain5. Its Office software, encompassing a suite of e-mail, word-processing, spreadsheet and presentation tools, dominates 90% of the market and bring in $9 billion annually, a third of the company's revenue6.
Bill Gates was born in Seattle in 1955. His first exposure to computers was at school in the late 1960s with his friend Paul Allen. By the time Gates was 14, the two friends were writing and testing computer programs for fun and profit. In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Or as one tracker of the software industry saw it “the idea was to get a nickel very time the traffic lights changed7.”
Inspired in 1975 by the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Alburquerque, New Mexico, to be near MITS Computer, where Allen took a position as Director of Software Development. Gate and Allen named their partnership Microsoft. Their revenues for 1975 totaled $16,000.
A year later, Gates published “An open letter to hobbyists” in the Altair newsletter. Arguing that software piracy prevented “good software from being written”, Gates went on to say that “nothing would please me more than being able to hire ten programmers and deluge the hobby market with good software.” Soon after, Allen left MITS to devote his full attention to Microsoft and the company's tradename was registered.
Microsoft's big break came in 1980 when Gates got the chance to provide the crucial operating system, DOS, for IBM's landmark PC. He could hardly be satisfied with a market limited just to IBM, so he, along with Intel Corp., which provided the microprocessors that are the powertrains of most PC's, encouraged other entrepreneurs to create the PC clone industry that today dominates the market.
It was in 1990, though, with the introduction of Microsoft's Windows 3.0 program, that Gates showed just where he intended Microsoft to go. Not only did Windows – of which 60 million copies have been sold –effectively made Microsoft the sole keeper of the PC software standard, it permanently stunted IBM's incipient OS/2 system, which until then had been a joint development project with – who else? - Microsoft. Windows didn't just leave IBM hanging, nor merely relegate Apple's famously friendly Macintosh to the fringe of the market. It also threw into confusion the leaders in the applications software industry – Lotus and WordPerfect – because they had been gearing up new spreadsheet and word processor products for OS/2. This, in turn, left the window open for Microsoft to become a real player in the applications software business – which it did with a vengeance8.
Before 1990, Microsoft was primarily a supplier to hardware manufacturers, but after 1990 the bulk of the company's revenues came from sales to consumers. That year Microsoft became the first software company to reach $1 bn in revenues.
In 1993 Microsoft introduced the first version of Windows NT, an operating system for users on corporate networks. It was disappointing and an upgrade soon followed which boosted sales of NT to more than one million copies by the end of 1994. Microsoft announced an agreement to purchase Intuit, the producer of the leading package of personal financial software, called Quicken; however, after the US Department of Justice filed suit to prevent the takeover on the basis of antitrust concerns, Microsoft withdrew its offer. Revenues for 1994 exceeded $4 bn.
In August 1995 Microsoft launched its next version of Windows, called Windows 95, which sold more than one million copies in the first four days after its release. For the rest of the decade Microsoft expanded aggressively into new businesses associated with its core franchise. Its projects included two joint ventures with the National Broadcasting Company under the name MSNBC: an interactive online news service and a cable channel broadcasting news and information 24 hours a day. The company's web-based services included the Microsoft Network online service, a travel agency, local event listings, car buying information, a personal financial management site, and a joint venture with First Data that allowed consumers to pay their bills online.
Microsoft purchased 11% of the cable television
company Comcast for $1 bn and cut a licensing deal with the largest
US cable operator, TCI Communications, to put Windows into at least
five million set-top boxes. The company also purchased WebTV, whose
core technology allows users to surf the internet without a PC.
In 1998, Microsoft launched Windows 1998. The year 2000 saw the acquisition of the Visio Corporation, the largest acquisition in Microsoft's history. Windows 2000 was also launched together with the unveiling of the .NET platform.
Up to now, Microsoft has grown by serving the
seemingly limitless supply of new customers for PCs and software. Microsoft's
high market valuation and the accompanying high expectations for continued
growth have forced the company to find new businesses and markets. But,
as is true of other monopolies, they simply aren't competitive in open
markets. While Windows has a profit margin of 85%, and Microsoft Office
has a margin of 79%, every other Microsoft division is losing money
Its attempts to expand outside the PC arena have been less than successful
as it faces entrenched adversaries with management far more astute and
aggressive than anything they saw in the PC market11.
It has now become reliant on the less saturated replacement markets
with the bulk of its best customers upgrading their existing software
at much lower profit margins than new business. This “upgrade
plateau” is already dampening Microsoft's dramatic growth. Its
stock price has trended down for three years and recently led to the
'surprise' announcement of its first dividend. This was a ploy to allow
funds that require dividends to buy Microsoft shares for the first time.
Microsoft hopes more buyers will bring the stock price up. Countering
this is the growing feeling among investors that Microsoft is badly
overvalued at its current price of 25 times earnings12.
Microsoft's desperate reliance on repeat revenues have caused it to
raise costs to their customers - mostly by changing licensing terms.
This is creating resentment in formerly docile customers, many of whom
consider the new terms extortion.
Throughout the world, Microsoft actively educates consumers on the benefits of licensing genuine products and educates lawmakers on the advantages of a business climate where intellectual property rights are protected.” - Microsoft13
You pay plenty for Microsoft software, but you do not own it - you have a non-transferable license to use the software as Microsoft sees fit. Microsoft own it and they are not at all shy about exercising their "property rights". Further, the license terms can be changed retroactively (and are) any time Microsoft pleases. It says so right in the license terms.
Once they sell a license, they can only keep revenue flowing by releasing "upgrades" and convincing people the upgrades are worth purchasing. Producing these upgrades is a lot of work, and they are finding it increasingly difficult to convince anyone the upgrades are worthwhile14.
In the year running up to the millennium, Microsoft
launched a campaign aimed at its 60 million customers warning them to
“address their Y2K concerns in a timely fashion by taking advantage
of the preparedness resources available at the Microsoft Y2K website.”
Instead of offering concrete solutions, the Y2K site sent consumers
to an MSN site which guided them to, guess what?, software upgrades15.
Nowhere else is our mission to help individuals realize their potential more immediate and apparent than in education. All of the initiatives recognize the importance of education in empowering learners to realize their true potential.” - Microsoft20
Should a school district fail to complete the audit in time, Microsoft will "help" by sending in their own audit team, but if just one computer is found non-compliant, the schools have to pay for the audit – which isn't cheap. Given the way schools acquire computers (many are donated), it is absolutely certain some will be declared noncompliant. In 2001, following an anonymous tip through hotlines like 1-800-RU-LEGIT, Microsoft launched an investigation of Philadelphia's entire public school system which has some of the poorest schools and students in the country . Microsoft threatened to sue unless the administrative offices and all 264 schools conducted an audit and proved that every piece of installed Microsoft software had a valid license.
Working alone or through the Business Sofware
an industry wide enforcement group, Microsoft has been fighting the
spread of illegally copied software for over a decade. Its most common
targets are companies that copy software and then resell it illegally,
but it's not unusual for urban, low-income schools to end up caught
in the net too. British teachers in Birmingham received letters from
Microsoft telling them they were sitting on a "legal timebomb"
that they'd better clean up. Once discovered they're treated just like
any other violator, says Jenny Blank, BSA's director of enforcement.
"The copyright law should be applied universally. The message we
need to get to them is that intellectual property deserves to be respected."
One teacher has a different view. "It's kind of like AIDS in Africa
and the drug companies," says Lloyd Kowalski. "Can anyone
expect a dying person to be concerned about the drug companies' profits?"
One of the first and most-discussed scuffles between the software industry
and schools started back in 1996. The BSA, which includes Adobe, Intel,
IBM and Macromedia as members, received a tip about a Los Angeles school
that was supposedly using more than 1,000 copies of unlicensed software
programs. The BSA asked the district to investigate, and after auditing
the school in 1998, the school district, working with the BSA, discovered
several hundred unauthorized copies, including 132 versions of MS-DOS.
The total cost of the copying could have run into the tens of millions.
Each violation carries a potential penalty of $150,000; the fines for
just the MS-DOS copies could add up to as much as $19.8 million, not
even counting lawyers' fees. David Tokofsky, a member of the Los Angeles
school board said: “It's like Xerox walking into a major university
and arresting students for copying essays." The school board, however,
chose to settle rather than fight. It eventually negotiated a reduced
settlement: a $300,000 fine, in addition to which the cash-strapped
district had to set aside $3 million to replace pirated materials, and
another $1.5 million to create an internal piracy team22.
On looking at the fine print for the latest updates to Microsoft Windows
the Seattle Metropolitan Credit Union concluded that the terms for the
end user license agreement (EULA) for Microsoft's Windows 2000 Service
Pack 3 (SP3) and XP Service Pack 1, might well put the credit union
in violation of new federal privacy laws23.
At issue is Microsoft's "automatic update" feature, which
allows users to automatically get upgrades and patches to their systems.
To get the updates, users must agree to give Microsoft access to information
on their systems. That, said a representative of the Union, conflicts
with federal regulations for financial institutions, such as the Gramm-Leach-Bliley
Act of 2001 which forbids financial service companies from giving third
parties access to customer data without express consent from the customer.
European countries generally have even stricter data privacy laws.
Microsoft Corporation grew large and successful
without patents, relying instead on copyright. In 1991, Microsoft CEO
Bill Gates warned that patents could bring the software market to a
complete standstill and drive out small players. In 1994, Microsoft
was the only software company at the USPTO hearings which spoke in favor
of software patentability. Meanwhile, Microsoft had been stepping up
efforts to build a patent portfolio to counter the much larger portfolios
of traditional IT hardware companies such as IBM, HP, Canon etc. When
the patent lawyers at the European Commission pressed for legalising
software patents in Europe in 1997, they cited Microsoft as a success
model, pointing out that Microsft already owned 400 software patents.
In late 1998, an internal Microsoft stratgegy document about the "opensource
threat" leaked out which suggested using software patents alongside
with proprietary standards in order to crush competition from free software
such as Apache and Linux. In 2000, Microsoft forced a free sofware project
to abandon support for its patented video streaming format ASF. In July
2001, in the midst of an ongoing campaign against free software, a leading
MS executive challenged opensource companies to keep clear of Microsoft
patents or else "Get your money and let's go to court!". March
2002 saw Steve Ballmer, CEO of Microsoft, declaring that Microsoft's
new standard DotNet was protected by patents and free implementations
would not be allowed. In April 2003 Microsoft published patent license
terms for CIFS which disallow the use or reimplementation of this communication
architecture by GNU software. In late 2002, Microsoft began to dissuade
corporate customers from introducing GNU/Linux by pointing out that
if they use free software nobody would protect them from being sued
for patent infringement24.
It is Microsoft's dependence on customers upgrading their software that led to the strange situation where Microsoft, in promoting Windows 2003, pointed out that previous versions of Windows were dangerous to run because they were less stable, slower, and riddled with serious security problems. It was the same thing they said about Windows NT when 2000 came out25. Similarly, at the launch of Microsoft's new Office software in October 2003, Gates complained that “it's too hard to find things in e-mail” in the old version of Outlook, the name of Office's e-mail program. Gates also described early versions of the Word text-processing program as "clunky26." He wasn't lying. Customers and critics have long complained of the numerous faults in Microsoft's software. In 2001, exploiting a security fault in Microsoft's Internet Information Server, the “Code Red” worm infected 370, 000 Web servers costing Microsoft customers around $1.2 bn27. Windows users haven't fared any better in 2003. Damage from bugs like the Blaster worm and the SoBig.F e-mail virus, which crashed systems and disrupted Internet traffic around the world, already totals some $13 billion. The usual theory has been that Windows gets all the attacks because almost everybody uses it. But millions of people use Mac OS X and Linux and have emerged unscathed. As one observer put it: “In its default setup, Windows XP on the Internet amounts to a car parked in a bad part of town, with the doors unlocked, the key in the ignition and a Post-It note on the dashboard saying, 'Please don't steal this.'28” In March, Microsoft issued a warning of a serious flaw in all versions of its popular Windows software that allowed hackers to seize control of a person's computer when victims read e-mails or visit Web sites. This ranged from Windows 98 through to its latest Windows XP editions (which the company had billed as its most secure ever). Funnily enough, an internet security company called iDefense, who represent many US agencies and large corporations, alerted their clients in December 200229. "Our products just aren't engineered for security," said Brian Valentine, Microsoft senior vice president for Windows development. Another Microsoft executive recently explained they never paid attention to security "Because customers wouldn't pay for it until recently30."
1'What Bill Gates really wants,' Brent Schlender, Fortune, 16.01.95
2'Bill Gates’s Money,' Jean Strouse, 16.04.00, New York Times. See: http://www3.sympatico.ca/truegrowth/gates1.html. Viewed: 10.12.03
3Microsoft Annual Report 2003. See: http://www.microsoft.com/presspass/inside_ms.asp. Viewed: 28.11.03
4'Key dates in the antitrust investigation of Microsoft Corp.' See: http://www.courttv.com/archive/business/1999/1106/microsoft_timetable_ap.html. Viewed: 03.12.03
5'Bill Gates’s Money,' Jean Strouse, 16.04.00, New York Times. See: http://www3.sympatico.ca/truegrowth/gates1.html. Viewed: 10.12.03
6'What Bill Gates really wants,' Brent Schlender, Fortune, 16.01.95
7'What Bill Gates really wants,' Brent Schlender, Fortune, 16.01.95
8'What Bill Gates really wants,' Brent Schlender, Fortune, 16.01.95
9'Microsoft,' Paula Kepos, International Directory of Company History, Vol. 27, 1999, St. James Press.
10'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
11'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
12'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
13Microsoft Annual Report 2002, p. 33
14'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
15'Fear, marketing and Microsoft,' Kaitlin Quistgaard, 19.08.99. See: http://dir.salon.com/tech/log/1999/08/19/microsoft_marketing/index.html Viewed: 11.12.03
16'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
17'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
18'Fear, marketing and Microsoft,' Kaitlin Quistgaard, 19.08.99. See: http://dir.salon.com/tech/log/1999/08/19/microsoft_marketing/index.html Viewed: 11.12.03
19'Microsoft Screws Schools,' Andrew Grygus, 22.04.02. See: http://www.aaxnet.com/news/M020422.html Viewed: 04.11.03
22'Microsoft to schools: Give us your lunch money!,' Damien Cave, 10.07.01. See: http://dir.salon.com/tech/feature/2001/07/10/microsoft_school/index.html. Viewed: 11.12.03
23'Is Microsoft Licensing Forcing Banks to Break The Law?' Dan Orzech, 22.10.02. See: http://boston.internet.com/news/print.php/1485861. Viewed: 16.12.03
24'Microsoft and patents.' See: http://swpat.ffii.org/players/microsoft/index.en.html. Viewed: 16.12.03
25'2003 and beyond,' Andrew Gygus, 23.02.03. See: http://www.aaxnet.com/editor/edit029.html#mspath. Viewed: 11.12.03
26'Microsoft Tears Down the Old To Sell the New,' Bizreport, 22.10.03. See: http://www.bizreport.com/article.php?art_id=5250 Viewed: 06.11.03
27'Code Red Puts Heat on Microsoft,' Maria Godoy, 01.08.01. See: http://188.8.131.52/search?q=cache:2IoOJJc0a3AJ:
www.techtv.com/news/securityalert/story/0,24195,3340016,00.html+microsoft+faulty+software&hl=en&ie=UTF-8. Viewed: 09.12.03
28'Microsoft Windows: Insecure by Design,' Rob Pegoraro, 24.08.03, The Washington Post. See: http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A34978-2003Aug23¬Found=true. Viewed: 09.12.03
29'Microsoft warns of new software flaw,' 20.03.03. See: http://184.108.40.206/search?q=cache:5gByx60tY5EJ:www.cnn.com/2003/TECH/ptech/03/20/
microsoft.warning.ap/+microsoft+faulty+software&hl=en&ie=UTF-8. Viewed: 09.12.03