By Corporate Watch UK
Completed February 2004

1. The company

• Overview
• Market share/importance
• History and strategy

• Licenses
• Patents
• Crap software

Microsoft

Industry Area: Computers – software and services.

Overview

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.”

Market share and importance

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 15^th 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.

History and strategy

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.
Microsoft's next generation of Windows, Windows CE, was designed to expand the franchise into computer-like devices including mobile phones, point-of-sale terminals, pocket organizers, digital televisions, digital cameras, hand-held computers, automobile multimedia systems, and pagers. By early 1999 the company had secured more than 100 licensing agreements with manufacturers of these “intelligent appliances”⁹.

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 in reams¹⁰. 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.

Licenses

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.

Later on, the very disappointing uptake of Windows XP convinced Microsoft they must force upgrades. License 6 does force customers to upgrade on Microsoft's schedule, whether they want to or not, but a majority of the market has not adopted License 6, despite Microsoft's threats. License 6 practically promises a major upgrade every 3 years or so The successor to Windows XP (due in 2004, and rapidly slipping to 2005) is currently code named Longhorn and backward compatibility will not be an option¹⁶. After many setbacks, when Windows 2003 finally came out in May, Microsoft declared the version still incomplete with multiple features to be released over a period of time which have to be installed when available by lucky users “who wished to fully utilize this version of Windows¹⁷”. For Microsoft, this a relatively subtle way of gaining revenue. If you want them to really come after you try using an even unknowingly copied version of a Microsoft product. After threatening you with jail you may be tempted by their suggestion of Microsoft Open License to “help ensure that your software is licensed and lawful”. The brochure then explains how you may like to purchase something called “Upgrade Advantage” which promises to reduce the total cost of the software while providing two years' worth of upgrades¹⁸.

Microsoft don't just do threats however, as schools across the world have discovered. Microsoft especially like going after schools. Probably because they can't run away like those pesky pirates can. In 2002, at the busiest time in the school year, Microsoft gave the 24 largest school districts in Washington and Oregon 60 days to inventory their huge number of computers and match them all to paperwork proving they have valid licenses for all Microsoft software. Microsoft's Guide to Accepting Donated Computers states that you cannot accept donations that do not include the original disks and certificates for Windows and all other software on them¹⁹. Failing this, the district could just sign the Microsoft School Agreement. Just count all the computers and pay Microsoft $42 per computer every year. The Microsoft agreement says you count all computers that could conceivably ever run any Microsoft software. That includes Apple Macintoshes and apparently any computers running Linux, Unix and other non-Microsoft operating systems. “

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 Alliance (BSA)²¹, 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.

Patents

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.

Crap software

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."