The Daily - How One Tech Monopoly Paved the Way for Another

Episode Date: August 14, 2024

In a landmark antitrust ruling against Google last week, another case was at the heart of the story — one from the 1990s.Steve Lohr, who covers technology and the economy for The Times, explains the influence of United States v. Microsoft and what lessons that case might hold for the future of Big Tech today.Guest: Steve Lohr, who covers technology, the economy and work for The New York Times.Background reading: How the Google antitrust ruling may influence tech competition.The ruling on Google’s search dominance was the first antitrust decision of the modern internet era in a case against a technology giant.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From the New York Times, I'm Sabrina Tavernisi, and this is The Daily. A landmark antitrust ruling against Google last week had at its heart the story of another case, one from the 1990s. Today, my colleague Steve Lohr, on the influence of US v. Microsoft, and what lessons that case may hold for the future of big tech today. It's Wednesday, August 14th. Steve, welcome to the show.

Nice to be here. Thank you. So Steve, we wanted to have you on the show because last week we finally got a decision in the big case involving Google. And that was, of course, the case where the Department of Justice was arguing that Google was a monopoly. And as we now know, the judge in the case agreed. So just to start, refresh our memories about this case. This is the first big anti-monopoly case against modern tech company. There are others in the works. There's Amazon, Apple, and Metta, and those are to come. But this is the first salvo in this standoff between the

antitrust enforcers and the big tech companies. This one was actually filed in the Trump administration but picked up with eagerness by the Biden administration. And it centers on search. And the allegation here is that Google used its monopoly power to shut off competition and control distribution of its search engine to the disadvantage of everyone else. Right, and the way it did that, according to the government, was by paying companies like Apple, like Samsung, to be the default search engine on their platforms.

The DOJ, of course, said, this is illegal. Google's response was, in essence, no, this is just good business. These platforms want us there because we're the best, and our customers see that. That's right. But the judge ruled in favor of the Department of Justice. And one of the things I think is quite interesting about it is the continued repeated references in the ruling to this case from the 1990s, US v. Microsoft. It's really clear that this is a template that the judge is

working from, you know, this case that was the last time the government took on a big tech company and won. And Steve, we are very lucky to have you in studio with us today because you actually covered that case for the Times back in 1998. So there's no one better to help us understand how that moment connects to this one. So let's start with a basic explanation of that Microsoft case. What do I need to know about it?

It was a huge trial. This was the big showdown in the Clinton administration between the Department of Justice and Microsoft, which was by far the dominant technology company of its day. Just to paint the picture here, I mean, in the early and mid 1990s, it is the personal computer era. Microsoft Windows operating system runs on more than 90 percent of the personal computers in the world.

It shapes people's computing experience. It was more than that. They dominated this industry in a way that if you were a personal computer maker you had to deal with Microsoft on their terms. The reason why Bill Gates at the time was, I think, neck and neck with Warren Buffett to be the richest man in the world, all of that was because of the Microsoft control of the personal computer industry.

And what really showed the reach and power of Microsoft and Bill Gates, both as an economic force and a cultural force, really came in 1995 with the introduction of a new version of Windows called Windows 95. Bill Gates is on his way into millions of American homes through the Windows. Windows 95, one of the most hyped consumer products ever. The debut of Windows 95, as nerdy as it was, was a cultural event. Welcome, Microsofties. Nice to have you all here.

Actually, I'm here to tell you about this Windows 95. Before, let me give you an idea. Give me an idea how powerful Windows 95 is. It is able to keep track of all of OJ's alibis at once. Pretty amazing stuff. The product was launched with an event hosted by Jay Leno of The Tonight Show. Well, Windows 95 is so easy, even a talk show host can figure it out. As the product went on sale, the lights of the Empire State Building were changed to

mirror the company's red, green, blue, and yellow logo. Wow. This is Jennifer Aniston. I'm Matthew Perry. We're here to see Mr. Bill Gates about a possible starring role in the video guide to Microsoft Windows 95. Microsoft even had a tutorial on how to use Windows that starred Jennifer Aniston and Matthew Perry, who are the two lead stars of Friends,

which was the most popular TV show at the time. Taskbar is an email and shortcuts all mine. Taskbar is an email and shortcuts all mine. Taskbar is an email and shortcuts all mine. Microsoft had been pumping this for months. Millions of computer buffs swarmed into stores to buy the software package that's described as the dawn of a new era in personal computing. The company then announced it had

sold a million copies in the first four days. So it's hard to understate just how pervasive Microsoft and Windows were at the time. Microsoft's Dominance In the midst of Microsoft's dominance, something else is emerging, and it's the early commercialization of the Internet. And remember, most people got on the Internet with what was called dial-up service. It was literally you connect to a telephone landline, you know, this symphony of the calling sounds and then the bzzz.

You know, loading early web pages, you could go off and get a cup of coffee and come back. It slowly came from the top of the screen and gradually filled. I mean, it is an experience that today would be so broken. No one would hesitate for a moment just to junk it. But what you did see. An attractive, easy to use shop window, a gateway to the riches of the Internet. This is a browser.

What you did see is if you typed into that small rectangular box at the top, the browser box, typed in an address, ending with.com or.org, it brought you someplace for nothing. Anything was accessible anywhere in the world, and you could see that. This is where you get finally a commercial potential challenger to Microsoft. What could possibly threaten the survival of the world's largest software company? It revolves around a part of the Internet called the World Wide Web.

And it's this little startup company called Netscape. Netscape was the first commercial pioneer of internet browsing software that was at all successful. Netscape is engaged in a battle over whose software programs will be used to access the internet. So far Netscape is winning. Its Netscape Navigator browser program dominates the market. The founding software is written by two guys at the University of Illinois, a brand of champagne, the National Computing Center, one of whom is Marc Andreessen, who is much better known now as one of the leading venture capitalists in Silicon Valley. At 11 a.m. this morning, Netscape stock went public and Wall Street went bonkers.

Initially offered at a price of $28 a share, Netscape shot up to 72 within minutes. And so this company, which is basically founded in the spring of 1994, hits an IPO in August of 95, which is just rocket speed, and the IPO is extremely successful. And so we have this entity that starts to just take off like wildfire. It is this first commercial wave of the Internet, and Microsoft isn't there. I mean, this is something outside their realm. And so Gates, who's very technical, writes what becomes a famous memo for

internal circulation within Microsoft called the Internet Title Wave Wave. And he, you know, basically says it's an incredible opportunity as well as a challenge for us and identifies Netscape as this competitor born on the Internet and their chief target. So what does Microsoft do? Microsoft essentially goes to war with Netscape. It starts by developing its own browser which it calls Internet Explorer, but for years it's clearly an inferior product to Netscape's Navigator.

But Microsoft's tactics don't stop there. Microsoft then bundles Internet Explorer into its dominant product, Windows. It charges nothing for it, so gives it away for free, undermining Netscape's ability to charge for its browser. And then it goes out and uses its dominance in the personal computer industry to arrange contracts that make it very difficult for PC makers to feature Netscape on their personal computers. So really kind of bare-knuckle tactics by Microsoft.

What does Netscape do? Netscape still kept doing well. Into 1996, they had over 80% market share of the browser business. But the Netscape executives sort of see what's coming. Microsoft is chipping away at Netscape's lead in the browser market. It has improved its browser.

Microsoft has bundled it into Windows. It's clear that on the current path, Netscape is in real trouble. And so the leadership of Netscape talks to its outside lawyer, says, look, do your research, put together a document that we can show of all the misdeeds here and the chronology of what our rise and what Microsoft has done, and we'll take it to the Justice Department. That white paper is over 220 pages, and it's pretty detailed.

They take this white paper to the Justice Department, and that is the beginning of a landmark anti-trust case, which is US v Microsoft. We'll be right back. So tell me about this case US v Microsoft. So in May 1998. Today we are taking another step to keep our marketplace competitive. Janet Reno, who was the head of the Justice Department,

has a splashy news conference announcing they are taking on Microsoft in a huge antitrust case. Microsoft's actions have stifled competition in the operating system and browser markets. But most importantly, it has restricted the choices available for consumers in America and around the world. Months later when the trial begins, it is pandemonium. I mean, everybody's there to cover it. I was told that at the New York Times there are only three trials where we have written about

every day that ran for any length. I mean, one was the Microsoft trial, the other was the OJ trial, and the third was the Lindbergh kidnapping trial. Wow. So it was a big deal. the third was the Lindbergh kidnapping trial. Wow, so it was a big deal. Exactly. Then the trial lasted for over eight months, there were 76 days of testimony. It really kind of boiled down to two essential allegations.

Were the contracts that Microsoft had with personal computer makers and others an abuse of their monopoly power by restricting the distribution for Netscape's browser, and was bundling Microsoft's browser Internet Explorer with its monopoly product Windows, was that illegal? And how was the government making that case, Steve? What was it arguing exactly? This was the first real email trial.

The Justice Department had gathered troves and troves of memos of meetings and of email from inside Microsoft. And that gave you a glimpse inside how the company operated in a way that just never would have happened before. In this email evidence and in notes that were taken at private meetings, you have the kind of phrasing like cut off their air supply, crush them, knife the baby. Wow. The tone of this showed the kind of unrestrained

competitive culture within Microsoft. They were doing everything they possibly could. We have to leverage Windows more because we're not gonna just win with Internet Explorer because it's not that good a product yet. All of this kind of came out in the email. Okay, so there are these aggressive emails with this very kind of remarkable language. What else did the government introduce?

At the very start of the trial... I understand that you're one of the co-founders of Microsoft, is that correct? Yes. What's your present title? Sherman and CEO. There was excerpts of videotaped deposition testimony from Bill Gates, and he came off as he was nitpicking. Actually, in this last answer, I used the word believe.

So you're changing the question. Well, if believe and conclude is different for you, I'll ask it both ways. Yeah, it's very different. He was uncooperative. Did you recall receiving this memorandum for email? Email, no. You don't recall receiving this email in particular? No.

They showed him emails. He didn't remember any of this stuff. What non-Microsoft browsers were you concerned about in January of 1996? I don't know. What do you mean concerned. What is it about the word concerned that you don't understand? I'm not sure what you mean by it. Is the term concerned a term that you're familiar with in the English language? Yes. Does it have a meaning that you're familiar with? Yes. But you have to understand that the reputation of this guy, and he had appeared a lot in public before,

is super smart on it, totally up to speed on everything. This came off as dishonest. It undermined the credibility of the Microsoft case, and put together, it was pretty damning. And perhaps even the nature of the arrogance of the deposition sort of like spoke to the monopoly. Yeah, no, that's right.

That's right. And how do Bill Gates and Microsoft respond? What were they arguing? That what they were doing was good for consumers. What's free, Pro-consumer. I mean, what's better than that? They were innovating and, you know, the government and others shouldn't get in the way. And their strongest pushback was on the bundling.

Because if they couldn't bundle anything they wanted to in their operating system into windows, that was government meddling in product design. The government should not be anywhere near this. Exactly. Microsoft said this was going to be a terrible precedent, that it could essentially allow government to meddle in the innovation economy, which Microsoft was at the forefront of. They felt so strongly about this, they cast the issue in no uncertain terms. At one point, a Microsoft's executive said,

we can bundle anything we want into Windows, including a ham sandwich. So it sounds a lot like the way Silicon Valley in the tech industry talks today about their mission, right? I mean, when people criticize the tech industry, they say, we're just trying to be good, and we're just trying to do great things and help the world innovate. And it sounds a lot to me like the arguments that are being made today. You know, the government can't understand the amazing things we're doing and should not stand in our way.

Yeah. You know, the broad phrasing of this is, we're changing the world. As opposed to saying, you know, we are digital toolmakers. Which they are. But if that's the case, then it invites outside scrutiny and regulation. How does all of this ultimately shake out? What happens in the end? I mean, after this lengthy trial, we get a ruling from the judge, and he sides with the Justice Department that Microsoft has abused its monopoly power and has repeatedly violated

the nation's antitrust laws. And the judge fairly quickly approved the Justice Department's preferred remedy, which was to split Microsoft into two companies. One would be the Windows operating system, and the other would be its office suite of software products, Word, PowerPoint, Excel, and those would be separate from Microsoft Windows. Now, Microsoft resisted and said a breakup would be disastrous and is opposed, absolutely opposed to a breakup. And that breakup never happens. First an appeals court overrules it and sends it back to the district court, but what ultimately

ends this case is a change in the political environment. The Bush administration takes over from the Clinton administration. They are less aggressive about antitrust, and their Justice Department is ordered to engage in settlement talks with Microsoft, and they settle the case. Does that mean they threw everything out? No, the court rulings still stand.

The findings of facts and the conclusion of law. It was a big loss for Microsoft, but it wasn't this catastrophic breakup of the company, or could have been catastrophic breakup of the company that they had deathly feared. And you had restrictions placed as part of the settlement. You had restrictions placed on the kinds of contracts, for example, that Microsoft could impose on industry partners. So the PC makers could feature any software they wanted to on Windows.

The other thing was access to some of their technology. One of the concerns and the threats, the rest of the software industry is, if Microsoft doesn't like you, your stuff isn't going to work very well on Windows. And so this, it wasn't all opened up, but some of it was. So this was not a remedy on the skill of a breakup. What was the ultimate effect of this case in the end?

People debate that to this day. I mean, on one side, you have people say that had made no difference whatsoever. Market forces were at work, the Internet was developing and opening up, and the browser competition would have taken care of itself one way or another, and new innovators would have come in. For Netscape, you can argue that the ruling and the outcome of the trial were too little, too late.

By that time, Microsoft had really taken the upper hand in the browser market, and Netscape was eventually sold to America Online. Netscape as a company went away. So if this door opening was too late for Netscape in a sense, it still happened. Four months after the Microsoft trial began, a small startup called Google was founded. It had a thing called a search engine.

It had no business model. It had, you know, but the door was open. Amazing. A lot of people think Microsoft became a less aggressive, less utterly unrestrained entity than it was, and that kept the door open for newcomers like Google. I mean, it just all comes full circle here. Google sprouted from the ground that had been made fertile by the court case against Microsoft.

It really opened the door for new companies, and here we are today. Once again, kind of in the same boat, but it's Google this time, not Microsoft. Yes, and you can look at Google's search engine as the equivalent of Microsoft's Windows operating system. Okay, so stepping back here for a second, we know that the Microsoft case was one of the primary influences on the judge who just declared Google a monopoly. We're still waiting, of course, to see what remedies that judge ultimately recommends.

But I wonder how you think the Microsoft case might shape where that judge lands in the end. Like, what clues does it give us here? Well, we have a whole separate hearing on remedies, and there's a lot of proposals, everything from just restricting certain contracts, banning those kinds of payments, to having to split off either its Android operating system or its Chrome browser. We have no idea. But what I think you have here is a signal of what kind of behavior in this environment is going to be viewed as suspect and what you should avoid.

And again, a lot of debate about these antitrust cases, you know, whether they're worthwhile or not. But I think what you do have is a sense of some restraining influence on these dominant companies, some pulling back, and some opening of the door to opportunity for innovators. And we don't know what the future is going to look like or who is going to benefit. One irony is that a winner could be Microsoft. It has the most directly competing search engine to Google with Bing. But I think the broader implication is the uncertainty of new innovation and trying to keep the door

open for the kind of things you may not have thought about. Just as nobody thought Google would become what it did when it was founded in the midst of the Microsoft trial. You don't know what the future is going to hold, but you want that window of opportunity, that door to be open so that whatever comes, it has a better chance of success than it might have had otherwise. Which is fundamentally what these cases are about. Exactly.

Steve, thank you. Thank you. We'll be right back. Here's what else you should know today. On Tuesday, Hamas announced that it would not take part in a long-awaited round of ceasefire talks with Israel planned for Thursday, despite stepped-up pressure from the U.S. to reach a deal. A representative for Hamas in Lebanon said in an interview that Hamas had decided not

to participate because its leaders did not think the Israeli government had been negotiating in good faith. The decision came after the Times reported that Israeli Prime Minister Benjamin Netanyahu had quietly added new conditions that negotiators fear have created extra obstacles to a deal. Netanyahu's office has denied that he added new conditions and said that he was simply seeking to clarify ambiguities. Today's episode was produced by Ricky Nowetzki, Rochelle Bonja, and Sydney Harper

with help from Nina Feldman. It was edited by Mark George, contains original music by Diane Wong, Alicia Beatney Tube, Dan Powell and Pat McCusker and was engineered by Alyssa Moxley. Our theme music is by Jim Wonderly. That's it for the daily. I'm Sabrina Tavernisi. See you tomorrow.