.. move into other markets. With large areas of commercial activity moving onto the Internet, a prime Microsoft goal is to take substantial control of the standards governing financial transactions on the Internet and to use that position to leverage itself into an array of on-line commercial activities. While working to set the software standards for financial transactions on the Internet, Microsoft is rapidly moving from being a software supplier to being a major direct player in Internet commerce unto itself by using its dominance of software and its monopoly position in operating systems to reinforce its other businesses on-line. Microsoft had originally hoped to take a very direct route to dominating on-line commerce by cornering the market on all financial software sold to consumers.

In 1995, it was ready to pay $1.5 billion to acquire Intuit, maker of the dominant financial software program Quicken. Microsoft had tried to make inroads with its own Money software, but Quicken had proven a harder challenger than any other software competitor (even with Money bundled with other software for free), so buying the company had become the next best option. However, under pressure from competitors and banks, the Justice Department intervened to pressure Microsoft to abandon the deal. The result shows some of the benefits of blocking Microsoft from dominating a market, but subsequent events demonstrate that when one avenue of control is blocked, Microsoft will simply take another route. Consumers who purchase Intuit’s Quicken 98 will have to install Microsoft’s Explorer browser in order to use the software for online banking. In some respects, however, having been blocked from merger, Microsoft has been forced to compete hard with Intuit in improving its software. Most importantly, Microsoft has been forced to work with Intuit on open transaction standards, called Open Financial Exchange (OFX), acceptable to both companies along with an array of banks, including Bank of America, Chase Manhattan, Citibank, Wells Fargo along with many others.(56) However, having been blocked in directly controlling the software and standards for financial transactions, Microsoft has rushed to dominate the tools and server software necessary for banks and other financial institutions to implement the standards. It has established alliances with Hewlett-Packard and Verifone (maker of most credit card swipe machines in retail stores) to promote Microsoft financial server software.(57) It also has established an alliance with Tandem and Compaq computers, dominant suppliers of hardware to banks, to promote an upgraded version of its SQL Server to act as a database for financial transactions through ATMs and home computers. Microsoft has supplemented its developer tools with a specific set of tools aimed at financial institutions working to build transaction-oriented Web sites.(58) But the key to Microsoft’s strategy is making its Merchant Server the dominant Internet server for on-line commerce.

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Lacking the technology inside Microsoft, the company in mid-1996 acquired eShop Inc., which had created key technology in running their own virtual shopping mall. Shutting down the mall, Microsoft made it clear that it was eShop technology they needed for incorporation into Merchant Server. Analysts described Microsoft’s purchase as a major blow to competitors, especially Netscape. Measuring the importance of eShop, Microsoft itself stated it saved 12 to 24 months of development time and outside analysts argued that cornering the eShop technology was going to give Microsoft a three-year jump on the competition – a lifetime in the fast-moving computer world.(59) Sealing its advantage, Microsoft quickly nailed down contracts with major financial institutions to use Merchant Server, including BankAmerica Corp, Wells Fargo, NOVUS Services and hundreds of others (including many of those who had worked with Microsoft and Intuit in establishing the OFX on-line transaction standards.) As part of the deal, Microsoft and its on-line partner VeriFone added secure Internet retailing and payment systems, further strengthening the package that Microsoft has been able to offer in selling not only its Merchant Server but its underlying NT computers as well.(60) While Microsoft had not been able to dominate on-line financial transactions from the consumer software side, it rapidly proved that its already expanding dominance of server software could be leveraged for many of the same goals. It has opened its own financial Web site, Microsoft Investor, which already has 120,000 people a day–a number that Microsoft has generated by providing, in the words of Forbes magazine tour de force software and financial analysis at no cost. Along with this has come lavish spending on free services to generate Web traffic, while generating commissions and fees for higher-level services.(61) Microsoft has already forged alliances with Charles Schwab and Fidelity Investments for their customers to trade stocks through the service, generating a share of the commissions for Microsoft. Since Schwab alone already has 908,000 active online customer accounts with holdings of more than $66 billion, even a piece of that and other financial allies’ business promises large growth areas for Microsoft.(62) While Microsoft currently faces competition in each of these individual online markets, it is the only company in all of them, from personal finance to travel to real estate to car sales to local information services.

Its technological expertise and deep pockets give it a built-in advantage to begin with, but Microsoft’s ability to bundle these on-line services together allows it to repeat its suite strategy of linking and cross-promoting its different ventures into one dominant super-site. Combining customized local versions of Expedia, Carpoint and Boardwalk will give each city’s Sidewalk a powerful competitive edge over any rivals. And analysts see Microsoft’s breadth itself as a selling point to advertisers. Jupiter Communications analyst Peter Storck argues, They can package a network with a whole bunch of demographics in one media buy. That’s what advertisers are begging for.(71) The real kicker, however, goes right back to Microsoft’s dominance of the desktop. Microsoft’s new version of its Internet Explorer 4.0 contains a feature called active channels technology to send Web site information directly to the desktop. The software comes with twelve preset channels which Microsoft is busy licensing to media outfits and planning to use to promote its own Internet commerce sites.

Not only is Microsoft pressuring media outfits for exclusive deals to help reinforce its browser, it is in turn requiring computer resellers to stick with its preset channels as part of its operating system and browser licensing deals(72). Combined with its massive spending and technological know-how, Microsoft is adding in its usual pattern of monopolistic tie-ins to dominate online commerce. One other wrinkle is Microsoft’s recent investment stake in Comcast Cable, which in turns owns the QVC home-shopping cable channel. QVC’s new on-line site, iQVC, is only selling $1 million of goods per month, but it is backed by the QVC experience of over $2 billion in cable sales each year and, as importantly, has experience in fulfilling orders fast and accurately. With its investment in Comcast, Bill Gates announced, We’ll be sitting down and talking out how we can help QVC move and drive forward their interactive activities.(73) Microsoft’s most notable failure has been leveraging its original content on the Microsoft Network (MSN) into a stronger position as a service provider, although its 2.3 million subscribers still makes it the second largest Internet service provider behind America Online. But it has continued to invest in original content, from channels to Slate magazine, and is launching new content this fall with a range of media partners, including the Disney corporation.(74) On the other hand, the hundreds of millions invested by Microsoft in its MSNBC venture with NBC has resulted in programming, if not profits, that have won it respect. With an online editorial staff of over 100, its interactive coverage of the news has been hailed by critics as better and more original than CNN’s or ABC’s news web sites.(75) Microsoft has launched another joint service with Black Entertainment Television, MSBET, to target African Americans on-line.

Microsoft is already inking similar deals with news outlets around the world. In July, Microsoft agreed to develop an online news site with Australia’s Publishing and Broadcasting Ltd. (PBL), including Nine Network TV and a magazine publishing empire – all owned by Australia’s richest man, Kerry Packer (worth $3 billion). The online service will include news, sports, weather, entertainment and lifestyle shows along with access to financial and retail services, including Microsoft’s Sidewalk and Expedia services. One example cited in the advantages of the combination is leveraging Channel Nine’s travel shows with an instant link to Expedia’s Web sites to book tickets.(76) When Microsoft announced in April of this year that it was paying $425 million for Web TV Networks, a company with 56,000 customers that had made a few small inroads selling a cheap machine to surf the Internet without owning a computer, many commentators saw it as one more shot in the personal computer war with Microsoft placing a side bet on WebTV. With rivals like Netscape, Sun and Oracle lining up behind network computers, Web TV looked to be a nice piece of hardware to outflank them on accessing the Net cheaply.

At one level that was true, but the advantages for Microsoft go much deeper than that. Microsoft’s main goal is to merge WebTV’s access standards and technology with its own stripped down version of Windows called Windows CE. Microsoft had previously targeted Windows CE for handheld computers but was now making a large push to make CE the operating system of the whole consumer electronics world, from cable set-top boxes to DVD music players to Internet telephones. With WebTV adopting Windows CE, the consumer electronics companies that build the hardware for WebTV, like Phillips and Sony, would be encouraged to adopt Windows CE as a general multi-purpose operating system for all their consumer goods – a potential market far larger than the personal computer market. With Microsoft supplying the development tools, new smart consumer goods would become cheaper and easier to make while ensuring that machines could communicate with each other – more and more important over time – only on platforms controlled by Microsoft(87) Microsoft also recently invested in Navitel, the maker of an Internet telephone which has adopted CE as its standard and could be integrated into WebTV Of course, the primary consumer item Microsoft wants to have Windows CE set the standard for is the cable set-top box that many people expect will control high-speed access to the Internet from homes across the country.

Cable connections to the home are expected to be more than twenty times as fast as the fastest modems today – a speed that will suddenly make all the investments Microsoft has made in interactive 3D graphics incredibly valuable to the whole media industry. But to accomplish that, Microsoft wants to control the software in the cable box – thus its $1 billion investment (an 11.5% stake) in Comcast Corp., the fourth largest cable company in the country, and its negotiations with US West, Time Warner, Telecommunications Inc. (TCI) and Cox Cable for possible investments of similar magnitudes. With these major cable investments, Microsoft is seeking a commitment by them to support the WebTV/Windows CE standards for connecting cable set-top boxes to the Internet. This commitment by Comcast and other cable companies is crucial since there are moves by a consortium of cable companies called Cable Labs to adopt open standards for all cable set-top boxes–a development anathema to Microsoft.

With deals that are likely to include the Microsoft Network as well, Microsoft may be about to see all its investments come together in a highly profitable alignment.(88) Even if Microsoft is not able to control the exact standards adopted initially, it is leveraging itself into a position to control even open standards in much the way it has been able to embrace and extend other standards like Java. The next step is Microsoft’s effort to have television broadcasters adopt digital TV standards promoted by Microsoft, Intel and Compaq that would allow the bundling of interactive content with any television show as long as the viewer has the proper operating software (meaning Microsoft’s). Microsoft is already demonstrating a version of enhanced television this fall that depends on its new Windows98 operating system and special digital circuitry. UPN’s Moesha, the WB’s F/X, and USA Network’s Pacific Blue have all agreed to broadcast with the new system that allows the specially equipped computers to view cast biographies, chat with other viewers and even buy knockoffs of stars’ clothes as they watch the show. Combined with WebTV/CE standards, Microsoft is building a recipe for the complete convergence of computers, TV and Internet commerce.(89) But Microsoft’s control of the standards for Internet access over cable is apparently not enough; Bill Gates has personal plans to own a worldwide system of satellites beaming Internet access to homes anywhere in the world. Rather than Microsoft encircling the world, Bill Gates is investing out of his own pocket in a project called Teledesic, a plan to launch 288 low-orbit satellites that will relay Internet traffic to any point on the earth. Gates and fellow billionaire Bill McCaw (who made his fortune early in the cellular phone industry) are the primary partners in this $9 billion venture, with AT and Boeing each receiving a smaller stake for their contracting role in the operation.(90) The revolutionary part of Teledesic’s approach is that traditional stationary satellites are so high up that delays in transmission make them less useful for high-bandwidth transmission like the Internet, so Teledesic will have to coordinate low-orbit satellites careening 435 miles above the earth at 16,740 miles per hour.

Using government-financed technology left over from Star Wars experiments, Boeing is helping them solve the problem and get their satellites launched by 2002. That is when the partners want to start service to anyone with a satellite dish (that need be no larger than a dessert plate).(91) The irony is that this plan to create a massive worldwide Internet access service controlled by two of the richest men in the world has been assisted by the U.S. government with a complex give-away of radio spectrum that amounts to twice the total spectrum controlled by all of the country’s radio and television stations put together–without the government being paid a cent for this favor.(92) In fact, the government lobbied hard at the World Radio Conference, the world governing board for operating such a satellite system, to help Gates and McCaw get approval for their venture. So with government-financed research and free radio spectrum courtesy of U.S. taxpayers, Bill Gates will be adding the final touch to his computer network domination with the most comprehensive broadband Internet access system in the world–an access system that will no doubt enhance Microsoft’s monopoly in the computing world.

As noted at the beginning of this report, many of the monopolistic advantages enjoyed by Microsoft are due only partially to predatory abuses by the company; many of those advantages are results of the network effects to any dominant player in an area of technology where customers seek consistency and compatibility between converging technologies and connected markets. Microsoft has used its dominance of the operating system standards–the field of competition in many ways–to gain an unfair monopolistic advantage against application competitors trying to compete on the standards controlled by Microsoft. It has used predatory pricing, including free giveaways of its software through bundling and Internet distribution, to overwhelm competitors who do not possess similarly deep pockets, and it has used exclusive licensing deals to completely cut off competitors from access to markets such as computer resellers tied to Microsoft through those exclusive deals. For twenty years in the 1970s and 1980s, the federal government rigorously supported open technology standards and the end result was the innovative Internet. In recent years, the federal government has stepped back from that role as guardian of open standards and the result has been rapid monopolization by Microsoft.

It is NetAction’s position that the federal government must step back in to vigorously defend open standards and open competition, while carefully guarding against even the smallest abuses by Microsoft since even minor abuse by such a dominant player magnifies its advantages due to the network effects of the new economy. In conclusion, NetAction offers the following recommendations as appropriate means of restraining the negative aspects of Microsoft’s dominance: 1. Divestiture: At a minimum, Microsoft’s Windows operating system monopoly should be split off into a separate company from the application and Internet divisions. This would end the inherent opportunities for abuse of one company competing in application markets while controlling the field of competition as well. It may also prove necessary to separate Microsoft’s application and Internet divisions.

2. Restrain Predation: Stop Microsoft from giving away browser products. Since $0.00 is below any measure of cost, it meets the traditional test for predatory pricing (sustaining below cost pricing with monopoly profits in order to drive out competition and then raise price). 3. Licensing: Microsoft should be forced to discontinue any licensing practices (NT, database server, etc.) that restrict customer dealings with competitors or require customer use of MSFT products.

Exclusive dealing and tying purchase of one product to purchase of another should be unlawful for this monopolist where linked to the operating system. 4. Open Standards: The government should more vigorously support open standards processes and endeavor to defend open standards developed through industry standards processes from anticompetitive abuse by Microsoft. 5. Consumer Involvement: The government must establish processes to ensure participation by Internet users in public policy decisions effecting consumer use of the Internet, including appropriate mechanisms for addressing complaints about product marketing and the quality and reliability of Internet services. With these measures, we can begin restoring the promise of open standards and the dominance by the best available technology, not merely whatever technology furthers Microsoft’s profits and strategic dominance.