There were some rough patches between the two men early on. In a 1996 joint interview, they told Fortune about a dinner at Groves’s home that turned into a table-pounding shouting match. Groves recalled, “It was not a pleasant evening. I remember the caterer peeked into the room to see what all the ruckus was about. I was the only one who finished my salmon.” For a while after that Groves and Gates had contact only through other representatives of their two companies. But they got past that period and began to meet on a regular basis, two or three times a year, as their companies became more and more entwined with one another on many developmental projects. In part, they were drawn together because IBM broke with both of them. IBM invested in Intel, but sold its last interest in the company in 1987; it had refused to invest in Microsoft the previous year. “As these things happened,” Grove said, “instead of being two junior partners of a senior partner, we became equal players without that senior partner being present.”
* * *
The other day someone asked me, “Can’t Microsoft work with people so that they can be successful too?” That night I looked at a chart comparing Intel’s valuation with our valuation over the years. Although they vary somewhat, in both cases they went from a relatively small number to a relatively gigantic number. And I thought, “When have there ever been two companies with that kind of dependency both rising to that kind of success?” Even though we can tell you about all these disagreements and sarcastic meetings, we haven’t really gotten in each other’s way all that much. To me, that’s really amazing.
—BILL GATES, in a joint Fortune interview with Intel CEO Andy Grove, 1996
* * *
The results of the relationship between the two companies have been profoundly beneficial to both, and have been instrumental in keeping computer development moving ahead at an extraordinary pace. The two men have continued to have disagreements on many issues, but they have usually proved to be fruitful ones. Both men acknowledge that they get input from different sources. This sometimes causes friction, but more often it leads to showing each other the best way forward in an area that one or the other has failed to grasp clearly. Gates and Grove also are very complimentary about one another’s companies. Gates says, “It’s fun to hear Intel’s plans, because when they decide to do a next-generation processor, the execution is amazing. There’s so much behind it in terms of capital and design and testing and the like.” Grove returns the compliment: “What I’m most impressed with about Microsoft is that they are superb tacticians. They zigzag very, very well…if they are wrong they can be very, very pragmatic. What they are doing in the Internet field is phenomenal. I don’t think any other large company could have turned as profoundly and as broadly…”
* * *
The IBM lesson is cautionary to us. Almost every day we say, “Have we become them?”
—BILL GATES, Newsweek, 1996
* * *
This is not to say that they wouldn’t decide to work with a different partner if someone came up with better chips than Intel, or better software than Microsoft. They tend to agree that the PC and the television set will merge, and that the network computer or Internet terminal, cheaper and simpler and being pushed hard by Larry Ellison of Oracle, will fall between stools. But if things go the other way and Oracle’s vision of the future proves correct, it is perfectly possible that Microsoft and Intel might find themselves at odds in dealing with that development. Microsoft’s continued success depends on the ongoing dominance of the PC, even though Gates has made recent investments in a few companies that could give him an escape hatch. But Intel, as a chip maker, is in the more flexible position. Whatever new technology arises, it will need chips; it might not need Windows. But regardless of what happens, Gates and Grove are in agreement that the synergy that has existed between their two companies has been remarkable and close to unique since the start of the industrial revolution more than two centuries ago.
The relationship between Bill Gates and Andy Grove shows the degree to which Gates can be cooperative when there is a common ground. But it is worth noting that the two businesses are complementary rather than competitive with one another. In this sense, the relationship mirrors Gates’s personal life. His closest friends are, with one exception, people intimately tied to Microsoft: cofounder Paul Allen, Steve Ballmer, who keeps everything running smoothly, and Nathan Myhrvold, head of Microsoft’s Advanced Research Division and a coauthor of The Road Ahead. The exception, of course, is Warren Buffett, older than Gates and nearly as rich, who has almost nothing to do with the computer world. He bought a few shares of Microsoft early on and laughs that he should have bought a lot more, but his primary investments are in other fields. Perhaps exactly because Buffett is not a part of the frenetic computer society, Gates may be at his most relaxed and playful with this billionaire who is neither a collaborator nor a competitor.
* * *
Information is any sort of data that’s out there. Knowledge? Everybody has their own opinion of what’s most important and therefore what’s worth focusing on.
—BILL GATES, on the information highway, 1995
* * *
Having a friend from outside the computer industry to relax with probably seemed particularly felicitous to Gates in the fall of 1997, when a number of business problems coalesced. On September 15, Microsoft confirmed rumors that the latest version of its operating system software, Windows 98, would be delayed from the first to the second quarter of 1998. While Windows 95 had been nearly two years late, this fresh announcement caused Microsoft stock to fall by five percent that day, with a share falling by $7.25, although its stock still stood at fifty times the company’s earnings and rallied the following day. Windows 98, it had been announced previously, would include Microsoft’s browser, Internet Explorer, as an integral part of Windows for the first time. That plan would shortly be challenged on two separate fronts.
On October 7, 1997, Sun Microsystems, Inc. filed a suit in the Federal District Court of San Jose, California, charging that Microsoft was essentially attempting to “steal” Sun’s Java software standard by including a conflicting version of that software language in its new Internet Explorer 4.0 browser program. Microsoft had licensed the use of the Java language in April of 1996, four months after it was released by Sun, after five months of negotiation. Java is a programming language at base, but its design also allows it to be used as an all-purpose computer operating system—in other words, a potential alternative to Windows. Because it can run a wide range of different computer systems, Java was intended to bypass vexing compatability problems in the computer industry—indeed, Sun touted it with the phrase “Write once, run anywhere.” In addition, it was designed to mitigate security problems, particularly those caused by viruses, on computer network systems. Because Java can run on almost any system, it is not necessary to have the kind of extended linkage that makes a whole network vulnerable.
* * *
What’s new about Java versus other programming languages? Why is Business Week wirting about Java? Just having another computer language doesn’t change the dynamic of these things.
—BILL GATES, bad-mouthing Java to Business Week, even though
he had authorized talks about licensing the new language from Sun
Microsystems, late 1995
* * *
Sun has been attempting to have Java adopted as an international standard, a move that industry analysts have seen as a threat to the domination of Microsoft’s Windows operating system, since Java lessens the need for Windows in several important areas, including the retrieval of information from the Internet. What’s more, a Microsoft application like Word could be used with Java instead of with Windows. In developing its Internet Explorer 4.0, therefore, Windows changed the Java language to make it less versatile, removing two crucial standards established by Sun. That, Sun maintained in its suit, was a violation of the licensing agreement. Microsoft, of course, said that it had not violated anything at all and t
hat it had also made improvements to the Java standard that Sun had not yet gotten around to making but that were beneficial to all computer users. Exactly because Java is so broadly compatible, it is open to improvement by customization to a specific operating system like Windows. Microsoft made some forty changes over all, which simultaneously made Java more useful to Windows users but less compatible with other software products from rival companies. The New York Times quoted David Yoffie, a professor at the Harvard Business School, as saying that “Microsoft’s optimization is a risk for Sun. But if Sun can slow down Microsoft’s advances with the software developers, this will prove to be a good strategy.”
* * *
…Microsoft was clearly behind, which was an opportunity for other companies to get ahead. By enabling Microsoft to better compete, we had effectively closed that window of opportunity for those other companies. We gave Microsoft some very important keys to the castle. But in our defense, we saw this as good for Java. It was better to work with Microsoft than not. And eventually they would have built a Java clone. We had heard rumors that one was already in the works.
—ERIC SCHMIDT, Sun’s chief technology officer,
on licensing Java to Microsoft, December 1995
* * *
It may well take years for the Sun lawsuit to be decided; many computer industry suits consume two to five years of legal maneuvering. In the meantime, Sun and other Microsoft rivals were bending ears at the Justice Department, trying to persuade the Antitrust Division to take new action against Gates’s company. Even Ralph Nader, the legendary consumer activist, got into the act in September 1997, holding a much publicized meeting with top Justice Department officials. The director of Nader’s Consumer Project on Technology said at that time, “We think it’s an outrage that the Justice Department hasn’t taken action to stop Microsoft.” Spokespeople from Microsoft immediately professed astonishment that Nader would go after a company that had worked so hard to improve software technology while at the same time lowering the prices consumers paid for it.
While considering the possibility of new actions against Microsoft in various areas, the Justice Department took a major step on Monday, October 20, 1997, to reassure those who had been filing complaints about Microsoft. In a news conference given by Attorney General Janet Reno and Joel I. Klein, assistant attorney general for the Antitrust Division, who had been confirmed by the Senate in July, it was announced that the Justice Department had filed a complaint in federal court stating that Microsoft was in violation of the 1995 consent decree it had signed with the federal government and had asked the court to stop Microsoft from bundling Internet Explorer, its browser, with the Windows 95 operating system. The presence of Janet Reno at the news conference ensured headlines, but what really got the attention of the media was the request by the Justice Department that once such an order was issued by the court, Microsoft should be fined $1 million a day until it complied.
* * *
It’s kind of funny that it’s the computer industry, where the prices come down and the products get better and nobody has a guaranteed position, that’s the one that somebody would look into.
—BILL GATES, on Ralph Nader’s attack on Microsoft, 1997
* * *
The one-million-dollar-a-day potential fine made for splashy headlines, but it was quickly pointed out that although a fine of such proportions would be unprecedented, it would still be a drop in the bucket to Microsoft. Several commentators used the phrase “chump change” to describe what a million a day was to Gates, and Newsweek noted that in the days following the announcement of the Justice Department complaint, Microsoft stock went up three points, adding $846 million to Gates’s own net worth. Moreover, Gates himself indicated that such a fine was unnecessary, since Microsoft would comply immediately with whatever the court ordered. “That’s the way things work in this country,” he said.
But even leaving aside the matter of the possible fine, the action by the Justice Department was an aggressive challenge to Microsoft. The crux of the complaint was that Microsoft was forcing PC manufacturers to include its Internet Explorer on all new computers or lose the right to install Windows 95. The most damaging testimony was collected from Stephen Decker, the director of software procurement at the top PC manufacturer Compaq. Decker told Justice Department antitrust attorneys that in the spring of 1996 Compaq had wanted to put the icon for Netscape Navigator on its desktop instead of the icon for Microsoft’s Internet Explorer. Both browsers would continue to be available on the new PCs, but since it was assumed that computer buyers knew that the Microsoft browser was always included, Compaq wanted to make it clear that the rival Netscape system was included also. At that point, the Microsoft browser, which had been introduced a year later than Netscape’s, had only four percent of the browser market, while Netscape’s had eighty-seven percent. The much greater popularity of the Netscape product at that time also made it the more enticing icon to have displayed. But Microsoft got tough on this intended move—fast. It informed Compaq that it was terminating its Windows 95 licensing agreement with Compaq. A few days later it said that it would reconsider if Compaq replaced the Microsoft Internet Explorer within sixty days.
* * *
A fundamental principle at Microsoft is that Windows gets better and makes the PC easier to use with each new version. Today people want to use PCs to access the Internet. We are providing that functionality in Windows, and providing a platform for innovation by thousands of other software companies. It would be a great disservice to our customers if Microsoft did not enhance Windows with Internet-related features and rapidly distribute updated versions of Windows through PC manufacturers.
—BILL GATES, initial response to the Justice Department action,
October 20, 1997
* * *
It would, of course, have been ruinous for Compaq not to have been able to ship the world’s foremost operating system, Windows 95, and it quickly complied. By August of that year, the market share of Microsoft’s browser doubled to eight percent, with the added points coming directly from Netscape’s browser, which dropped to eighty-three percent, while the share of smaller rivals remained at nine percent. And by September of 1997, Microsoft had acquired thirty-six percent of the browser market, Netscape was down to sixty-two percent, and the small rivals were left with only two percent of the market. To Janet Reno and antitrust head Joel Klein that was clear evidence that the pressure applied to Compaq (which had been duly noted by other PC manufacturers) had directly harmed Netscape and amounted to Microsoft “unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly and undermine consumer choice,” as Janet Reno put it. At the October 20, 1997 news conference Reno added that the Justice Department “won’t tolerate any coercion by dominant companies in any way that distorts competition.”
The question of whether Microsoft had in fact violated its 1995 consent decree depended on whether or not its browser was considered an entirely separate product from Windows 95 or an integrated part of it. If it was an integrated aspect of Windows, then the consent decree hadn’t been violated, most analysts agreed. But if it was an independent product that Microsoft had forced PC manufacturers to accept in order to ship their computers with Windows, then the decree had been violated. From the point of view of Netscape, as put forward to Time by Netscape general counsel Roberta Katz, it was unequivocably a separate product: “They’ve produced it as a separate product. They’ve advertised it separately; they’ve produced it separately; they’ve sold it separately.”
* * *
If you’re asking for a guarantee that your company will be successful, then you are in the wrong business. We put into the operating system the things a super-high percentage of our customers want and keep the price of Windows very aggressive…in this business every year you have to prove yourself.
—BILL GATES, at a computer industry conference in Scottsdale, Arizona, the day after the Justice Department filing, Oct
ober 21, 1997
* * *
But there is a weakness in this statement that some analysts took note of: Microsoft’s Internet browser is free. Microsoft does not charge PC manufacturers to install it—they just insist that it be installed. In addition, from the beginning, computer users could download it free if their computer did not already have it. Can a company really be accused of coercion when the product in question is a giveaway? The commonsense answer to that question is no. But to Microsoft’s competitors, the answer is, Wait and see if it’s still free once Microsoft has cornered the market. Ralph Nader hit hard on this point, saying that the fact that Internet Explorer is now free “is a classic definition of predatory pricing. Once they get rid of Netscape you will see the difference.”
But can Microsoft really knock Netscape out of the browser business? The technical analysts don’t think so. Independent computer publications like PC Magazine, as well as Wall Street technical analysts, feel that the Microsoft and Netscape products have different strengths and weaknesses, and that the choice of one over the other may depend on what a user wants to do in terms of accessing the Internet. In a November 1997 editorial, Michael J. Miller, editor of PC Magazine, flatly said, “I think you should have both browsers on your system.” What’s more, analysts who specialize in looking ahead suggest that both browsers may be only temporary solutions to accessing the Internet. There are several start-up companies, some with considerable financial support from major corporations that have a stake in the future of the Internet, that are concentrating on the development of set-top boxes for television sets. Such set-top boxes would make it possible for users to access the Internet using remote controls no more complicated than those used for VCRs, with the real computing done at central networks leased to local television cable companies. That eventuality, it is pointed out, is far more of a threat to Microsoft than any Justice Department confrontation, since the Internet would then be available to people who don’t even own a PC, and who would have no need for Windows at all.
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