Unbundling Bill Gates and why it's so hard

Jeremy Warner on meeting Bill Gates and the mistake he's made in not backing off earlier
IT'S A CURIOUS experience meeting Bill Gates, the world's richest and most successful businessman. I've met many powerful and successful industrialists, but nothing compares to the feeling of awe you get when given this opportunity. The anticipation is of being ushered into the presence of some demi-god. It's nerve wracking and you worry the experience will strike you dumb.

And then it happens and he is none of the things you thought; he's easy going, laid-back, charming, accessible, possibly even sensitive. Certainly he seems genuinely hurt by the persistent attacks on his company that now litter the internet and the pages of the world's press. Meeting this faintly shy, awkward man for the first time three months ago at the World Economic Forum annual meeting in Davos, Switzerland, I found it hard to credit him with being the evil monopolist he's now often depicted as.

The idle chit chat dispensed with - hello, how are you, where do you come from, oh, The Independent, good paper, and so on - he takes the rostrum before a small gathering of editors and financial journalists. Mr Gates has long been the most fascinating business story of recent times. Now, with the US Justice Department threatening to issue an all-embracing anti-trust suit against him, the story is about to go nuclear.

I'd heard he was inarticulate and unconvincing; he's not. He's persuasive and compelling as he takes on the case against him. But as with all those who preach a message, he deals only in generalisations. They are good ones, all the same. He talks about the huge benefits his operating system and applications software have brought to business throughout the world. People don't have to buy our products or upgrades, he says, nor do we use our position to restrict trade or stifle competition.

The usual characteristics of monopoly - restricted output, rising prices and insurmountable barriers to entry - simply are not there in our case, he insists. In fact prices are falling by an order of magnitude, production is rising and new companies and competitors are continually entering the market place.

Mr Gates plainly still has some friends. Later that day I heard a Nobel prize-winning economics professor take the defence of Microsoft a stage further. He argued that since the Windows monopoly was created by the market, and since it wasn't immediately apparent it was doing any harm, it was bad policy to attack it. The US Justice Department, he claimed, simply wasn't equipped to judge a new techno-monopoly, nor did it have the laws with which to do so. As for the "bundling" of Microsoft's Internet browser and other applications with its PC operating system, he thought that a non issue. The bundling of products together for sale is common throughout commerce and should be dealt with on a case by case basis.

He also took the view that Microsoft had a fundamental right to profit from the monopoly of its operating system, a monopoly achieved simply because Microsoft was a cleverer organisation commercially than Apple and others with rival products. Apple's refusal to sell its operating system to other hardware manufacturers was itself a kind of abuse, he said, and Apple only has itself to blame for what happened. In the end we should trust to the market, for if the consumer didn't like Microsoft and its products, it would ostracise the company and find a way round them.

I have to admit, I came away from Davos feeling all warm inside about Microsoft. I was seduced, I really was. Joel Klein and the US Justice Department were most definitely barking up the wrong tree. They were the type that believed all business was theft, and if they could build up enough of a head of steam against a successful business enterprise, they would attack and destroy it. IBM spent 19 years defending what proved to be an ultimately groundless anti-trust suite from the US Justice Department. The process was so distracting for management that it virtually destroyed the company.

Is this really what the US wants to do to Microsoft? Of course Sun Microsystems, Novell and Netscape would like to see Microsoft brought low and broken up, but what competitor wouldn't want to do that to its rivals. If government is stupid enough to do the job for them, so much the better.

Well, that was my frame of mind at the time but as I descended from the rarefied Alpine air, the doubts began to surface again. Was that not the ice-cold, calculating look of the consummate predator I had caught in Mr Gates's eyes amid the bon amis and smiles? How is it possible to grow from nothing in little more than 20 years to the third largest company by market value in the world without monopoly of a big and fast growing market?

Furthermore I've begun to believe the black propaganda about Windows, that though its price is falling and each upgrade makes it better, it nonetheless may not be a very good operating system. But because everyone else has it, and the overwhelming bulk of other software is designed to operate on it, we have no option but to buy it. Worse, we have no option but to buy each new upgraded version of it. If Windows 98 is not launched because of action by the Justice Department, it will be a blow not just to Microsoft, but to Intel and the legion of hardware producers which rely on each successive upgrade to boost sales of new PCs. It is easy to see how the operating system becomes a conspiracy against the public.

Then there is the opportunity Microsoft has to use this gateway to promote and sell its applications software at the expense of others. This is what lies at the heart of the Justice Department case against Microsoft. A dominant but inadequate operating system is one thing, but to use that to disadvantage rivals in the applications market is another altogether. This may be a new and vibrant industry, but actually what seems to be happening is not so very different from what happens with all monopolies. One monopoly is used to build another, to cross subsidise into other markets and to freeze out those who would compete in them.

The US has a long history and tradition of trust-busting. Each onslaught has prompted the same siren voices, the same dire warnings over the consequences of attacking and breaking up successful companies. In each case, the US economy has survived and prospered. It is one of the great paradoxes of the free market system that it produces these wonderful breakthroughs, these extraordinary companies and entrepreneurs, but to protect that power of invention and enterprise it needs constantly to cleanse itself of them. The market cannot be relied on to self correct. There must always be a referee.

As for Mr Gates, I believe he has made a serious strategic error in not backing off at an earlier stage. It may now be too late to reverse the tide of hostility building against him.