Microsoft the Company

The House Monopoly Built



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How did Microsoft and its executives get so rich so fast? It wasn't through "innovation" (even Microsoft execs can't come up with a genuine Microsoft innovation). It wasn't by giving credit where credit was due. It wasn't by giving others the best deal, or giving them the best product.

A few hundred million a year well spent on PR has most of the world believing it was exactly these things that made them rich. In reality, it was an intense, single minded determination to make the most possible money by marketing and popularizing innovations, without regard, or compensation, to those who originated or who owned these innovations. In the process, they made an incredible number of enemies - so many enemies the hundreds of millions for PR is stretched a bit thin lately.

Origins of Microsoft

The story of Microsoft is not one of rags to riches. Bill Gates was the son of a very wealthy Seattle attorney, which is why he had the money to found Microsoft, how he got involved with IBM, and why he was able to leverage a little luck into an empire. "To get rich, start rich" - advice to the ambitious.

When the "personal computer" was born, the world of software was much different from today. On larger computers, software was simply included. What wasn't included was developed by the owner. Software was seldom sold - since all software was based on the ideas and software of others, it was considered impossible to own it. Software was developed by those who could, passed around and shared.

Enter Bill Gates and Paul Allen. Microsoft's first product was a BASIC programming language interpreter for the 8080 based Altair computer. The way this product was developed set the tone for the Microsoft of today.

  • Someone else's intellectual property was used without compensation (Dartmouth BASIC, donated to the public domain).
  • Development was done by "borrowing" time on an expensive timeshare system - time that was being paid for by someone else.
  • The product was announced and advertised before real work was even begun (to discourage competition).
  • The product missed promised delivery after promised delivery and delivered versions were riddled with bugs.
  • This product, based on the ideas of others and developed on equipment not owned by Gates or Allen, was declared Microsoft's property to be sold at the highest price the traffic would bear.
  • At least as much effort was put into promoting the product and disparaging other people's products as was put into development.
  • When people passed around his product (largely appropriated by him from the public domain), Bill Gates screamed "Piracy!". This use of the term "Software Piracy" may be Gates' only true innovation.

When IBM was designing the IBM PC, they needed two things: an operating system to run it, and a programming language so people could get it to do something. The logical thing for IBM to do was use CP/M as the operating system, since it was the business standard at the time. CP/M was written by Gary Kildall and published by Digital Research Corp.

Bill Gates' mother, a wealthy society matron who, as director of a prominent charity, associated with high IBM executives, urged these executives to talk to her son about his BASIC language interpreter. Since IBM was going to the West Coast to talk to Digital Research about CP/M, they agreed to talk to Bill.

Negotiations at Digital Research were handled by Gary Kildall's wife (who was the appropriate officer to handle negotiations) and did not go smoothly. IBM's people were upset at having to negotiate with a woman (this was the "Old IBM", remember). DR's lawyers declared the contract so one-sided it could not be signed without significant changes. DR, as the dominant operating system provider for small computers, had plenty at risk.

Alternate story - (there is some supporting evidence). While CP/M-86 was the logical choice for the IBM PC, it was considered unacceptable because Gary Kildall had had an affair with an IBM executive's wife, making IBM very anxious to find an alternative.

Popular story - (no supporting evidence). Gary Kildall was out flying his airplane and didn't bother showing up for the meeting with IBM. This seems to have been made up by IBM or Microsoft to cover up the real story.

While they were talking to Bill Gates about BASIC, IBM asked if he could also provide an operating system. Bill Gates answered "yes" and signed the contract. He had no product, no market and nothing at risk, so what the hell. Renegotiate later.

Microsoft purchased QDOS (Quick and Dirty Operating System), a ripoff of CP/M (proven in court) from Seattle Computers for next to nothing and set out to finish it up. Unfortunately, Microsoft didn't have the skills required for operating systems, so IBM had to do much of the finish work just to get the PC out the door.

Having almost no investment in DOS (Digital Research, Seattle Computers and IBM had done nearly all the work), no production costs (IBM did the production) and competing with companies that had a lot invested in their product, Bill Gates decided to sell at a price lower than others could reasonably match to drive competitors out of the business.

From this point on, Microsoft had a monopoly, which Bill Gates has worked tirelessly to deepen, extend and leverage.

When IBM created the PC AT, they also created a new operating system for it, much more advanced than DOS. Bill Gates threatened IBM that he would withdraw all licensing for DOS if the AT came out with any operating system other than DOS. Since the PC XT was nearly all of IBM's PC business, and it was entirely dependent on DOS, IBM backed down. For the first time, but not the last, Microsoft used its monopoly position to deprive the public of a superior product.

Note: refer to well researched book "Big Blues" for background on the above.

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Microsoft and the Stock Market

Microsoft has almost no assets, a few buildings and some obsolete computer code called "Windows", code for a few Windows dependent applications, and a bunch of software patents related to Windows. Its market valuation (stock price per share multiplied by number of shares) is higher than IBM or General Electric. Both these companies have assets up the kazoo. Can you say "bubble"? I knew you could. A lot more on the Microsoft stock market problem is provided by analyst Bill Parish

[ UPDATE: 09-01-00 - Microsoft stock is still below 50% of its peak at 57. Even the sendoff of Windows XP to manufacturing didn't get a rise out of it. ]

[ UPDATE: 10-10-00 - Microsoft stock is now below 50% of its peak, and is continuing down ]

The market valuation of Microsoft is based on expectations of growth and profitability continuing to exceed expectations, and on the "greater fool" principle (no matter how foolish you were to pay that much, a greater fool will pay you more). These expectations are entirely unrealistic, but Microsoft is determined to keep them going as long as possible - especially since the wealth of Bill Gates, Paul Allen, Steve Balmer and many other Microsofties is based on this same unrealistic valuation.

[ UPDATE: 10-10-00 - Paul Allen has sold out of Microsoft almost completely to preserve his wealth, and has resigned from the Board of Directors, as is appropriate for a person with little stock in the company. Bill Gates has also been selling out as fast as he has been able, considering his prominence in the company. ]

The imperative for high growth and high profit to support the valuation bubble has Microsoft attempting to leverage their monopoly into other areas. Having a monopoly is not against the law, but leveraging one to take over other markets is, and that's why Microsoft is in trouble with the Department of Justice.

"Microsoft is debt free and awash in cash". In a conventional sense, yes. Microsoft has not borrowed to grow its business - what it has done is issue vast amounts of stock options to its officers and employees to keep them working at very low rates of pay.

The problem is, should Microsoft's stock begin to slide seriously, as it eventually must, those holding options would have every reason to exercise them as soon as possible. Once some employees exercise their options, they will hold Microsoft stock, which, loosing value, obviously must be sold immediately, further depressing the stock and causing other options holds to panic. This activity among insiders will result in panic among other investors. A major bloodbath will ensue, and fortunes will be decimated overnight.

Once their options were exercised, key Microsoft employees would no longer have any incentive to stay with the company, since the rising value of their options was the main reason to put up with low pay and strenuous working conditions.

[ UPDATE: - 10-11-00 - With their stock sliding rather than growing, the options ploy for recruitment and retention is no longer viable. Microsoft has restructured their compensation program to bring them to "low middle" instead of "low" on the industry scale. This will significantly increase their labor costs. ]

Should Microsoft try to prevent an options panic by revaluing stock options, they would incur the wrath of all other investors who would be given no such protection, so a mass sell-off would certainly ensue anyway, with further pressure on the options.

[ UPDATE: - 10-11-00 - When Microsoft's stock valuation hit 1/3 of its high, the company had to do something about stock options. To avoid angering investors, rather than revalue the options Microsoft issued matching options, holding off the problem for the momemt but doubling their long term exposure ]

Once the stock has crashed, Microsoft will lose the confidence of corporate America. In fact corporate management will start to wonder about future viability, and Microsoft's marketing advantage will be seriously damaged. Windows, already a cost problem and obsolete in many ways, will suffer severely. (top)

Microsoft's Public Image - Billions Well Spent

Key to Microsoft's success is its public image. Whatever reality may be, it is critical for Microsoft to keep the public on its side. To this end they employ a number of PR (Public Relations) firms, most prominently Waggener Edstrom. Microsoft pays Waggener Edstrom about a quarter of a billion $$ a year (that's billion with a B) and other PR firms many millions more to keep Bill Gate's image polished and Microsoft shining in the public eye.

Humans are pack animals, and packs can't have a lot of leaders, so most people are genetically disposed to admire and follow a rich and powerful leader. Microsoft's PR campaigns have been highly successful. Even with evidence of its true personality pouring off the TV screen and printed page, the American public remains faithful to the image.

So how was this achieved? Fortunately, we don't have to guess. Pam Edstrom is a principal of Waggener Edstrom. She has a daughter, Jenifer. Jenifer wrote a book, Barbarians Lead by Bill Gates detailing her mother's work. This book is not on Microsoft's recommended reading list.

Astro-Turf - Another PR firm, Edelman Public Relations Worldwide, was much in the news in April 1998. Microsoft, concerned about image damage from the Department of Justice investigation, had Edelman put together a program to fake spontaneous "grass roots" support for Microsoft. Prominent public and industry personalities were to be paid to submit Microsoft prepared letters and columns to newspapers and magazines as their own. This is known as an "astro-turf" campaign in honor of it's fake grass roots.

The Los Angeles Times obtained a set of Microsoft / Edelman planning documents and published an expose. Microsoft immediately denied everything. When it became obvious nobody believed them, they claimed it was just a proposal and they had not acted on it. Faced with the fact that the main kick-off had already been held with PR people flown in from all over the country, Microsoft responded that they "had a right" to tell their story. In other words, Microsoft feels they have a right to pay people to deceive the public. For more information see "Links" [k1,k2,k3]

Microsoft has apparently made good on it's claimed "right" to go ahead with this campaign. Since the LA Times article, many letters and columns displaying an unusual sameness in subject, wording and lack of substantiation have been published in many newspapers and magazines.

Above and beyond all this is Microsoft's massive advertising budget, one of the largest on the planet - an advertising budget that makes the editors of most industry magazines willing conduits for the Microsoft public relations story.

Beyond paid PR, there is a considerable effort using Microsoft employees who "participate" in on-line discussion groups, usually without admitting they are Microsoft employees.

The most famous "participation" case was the "Barkto incident". A person calling himself Steve Barkto appeared in OS/2 discussion groups claiming to be a big IBM customer in Oklahoma who had adopted OS/2. Barkto had nothing good to say about OS/2 or IBM, and many of the things he said were outright lies. His posting was traced back to an account that was paid for by the credit card of Rick Segal, a high Microsoft executive.

Years ago, on-line postings by Microsoft "shills" were easy to spot. Not only did they spout the party line precisely, but their grammar and spelling were always excellent - highly unusual for newsgroup posts. They learn - today's shills use some of the worst spelling seen on the net and are often almost incoherent. pro Microsoft "Shill fests" often follow magazine articles embarrassing to Microsoft but verified to be true. If you can't deny it, bring out the shills!

The most prominent MS shill today is Michael Merlin, who claims to post from Paris France (his variable command of English has aroused suspicion he is more than one person). Michael denounces as a lie any statement critical of Microsoft, and claims all witnesses who testified against Microsoft in the DOJ case were lying. He will not answer any question as to his financial relationship with Microsoft (and he has been asked many times). (top)

Microsoft and the Truth - "Have we been introduced?"

Prominent InfoWorld columnist Nick Petreley, who is also a bible student, wrote a column in 1997 based on the passage "When the devil speaks lies, he speaks his native tongue". According to Mr. Petreley, Microsoft is not the devil, but, "Should Microsoft ever meet up with the devil, they won't need a translator." He gave plenty of examples. Unfortunately, practically any statement from Microsoft, whether about the company, its products or the products of others, must be presumed to be, at the least, a misrepresentation of fact.

A recent Microsoft's distortion is to imply they invented XML, which they most certainly did not. They submitted some improvements to the XML DTD (data definition section) and the W3C committe accepted them with little change. The claim is probably a face saving move since XML is so central to Microsoft's .NET initiative, but it is untrue just the same.

Microsoft has long depended on the PR firm Waggener Edstrom to cover up and smooth over. WagEd has done a magnificent job of creating a public image completely unrelated to reality, and truly deserves the hundreds of millions Microsoft has paid them. The reason the image is now crumbling is simple. Microsoft is in court. WagEd is not part of Microsoft. They can be subpoenaed. Brought to court they might tell the truth to avoid a perjury conviction. Microsoft is forced to do its own PR on some issues, and isn't at all good at it.

Watching the Justice Department directly contrast Bill Gates' testimony against his own email has introduced the public to what we in the industry have long known. Here's another lovely example. Microsoft denounced Wendy Goldwin Rholm's book The Secret Microsoft Files as "pure fiction" - then, in court, accused Caldera of leaking confidential documents to Goldwin Rholm (obtained for the Caldera vs Microsoft court battle). So which is it, all lies or leaked truth?

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http://www.infosatellite.com/news/2001/12/h081201microsoft_softwarepiracy.html

Microsoft and the Law - Trouble, trouble, trouble

It isn't at all unusual for a large and active corporation to have a few lawsuits against it. What is different about Microsoft is the nature of the suits, their number, and that they are found clearly guilty on just about every one that goes to trial. A fair number they just buy out of to avoid the embarrassement of yet another loss.

Microsoft has so many actions against it, we can only cover the most important. Most of Microsoft's (alleged) victims don't have the resources to sue, especially since Microsoft may have already used their own technology to destroy them. Of those who do sue Microsoft, some of the most obvious cases are simply paid off under a nondisclosure agreement, so we never hear of them. Others get nowhere because the victim doesn't have the money to be effective against Microsoft's huge legal department.

By 2003 monetary judgements and pay-offs had spawned a mini industry engaged in suing Microsoft for patent infringement. As the quantity increased the quality decreased, so Microsoft has been winning some of them.

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