Microsoft's Windows 98: in the Eye of the Storm

Software giant battling for its mid-May release of latest operating system.

Compared with the glitz and hype that surrounded the release of Microsoft's new operating system three years ago, the June unveiling of Windows 98 is practically a non-event. "That was a paradigm change. This is not." says a company spokesman.

Yet any interference in bringing the product to market would have "broad, negative consequences," warned the software superpower ominously in a letter that greeted Wall Street market analysts this week. Earlier, a group of companies supportive of Microsoft warned the Justice Department that a delay would "harm consumers and the economy."

Can the delay of an incremental product upgrade hurt the national economy? "I'd score that hype: 10, reality: 1," says Ken Flamm, an economist at the Brookings Institution in Washington. Even if exaggerated, Microsoft's warnings indicate the war for the hearts and minds of the nation's decisionmakers and technology consumers is reaching its zenith, say Mr. Flamm and other industry analysts.

And the mere existence of the battle represents a sea change for the nation's powerful technology sector. For most of its life, the technology sector has been, and preferred to be, off Washington's radar, devoid of lobbyists and political influence. Today it sits in the eye of a growing storm.

There is a broadening investigation of Microsoft by the Justice Department and more than a dozen states, are considering action against the company for alleged antitrust activity. With Microsoft scheduled to release Windows 98 to computer manufacturers next week and the product expected to be in stores by mid-June, all parties hear the clock ticking. Though action after the product release is possible, many analysts believe the states would prefer to act in advance.

Microsoft's dominance in the personal-computer market, where 85 percent of the machines are run by its Windows operating system, complaints of its competitors, the importance of the tech sector in the expanding economy and a more vigorous antitrust division of the Justice Department are all factors in the government's heightened scrutiny of the technology sector.

Some bemoan the trend. "Technology was the last bastion of laissez faire economics at work in the US," says Robert Levy of the libertarian Cato Institute in Washington. "Microsoft is learning the public relations game quickly. The diversion of its energies into politicking is nauseating," he adds, saying the economy would be better off if the company were allowed to continue to focus on products rather than ways to escape government control.

Microsoft has already been sued by the Justice Department for allegedly forcing computer- makers to include its Internet browser as a condition of licensing its operating system. In recent weeks, Microsoft has made several concessions, effectively giving content providers and Internet service companies greater freedom in promoting competing browsers. But the investigations by Justice and the states have continued, examining practices that go well beyond the browser issues and concern whether the company engages in predatory and anti-competitive behavior.

For Microsoft, the issue is "about companies' rights to integrate and innovate," says spokesman Jim Cullinan, who adds that those traits have been vital to technology's success in driving an expanding economy.

Whatever the merits of the case, some marketing experts say Microsoft is worried about a bigger war. "They're probably most frightened about state action. It'll mean being attacked on multiple fronts. It doesn't take away directly from products, but it's going to require more management attention," says Regis McKenna, of The McKenna Group in Palo Alto, Calif.

Chris Le Tocq, a software analyst at Dataquest Inc. in San Jose, Calif. says Microsoft stands to earn about $300 million from Windows 98 in this calendar year. While a serious delay would have ripple effects on hardware and software vendors, as well as retailers, he says "clearly, the sky is not going to fall."

Michael Borrus, co-director of the Berkeley Roundtable on the International Economy, says claims that a delay in Windows 98 would hurt the economy are "ludicrous." He adds: "Microsoft is the one that most often delays its own products. No one predicted disaster when that happened."

If government action does not come soon, that may not mean much except that the investigations have moved beyond the issue of bundling browser software with the basic operating system. In fact, bundling is no longer a central issue, says Garth Saloner, professor of economics at Stanford University. "Windows 98 is almost a non-event," in terms of relating to the issues on which Microsoft is most vulnerable, he says.

Those issues, according to a number of analysts, are whether the company allows competitors access in a timely manner and at reasonable cost to the technical specifications necessary for them to develop competitive products compatible with the Windows operating system.

The states considering action against Microsoft include New York, Ohio, California, Texas, Wisconsin, Minnesota, West Virginia, Connecticut, and Florida.