Five years after Iowa (the Microsoft trial)

I’m generally not one to forget a major anniversary when it comes to Apple. (Please don’t ask my wife about how I am with other anniversaries, though.) But it appears that during my recent house-hunting excursion to Santiago, I missed the five-year anniversary of Steve Job’s announcement of the iPhone during his January 9, 2007 Macworld keynote.

I remember that “Stevenote” well, though not so much because of the iPhone announcement. Rather, it was the moment that I and the other members of the plaintiffs’ trial team in the Iowa Microsoft litigation (Comes v. Microsoft Corp.) briefly and ever so slightly influenced the famous Reality Distortion Field.

The keynote took place several weeks into a trial that would last more than another month before the parties settled. During the litigation, a January 2004 email from Jim Allchin to Bill Gates and Steve Ballmer titled “losing our way…” was found amongst the voluminous discovery turned over by Microsoft. Jim Allchin at the time was co-president of Microsoft’s Platform Products and Services Group, in charge of development of Windows Vista (codename Longhorn). Everyone knows Mr. Gates, of course, while Mr. Ballmer was (and still is) Microsoft’s CEO and chief motivational officer.

In his email, which would become plaintiffs’ exhibit 7264, Mr. Allchin writes:

This is a rant. I’m sorry….

[I]n my view we lost our way. I think our teams lost sight of… really understanding what the most important problems are [sic] customers face are. I see lots of random features and some great vision, but that doesn’t translate into great products.

I would buy a Mac today if I was not working at Microsoft.

When the email was introduced at trial in December 2006, it immediately captured the attention of the tech press. (Indeed, it later placed number six in a Time Magazine list of Top 10 Regrettable E-Mails.) But best of all–at least to this long-time Mac-ophile–was that the email made its way into the January 2007 Macworld keynote.

Standing in front of an image of Jim Allchin in the background, Steve Jobs wryly noted:

We are picking up lots and lots of new members of the Mac family, and we couldn’t be happier. As a matter of fact, here’s one that might be coming on soon. Jim Allchin of Microsoft was quoted recently as saying if he didn’t work for Microsoft, he would buy a Mac, and he’s retiring soon, so I’ve alerted our Seattle stores to keep an eye out for him and give him really good service.

Watching a replay of that moment in our war room in Des Moines was a memorable event, and one of the highlights of the lengthly trial.

Five years later, I look back at the Allchin email with particular interest. In some ways, little has changed. The general consensus appears to be that Windows Vista–the product that Jim Allchin (at least in its incarnation as of January 2004) called a “pig”–was a disappointment. Indeed, InfoWorld awarded Vista the number two spot on its list of Tech’s all-time top 25 flops. (As a Mac-user at home, I don’t believe I’ve ever used Windows Vista myself.) But even two years after Vista’s release, in early 2009, Microsoft apparently viewed unlicensed or pirated copies of Windows as a larger competitive threat than Apple.

The release of Windows 7 in late-2009 was met with a more positive reception. CNET wrote:

Windows 7 is more than what Vista should have been, it’s where Microsoft needed to go. How much damage Vista did and whether Windows 7 is enough for people to finally abandon Windows XP are questions that nobody has the answers to right now.

So even though Microsoft may have “lost its way” for a three-year release cycle with Vista, the primary damage done was that existing Windows users did not upgrade to the new version. Yes, Apple seems to report record Mac sales every quarter. Nevertheless, by the end of 2011, Windows still commanded more than 90 percent of the desktop operating system market, with Apple accounting for less than seven percent. If the market for Intel-compatible PC operating systems is still a valid antitrust market (and for various reasons, notwithstanding the changes that have occurred recently, I still think it is), Microsoft retains an extremely dominant position.

In other ways, however, the industry generally is almost unrecognizable from five years ago. In the smartphone market, for instance, Microsoft is a relatively marginal participant compared to the iPhone and Android platforms. The same goes for the tablet market (if there is, in fact, as tablet market, as opposed to an iPad market). Even in web browsers (the subject of the 1998 U.S. Department of Justice lawsuit), Microsoft’s share has declined significantly over the past five years, according to data from Net Applications, from about 80 percent in Q1 2007, to just over 50 percent in Q2 2011.

Outside the operating systems market, Microsoft’s failure to “really understand[] what the most important problems are [sic] customers face are,” has been costly. Just look at what has happened in the stock market over the past five years. On January 8, 2007–the day before the iPhone was introduced–Microsoft’s market capitalization was four times greater than Apple’s ($294.2 billion versus $73.44 billion). Today, Apple’s market cap is almost 60 percent larger than Microsoft’s ($391.8 billion versus $249.3 billion).

The lesson to be learned from this shift, I believe, is not–as Microsoft has argued (and as Google seems to be suggesting in response to antitrust concerns in the search market)–that antitrust enforcement has little or no role in the dynamic high tech industry. On the contrary, the experience seems to demonstrate that market power (here, in the desktop OS market) can be very durable and long-lasting, and with real effects on consumers, notwithstanding the overall evolution of the industry. Moreover, my hunch (and it is just that) is that the antitrust remedies imposed by the U.S. Department of Justice and (more significantly) the European Commission–even if they did not restore competition in the relevant markets at issue–may have facilitated some of these shifts by preventing Microsoft from leveraging its dominance on the desktop into emerging tech markets. In short, reflecting back after five years, competition policy does matter, and it continues to have an important role, in a high tech economy.

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