Microsoft pays court to Washington

Declan McCullagh: Microsoft is trying to conceal its change of heart on government regulation
Written by Declan McCullagh, Contributor on

At the height of the US government's antitrust pursuit of Microsoft, Bill Gates and his execs were vigorously denouncing rivals Sun Microsystems and Oracle for using the Feds to try to cripple the world's largest software company.

For a while, it sounded like Gates was channelling capitalist doyenne Ayn Rand, saying in 1998 that the technology industry's successes were due to lack of interference from Uncle Sam, and claiming that "the government is still trying to slow Microsoft down."

Microsoft even launched a Web site, FreeToInnovate.com, where you could send a note to your member of Congress, sign up for a get-your-hands-off-our-software newsletter or order "Freedom to Innovate" ceramic mugs and T-shirts.

Well, that was then. Now Microsoft has given new marching orders to its phalanx of lobbyists: use the government to seek a competitive advantage in the marketplace.

Hypocritical? Perhaps. Randian? Hardly. But all in all, entirely unsurprising. While the old Microsoft would have been appalled, this is becoming the standard way of doing business in Washington for the new Microsoft. In fact, though Microsoft may learn slowly, it learns its lessons exceedingly well.

Some background: Microsoft and large Web site operators like Yahoo, Amazon.com and eBay have been trying to pressure the Federal Communications Commission to impose additional regulations on the cable industry. They're waving the marketing slogan of "Net neutrality" and warning that the cable companies could start to favour some Web sites over others or even block access entirely.

Be sceptical of this flimsy claim. There is no evidence that any company offering cable modem access does this -- or, for that matter, ever will. At the very least, the prospective wrongdoer should become a real threat before the FCC gets involved.

Paul Rodriguez of the National Cable and Telecommunications Association says cable companies won't play favourites, and correctly points out that if consumers suddenly found out that they couldn't visit certain sites, they'd dump their cable modems in a millisecond. That's Microsoft's free market at work -- right?

All this might be just a standard inside-the-beltway political spat except for one odd point: so far, Microsoft is unwilling to defend its position publicly.

Privately, its lobbyists have never been busier. Microsoft lobbyist Paula Boyd met with Jonathan Cody, FCC chairman Michael Powell's special policy advisor, to talk about this topic on 4 June, according to disclosure documents on lobbying. Last week, Microsoft strategist Pierre De Vries and Microsoft attorney Scott Blake Harris (the FCC's former international bureau chief) met with FCC Commissioner Jonathan Adelstein. Craig Mundie, Microsoft's senior vice president, has met with Powell personally. And those are just a few examples.

So then why would Microsoft, typically no shrinking violet, not want to stand up in public and say the same thing? At a conference on this topic organised by the Progress and Freedom Forum last Friday, Microsoft representatives refused to show up to speak.

"We did invite them, and they didn't show up," says Randy May, PFF's director of communications policy studies. "Honestly, I don't know why. I don't probe those things deeply... It is puzzling."

The Cato Institute, a free-market think tank that has been a close Microsoft ally in the past, had been planning a similar event on "Net neutrality." It also found that out of Microsoft's legions of lobbyists, attorneys, engineers and public-policy specialists, not one would show up and say publicly what the company has been telling the FCC behind closed doors.

"I really worked hard to get them to show up but they refused," says Adam Thierer, Cato's director of telecommunications studies. "Basically, they want to agitate behind the scenes for FCC regulations, but they refuse to defend those actions publicly... They have been so vocal about this; I figured they would be eager to defend their position publicly. But thus far they have not been willing to do so."

Translation: Microsoft once was the poster child for a laissez-faire approach to government regulation. Now that the company has abandoned that approach, which tends to be a wise one, it's vulnerable to charges of hypocrisy.

It's not like Microsoft is a stranger to the Cato Institute. Microsoft gives the prominent think tank an undisclosed amount of cash every year, and its lobbyists are frequent guests at the group's conferences and panels. Gates himself showed up at Cato in 1999 for a gala reception with Republican and libertarian luminaries. (Ed Crane, Cato's president, proclaimed at the time: "Bill Gates is in a battle with an entire department of the federal government that suffers from a terrible case of the fatal conceit. We wish him well in that battle and congratulate him on the incredible success story that Microsoft is.")

But now Microsoft may be morphing into the same species of beltway creature that it once condemned. "I've spent much of my time over the last few years defending them against accusations that I thought were silly about discrimination in the browser market," Thierer says. "This is unusual since I consider them a friend and think they still do... I think they have a misguided position on this issue especially since Microsoft has substantial bargaining power in the cable industry. They already have substantial investments in and relationships with the cable sector. Isn't that enough to let them hammer out any disagreements or disputes that could arise?"

That's exactly right. Microsoft bought a $1bn (£600 million) stake in Comcast. Microsoft spent $3.4bn on an investment in three European cable operators (though admittedly this turned out to be a flop). This month, Gates released a list of companies that are pledging support for Microsoft's TV Foundation plan: Advanced Digital Broadcast, Concurrent Computer, MetaTV, Motorola, SeaChange and Two Way TV.

Remember that nobody ever passed up extra leverage at the bargaining table. Microsoft is trying to persuade cable companies to adopt TV Foundation, which would lead to the company's software being used in set-top boxes, future TVs, and by cable operators themselves. This is just speculation, but you can imagine Microsoft execs offering this kind of deal: if you buy our software, we'll stop pressuring the Feds to crack down on you.

One veteran cable lobbyist, who spoke on condition of anonymity, told me: "I think Microsoft has a lot to gain from pursuing this strategy. They gain a market advantage when there's a spectre of regulation hanging over a competitor. The best-case scenario for them is that they pull a rabbit out of the hat and they get the regulation. Even if they don't accomplish the regulation, they've planted a seed in people's minds, raising doubts about the network operators and their long-term business strategy: if not now, maybe in the future they should be regulated."

Microsoft's staff lobbyists did not respond to repeated requests for comment on Friday. (To be fair, Microsoft lobbyist Gerald Waldron, a partner at Covington and Burling, did call me back and leave a brief voice mail message.) A company spokesman said in an email that Microsoft's position on "Net neutrality" remains the same: "Microsoft continues to believe in the connectivity principles that have been articulated for some time now."

The good news is that Microsoft is unlikely to get what it wants. The FCC and the Bush administration seem to have figured out what's going on, and, besides, Microsoft's suggestions don't jibe well with this Republican administration's deregulatory views.

At Friday's PFF conference on this topic, Nancy Victory, assistant secretary of commerce, expressed scepticism about the need for prophylactic regulation. "We would urge caution against attempts to impose regulations mandating some form of 'Net neutrality' without solid and substantial evidence of unfair or discriminatory conduct," she said. "So far, we simply have not seen that kind of evidence."

Ken Ferree, chief of the FCC's media bureau, went even further on Friday, noting that there are "powerful market incentives already for broadband providers to make their systems consumer-friendly -- that is, to ensure that their networks largely are open" without the heavy hand of the government mandating it.

Much to the credit of the media bureau, Ferree added that unnecessary regulation may "impede investment, stifle innovation and undermine the long-term policy goals of the commission. License they mean when they cry liberty. I am not inclined to grant it to them."

Remember that he's talking about Microsoft, a company that has made a point of letting the world know what it thinks -- and why what's good for Microsoft is good for you too.

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