Dear Mr. Gates & Mr. Ballmer,
This letter warns that Microsoft's pro-regulation strategy in Washington is backfiring and is likely to end very badly for Microsoft. Microsoft's recent decision to withdraw from the ItsOurNet Coalition during FCC consideration of the pending AT&T-BellSouth merger, offers a golden opportunity for Microsoft to objectively reevaluate whether pursuit of permanent techcom regulation remains in Microsoft's best interests, especially given the experience and changes of the last year.
Upon closer examination, it is evident that Microsoft's:
A) Original political judgment behind the risk-reward tradeoff of net neutrality was badly flawed; and
B) Pro-regulation efforts have made the company worse off than when it started pursuing net neutrality regulation.
History is repeating itself. Microsoft is on path to get wrapped around the Washington regulatory axle just as badly as Microsoft got wrapped around the antitrust axle this past decade. Why history is repeating itself is that Microsoft apparently has learned little about the huge risks Washington can present to Microsoft. Just as Microsoft's political misjudgment got the company legally ruled a monopoly and under the thumb of DOJ and EU regulators, Microsoft's political misjudgment on net neutrality regulation is now endangering the future of the web services model that Microsoft has staked its future on.
I. Microsoft's original judgment of the risk-reward trade-off was badly flawed.
A. Microsoft has much more to lose than gain from Net Neutrality. Just like it’s never smart to play with matches in windy weather when you own a forest, it’s never smart to push for permanent regulation of market power when the political winds are blowing much more regulatory and your company has more market power than any other.
In your fall 2005 company memo Mr. Gates, you succinctly explained why Microsoft has so much to gain and lose from the “very disruptive software services wave”: “More than any other company, we have the vision, assets, experience, and aspirations to deliver experiences and solutions across the entire range of digital workstyle & digital lifestyle scenarios, and to do so at scale reaching users, developers, and businesses across all markets? To a Washington audience, you are reasserting the fact that Microsoft has more and broader market power, in a wider range of markets, than any other company.
Have senior executives in Redmond recently thought through:
• The wisdom of a company legally ruled a monopoly trumpeting re-regulation of adjacent markets predicated on lack of competition?
o By any measure compared to Microsoft, broadband markets are vastly more competitive and fragmented than Microsoft’s core markets. No broadband company has anywhere near Microsoft’s depth or breadth of market share, nationally and internationally, and in both consumer and business markets.
o Is Microsoft implicitly asking for permanent regulation of its operating system and Office?
• The risk to Redmond’s “glass house” from throwing regulatory stones at their broadband neighbors’ houses, when their broadband neighbors have plenty of stones and more than ample arm strength to reach Microsoft’s “glass house”?
• The peril of championing legislation which effectively would destroy the broadband business and any incentive to invest in the ubiquitous, much-faster bandwidth that Microsoft’s web services and products will need in the future?
• The wisdom of continuing to call for highly-regulatory legislation now that there is a new Democratic-controlled Congress, which believes that the Bush DOJ has been much too lenient on Microsoft?
• The danger from a potential Democrat-led DOJ in 2009 that could wield Microsoft’s current pro-regulation stance against you in the future?
B. Microsoft has overestimated the rewards and underestimated the risks of net neutrality. The reason for this miscalculation is that net neutrality legislation represents a preemptive solution to a hypothetical problem. This means the “benefits” of the legislation is simply to ensure continuation of the status quo of no problem, while the “costs” of the legislation is the very big problem that Microsoft could become permanently regulated and that the faster bandwidth that Microsoft’s Web Services model depends on won’t get built. In other words, Microsoft is putting their entire franchise at great real risk to ensure against a much-smaller hypothetical risk.
Has senior management recently re-evaluated the risk-reward calculus of continuing to support net neutrality, in particular since its easy legislative vehicle has died for the year and since the Democrats have taken control of Congress? Has senior management recently looked at this issue holistically and realistically? Or is it as it appears from the outside, the accumulated result of many successive tactical and incremental decisions?
Has anyone explained to senior management how net neutrality proponents could end up getting nothing, when they had the negotiating upper hand and when they had a consensus legislative vehicle that could pass some net neutrality provisions into law -- before they expired for good? Has anyone explained to senior management the Washington truism, that it is much easier to block legislation than it is to pass it? Has anyone recalculated the odds of getting net neutrality passed into law this coming Congress relative to last Congress?
C. What is Microsoft willing to give up in order to get net neutrality? In politics, you have to give to get. Most everything is linked and there are tradeoffs for most everything. Your coalition understands this political principle. The quid pro quo for ItsOurNet, SaveTheInternet and Moveon.org to allow franchise reform legislation to pass, was inclusion of tough net neutrality language. Has Microsoft’s senior leadership consciously thought through what they might be willing to give up in order pass net neutrality legislation?
• Are you willing to risk permanent codification of the Microsoft Consent Decree? What if new net neutrality legislation had a new provision to replace the Microsoft Consent Decree with legislation that authorizes regulation of Microsoft until there is sufficient OS, Office and browser competition? Your consent decree was just recently extended from 5-7 years.
o A Democratic Congress might not want the decree to expire just before they may control the DOJ again in 2009. Moreover, the Committees that drafted the 1996 Telecom Act have experience with replacing the AT&T antitrust Consent Decree with economic regulation to promote competition. Furthermore, ItsOurNet pushed hard for net neutrality legislation in the House Judiciary Committee, the same committee which oversees the DOJ and your Consent Decree.
• Are you willing to risk net neutrality non-discrimination being applied to Microsoft? ItsOurNet’s position is that preemptive re-regulation of former monopolies is warranted because they have the potential to discriminate. If a broadband duopoly allegedly has the history, means and motive to discriminate, why wouldn’t a company that has legally been ruled a monopoly like Microsoft?
o Moreover, has anyone recently canvassed your .Net team on whether they could succeed with their plans to seamlessly integrate their many services model applications, if they had to abide by a net neutrality non-discrimination principle?
• Are you willing to risk more design complexity and more obstacles to shipping products? Ray Ozzie recently advised Microsoft that Complexity kills. Wouldn’t dealing with a formal regulatory bureaucracy, subject to political and industry pressure, be more complex for Microsoft to deal with than a much more narrowly-drafted consent decree with a small oversight committee? Ray Ozzie also advised that a key to Microsoft’s future success in the services model would be reducing “obstacles to developing and shipping products." How would adding a regulatory layer of approval complexity and timing uncertainty make Microsoft’s already daunting task easier?
II. Microsoft’s net neutrality actions have actually made Microsoft worse off.
Does Microsoft’s record to date on net neutrality inspire confidence that this effort is likely to end well for Microsoft? Consider some key facts. Microsoft started five years ago clearly outside of the FCC’s regulatory jurisdiction and now finds itself firmly inside it. In 2006, Microsoft blew a golden opportunity to make some real legislative progress on net neutrality.
Let’s examine more specifically how Microsoft’s net neutrality efforts to date have backfired on the company.
• In lobbying the FCC for “connectivity principles”, Microsoft has ensured that it will be ensnared in any future FCC net regulation.
o In the FCC’s Policy Statement on Net Neutrality adopted September 23, 2005, the FCC declared: “the Commission has jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner.” The FCC has effectively declared that Microsoft’s Web services model is clearly under the FCC’s Title I regulatory authority.
o Policy principle number four of that FCC Policy Statement also states: “consumers are entitled to competition among network providers, application and service providers, and content providers”.
• In choosing to align with ItsOurNet and Moveon.org’s Save the Internet coalition, Microsoft lost control of its policy agenda and fumbled the opportunity to get some net neutrality language into law as part of franchise reform legislation this past year. Microsoft was interested in getting some compromise net neutrality language into law before the FCC’s decision to de-regulate DSL went into full force this fall.
o In overplaying their hand, Net neutrality supporters have gone from having a lot of negotiating leverage to get something on a bill that could have passed into law -- to having much less leverage to move a new legislative vehicle from scratch that has very little chance of passing in to law.
o Moreover, in aligning with Google and Moveon.org, rather than taking a non-aligned approach like Cisco on net neutrality, Microsoft has put itself at much greater political and regulatory risk than necessary to achieve its objectives.
III. Conclusion
In short, no company has more to lose from a preemptive and activist regulatory approach like Net Neutrality than Microsoft. The DOJ and the Courts have ruled Microsoft a monopoly. Microsoft still has more market power in more markets, which affords Microsoft more potential to discriminate on the Internet than any other company.
It has been said that those who don’t learn from the past are doomed to repeat it. If Microsoft’s senior executives don’t appreciate how their Washington problems could get much worse with permanent economic regulation and government micromanagement, Microsoft is destined to that fate.
Scott Cleland
Chairman, NetCompetition.org
