BIS 332 AAssignmentsReaction Paper 2

23 MICROSOFT CORPORATION

Benjamin J. Birkinbine

From its founding in 1975, the Microsoft Corporation has grown to become one of the largest and most dominant companies in the world. In its 2014 annual review of the world’s most valuable brands, Forbes ranked Microsoft the second most valuable brand in the world with an estimated value of $63 billion.1 Forbes also listed the company’s founder, Bill Gates, as the richest person on the planet in 2015 with an estimated $79.2 billion fortune.2 In addition, Gates topped the Forbes list of billionaires 16 out of the previous 21 years, which is indicative of the immense wealth that Microsoft earned during its rise to become one of the world’s largest new media giants. The company initially focused solely on producing computer software, but has since diversified its product lines and expanded into new areas of business. Microsoft now has regional offices in more than 100 countries worldwide, and offers products and services that range from video games and mobile phones, to operating systems and cloud computing solutions. The company’s growth, however, has not been without controversy.

Throughout its history, Microsoft negotiated strategic partnerships with original equipment manufacturers (OEMs). Most notably, the company partnered with IBM, which ensured that its software would come pre-installed on personal computers. In effect, these partnerships and licensing agreements dramatically increased the ubiquity of Microsoft’s software and solidified its position as a recognizable brand worldwide. However, Microsoft’s corporate structure and its strategies have shifted in recent years, particularly as the company expands beyond personal computer and software licensing markets. This represents a fundamental shift in the focus of the company, which is reflected in its recent acquisitions as well as its change in leadership. As evidence of this new era at Microsoft, Satya Nadella was appointed as Chief Executive Officer in 2014, which made him only the third person to hold the position since the company’s founding.

Despite these changes, Microsoft still remains one of the largest and most powerful companies in the world. To understand the current changes occurring within Microsoft as well as the events that led to its rise to power, this chapter begins by charting the history of the company before providing an overview of the company’s current economic profile, including its corporate struc - ture, executive board members, and investors. Next, an analysis of the company’s political ties as well as its cultural and symbolic power is provided before the chapter concludes with reflections on the company’s core strategies.

Historical Background

Paul Allen and Bill Gates founded Microsoft in 1975 after they developed the Altair BASIC interpreter, which was designed to execute functions written in the BASIC (Beginner’s All-purpose Symbolic Instruction Code) programming language so that they could be performed on the Micro Instrumentation and Telemetry Systems (MITS) Altair 8800 microcomputer. Altair BASIC became Microsoft’s first product, which was distributed by MITS under contract with Microsoft. This initial product established the basis of Microsoft’s business model and its primary strategy, which relied on producing software and establishing contracts with equipment manufacturers as a way to ensure the company’s products were included with hardware devices.

In the 1980s, Microsoft shifted its focus to the production of operating systems. During this time, Microsoft developed its Microsoft Disk Operating System, or MS-DOS, which became its core commodity until the mid-1990s. MS-DOS was developed in 1981 after IBM requested an operating system that could be used on its IBM-PC line of personal computers (PCs). Shortly after IBM’s initial request, Microsoft acquired the rights to 86-DOS, an operating system from Seattle Computer Products, eventually renaming it MS-DOS.3 Microsoft customized the newly acquired operating system to the specifications required by IBM and licensed the operating system to IBM. In turn, IBM included MS-DOS with its IBM-PC line of personal computers under the name PC DOS.

The agreement with IBM was perhaps the biggest turning point in Microsoft’s rise to power. The agreement ensured that its software would be shipped with IBM’s hardware, which led to rapid adoption of its products and increased revenue. Based on its success with MS-DOS and its relationship with IBM, Microsoft held its initial public offering (IPO) in 1986, which earned $61 million. The funds earned from the IPO were primarily invested in developing an operating system that used a graphical user interface (GUI). The development of a GUI operating system was driven by the need to make personal computers more accessible to the consumer market. Both the investment in Windows and its relationship with IBM ensured that Microsoft Windows would be installed on all IBM-compatible computers. Ultimately, Microsoft Windows continued the company’s dominance of the personal computer software industry as well as ushering in an era of personal computer sales.

Microsoft’s revenues and market share grew tremendously during this period. By some estimates, Microsoft’s market share rose to 90% of the entire computing market in the mid-1990s.4

By the time Windows 3.0 was released in 1990, however, the relationship between IBM and Microsoft became strained to the point that the companies decided to terminate their Joint Development Agreement, which specified the partnership between the two firms for the purpose of working on IBM’s OS/2 operating system.5 Because the Windows operating system was much more developed when the companies ended their relationship, Microsoft continued to gain market share, as its operating system was included on sales of IBM-compatible PCs. In fact, the relationship between IBM and Microsoft was what initially drew attention from the United States Federal Trade Commission (FTC) in 1990.

The initial FTC investigation began as a result of a joint news release by IBM and Microsoft during the Comdex trade show in Las Vegas, NV, on November 13, 1989.6 In the press release, the companies claimed “Microsoft would hold back features for Windows in order to help industry acceptance of the OS/2 operating system.”7 The FTC was concerned that the companies were colluding to control the market for operating systems. Ultimately, the FTC investigation ended in 1993 because the commissioners were split 2–2 on whether to bring an administrative action against Microsoft. In the same year, however, the Antitrust Division of the United States Depart - ment of Justice (DoJ) took over the investigation, which eventually led to Microsoft’s conviction for antitrust violations. The main issues in that case did not center on Microsoft’s control of the operating system market but its web browser, Internet Explorer.8

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The Browser Wars

The development of Internet Explorer occurred within the context of the “browser wars” in the mid-1990s. One of the most notable web browsers developed at this time was the Mosaic web browser, which was developed by a team of researchers at the University of Illinois at Urbana- Champaign. After gaining popularity, Mosaic changed its name to Netscape Navigator to avoid trademark disputes with the university. The truly novel characteristic of the Netscape browser was that it was freely available to the general public for personal use. As a result, Netscape Navigator quickly rose to hold nearly 90% of the browser market in April 1996.9 Based on this quick success, Netscape held its IPO in August 1995. Netscape’s success was not lost on Microsoft, which began to develop a browser to rival Netscape.

Since Microsoft had not devoted any significant amount of time or resources to developing a web browser of its own, the company sought to acquire an existing browser rather than build one on its own. Microsoft approached Spyglass, which held the rights to the code base of the original Mosaic browser. Spyglass had been developing its own version of Mosaic, known as Spyglass Mosaic. Microsoft negotiated a license to use the Spyglass Mosaic code base in exchange for royalty payments for each copy of the browser issued, with an annual cap of $5 million.10 The resulting browser, Internet Explorer, was based on the same foundation as Netscape. As evidence of how aggressively Microsoft pursued its new browser strategy, the company originally had only five or six employees working in the browser department in 1995, but that number rose to more than 1,000 employees by 1999.11

In addition to assigning more employees to the browser division, Microsoft began packaging IE with distribution of its Windows operating system. As Microsoft held nearly 90% of the market for operating systems because of its contractual relationships with OEMs, the company quickly gained market share of the web browser market. In effect, Microsoft was giving away copies of Internet Explorer for free by bundling it with its Windows operating system. Microsoft began distributing versions of Internet Explorer to OEMs by sending discs to the manufacturers, but it eventually required the OEMs to install Internet Explorer with Windows 95. According to the Findings of Fact from the United States v. Microsoft antitrust case, Microsoft prohibited OEMs from “modifying or deleting any part of Windows 95, including Internet Explorer, prior to shipment” because of a non-negotiable licensing restriction that Microsoft placed on OEMs.12 In other words, the restriction did not allow OEMs to ship new PCs without Microsoft’s browser installed. The effect on the market for web browsers was almost immediate, as Netscape Navigator’s market share plummeted and Microsoft’s ascended.

The United States v. Microsoft

Microsoft’s actions during the browser wars were what ultimately led to its conviction for violations of Sections 1 and 2 of the Sherman Act. Section 1 of the Sherman Act prohibits “every contract, combination . . . or conspiracy, in restraint of trade or commerce . . .”13 Section 2 prohibits any person or firm to “monopolize . . . any part of the trade or commerce among the several States, or with foreign nations . . .”14 In United States v. Microsoft, the court found Microsoft to be in violation of both sections of the Act. Microsoft violated Section 1 by unlawfully bundling Internet Explorer with its operating system and restricting OEMs from modifying or removing the software. In addition, the company violated Section 2 by maintaining its monopoly power by anticompetitive means and attempting to monopolize the web browser market. In light of these violations, the U.S. District Court Judge, Thomas Penfield Jackson, ordered Microsoft to divest its operating systems business from its applications business operations.15 The intent of the decrees was to separate Microsoft’s operating system business from the business operations that handled

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its web browser development. These actions would prevent Microsoft from engaging in the same types of anticompetitive behavior that it had used during the browser wars.

However, Judge Thomas Penfield Jackson recused himself from the case in 2001 because of public comments that he made, which gave the impression that he had a personal bias or prejudice against Microsoft.16 In his place, U.S. District Judge Colleen Kollar-Kotelly took over the case, and approved a settlement between the parties that would not require the break-up of Microsoft’s two divisions. Instead, Microsoft agreed to a series of consent decrees in November 2002, whereby the company was prohibited from retaliating against any OEM that develops, distributes, promotes, uses, sells, or licenses any non-Microsoft products.17 In addition, Microsoft needed to establish a clearly documented schedule of all royalties received from OEMs for its Windows Operating System.

These provisions were aimed at prohibiting Microsoft from engaging in any anticompetitive behaviors, but Microsoft was also required to promote interoperability with its products. Interoperability ensures that other companies could develop products that would operate with Microsoft’s products. As such, Microsoft was ordered to disclose its Application Programming Interfaces (APIs), which specify how software components should interact with one another. By releasing its APIs to independent vendors, OEMs, and other Internet providers, they could develop software that could communicate with Microsoft’s operating systems and other software. These consent decrees were ultimately renewed twice, but officially expired May 12, 2011.18

The antitrust conviction marked a turning point in Microsoft’ history, as well as the broader information technology market. The antitrust conviction occurred in 2001, which coincided with the bursting of the so-called “dot-com bubble” of speculative capital investment in information technology companies.19 Microsoft, which had risen to power because of its bundled software and strong intellectual property protections, needed to shift its business strategies to reflect the broader changes occurring within the information technology industry. The most significant of these changes was the growth of smartphones and tablets, as well as Microsoft’s entrance into the video gaming industry. It is within this context that Microsoft released its Xbox video gaming console in late 2001 and began developing tablets for personal computing. Later, in 2014, Microsoft acquired the mobile phone business of Finnish telecommunications company Nokia. The acquisition of Nokia’s mobile phone business as well as the change in leadership will be discussed in greater detail in the section on new developments, which appears later in the chapter. What follows, however, is an economic profile of the company, which includes financial data and its current corporate structure.

Economic Profile

Figure 23.1 provides an illustration of Microsoft’s revenues and net profits from 1998 to 2014. The company’s revenues continued to grow during this period, despite its conviction for antitrust violations and the subsequent consent decrees. Moreover, Microsoft’s revenues were not affected by the dot-com crash during 2001. Indeed, the same can be said of the company’s profits during that time, although Microsoft did experience a dip in profits during the latest financial crisis that occurred between 2007–2008.

Properties (Corporate Structure, Holdings, Joint Ventures)

In 2014, Microsoft acquired the Nokia Corporation’s Device and Services Business (“NDS”). The acquisition led to a change in Microsoft’s organizational structure and represents the company’s broader strategic transition to a “devices and services company.”20 The upshot of the restructuring was the creation of a new operating segment as well as renaming others. The new organizational structure is divided into two main areas: (1) Devices and Consumer, and (2) Commercial. Both

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of these primary areas is further broken down into smaller operating segments. Brief descriptions of these operating segments are provided below.

Devices and Consumer (D&C)

Microsoft’s Devices and Consumer (D&C) segments “develop, manufacture, market, and support products and services designed to increase personal productivity, help people simplify tasks and make more informed decisions online, entertain and connect people, and help advertisers connect with audiences.”21 The company’s D&C operations are divided into four smaller operating segments: D&C Licensing, Computing and Gaming Hardware, Phone Hardware, and D&C Other.

D&C Licensing

The D&C Licensing segment primarily derives its revenue from licensing fees for use of Micro- soft software, including Microsoft Windows and Microsoft Office. The licensing revenues for Microsoft Windows come from the fees charged to original equipment manufacturers that sell hardware devices with Microsoft software pre-installed. Also included in this operating segment are patent licensing fees.

Computing and Gaming Hardware

The Computing and Gaming Hardware segment includes the Xbox video game console and accessories. This includes revenue from the subscription-based Xbox Live service, which allows subscribers to link with other Xbox players for collaborative or competitive video gaming. Premium Xbox Live accounts receive access to free games and special offers. This segment also includes royal ties from second- and third-party video game sales. Sales of Microsoft Surface tablets and accessories as well as Microsoft PC accessories are also included.

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FIGURE 23.1 Microsoft Corporation Annual Revenue and Net Profit, 1998–2014 (in $ billions)

Phone Hardware

The Phone Hardware segment is Microsoft’s newly created segment and was created because of Microsoft’s acquisition of Nokia’s Device and Services Business. This newly created segment includes sales of Lumia Smartphones and other non-Lumia phones.

D&C Other

The D&C Other segment includes revenue streams from those areas not otherwise covered by other segments. D&C Other includes sales from online marketplaces like Windows Store, Windows Phone Store, and Xbox Live as well as its retail stores. It also includes revenues earned from advertising on its Bing search engine, Xbox gaming console, and the Microsoft Network, also known simply as MSN, which is a collection of web sites and services provided by the company. This segment also includes Office 365 Consumer software, which is a subscription-based cloud service that provides access to Office 365 Home, Office 365 Personal, and other productivity software. The segment also includes Microsoft Studios, which develops and publishes video games. Microsoft also operates a Partner Network, whereby vendors can become an official reseller of Microsoft product licenses. Revenues from this service are also reported in this segment.

Commercial

Whereas the D&C segments cater specifically to consumers, the commercial segments are focused on providing products and services for other businesses. These products and services are aimed at increasing business productivity and efficiency. The company’s commercial operations are divided into two segments: Commercial Licensing and Commercial Other.

Commercial Licensing

The Commercial Licensing segment derives revenue from licensing fees paid by other businesses for access to Microsoft’s software and services. This includes a range of server-level products like Windows Server, Microsoft SQL Server, Visual Studio, and System Center. The company also earns revenue from sales of its Microsoft Office for business software, including the productivity software offered by Office, the Microsoft Exchange email server software, the SharePoint web application framework and platform, and the Microsoft Lync instant messenger. Microsoft also licenses Skype to businesses, which enables voice and video calling from devices connected to the Internet. Through Microsoft Dynamics, the company offers software for resource planning, customer relationship management, financial management, supply chain management, and analytics. In addition, Microsoft also derives revenue from licensing of its Windows operating system, including Windows Embedded. Embedded systems are computer systems that are embedded within other devices, which allows for the expansion of Internet-connected automation in everyday objects and devices.

Commercial Other

The Commercial Other segment includes product support and consulting services offered through its Enterprise Services division. The company also provides services via Commercial Cloud, which includes Office 365 Commercial and other Microsoft Office services. In addition, Microsoft Azure is a cloud computing platform and infrastructure for developing and managing applications.

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Typical Strategies

Throughout its history, Microsoft has relied on a few primary strategies. Microsoft ensured the ubiquity of its software by negotiating contractual relationships with original equipment manufacturers. Beginning with its initial contract with IBM to fuel adoption of its MS-DOS operating system, Microsoft continued this strategy with subsequent technologies like Microsoft Windows and Internet Explorer. Indeed, the findings from the United States v. Microsoft antitrust suit focused on the anticompetitive nature of Microsoft’s contractual agreements with manu- facturers. In particular, Microsoft used “contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user’s PC system, and to increase the costs attendant to installing and using [Netscape] Navigator on any PCs running Windows.”22 In addition, Microsoft restricted manufacturers from reconfiguring Windows 95 and Windows 98 in ways that could lead to greater use of Netscape Navigator. Finally, Microsoft “used incentives and threats to induce” certain manufacturers to make “distributional, promotional and technical efforts” that would favor Internet Explorer instead of Navigator.23

Once Microsoft achieved its market dominance, it relied on strong intellectual property protections of its software as a way to defend its ability to charge licensing fees for use of its software. Indeed, the company has consistently exhibited an antagonistic position with respect to alleged infringements on its intellectual property. In one early example, Bill Gates authored an “Open Letter to Hobbyists” in response to the fact that hobbyists were sharing copies of Microsoft’s Altair BASIC interpreter for the purposes of experimenting with the technology. In the letter, Gates claimed that most hobbyists steal software, and he rhetorically asked whether this is a fair practice because it ultimately prevents good software from being written.

The “Open Letter to Hobbyists” is indicative of Microsoft’s longstanding position toward the hobbyist community and, more specifically, the model of open development championed by this community. The most notable example of an open development model is the open source operating system, GNU/Linux. In 1998, a confidential source leaked a series of documents to Eric Raymond, a well-known member of the free and open source software community, which provided evidence of Microsoft’s strategies and tactics for combatting GNU/Linux in particular and open source software in general. These documents, known as “The Halloween Documents,” show that Microsoft viewed free software products as a genuine threat to its own products because such products had “acquired the depth and complexity traditionally associated with commercial projects.”24

In the first Halloween Document, Vinod Valloppillil argues “to understand how to compete against OSS [open source software], we must target a process rather than a company.”25 The author also discusses possible strategies for competing with open source software, with special attention given to “FUD tactics,” which is an acronym for Fear, Uncertainty, Doubt. FUD tactics are used in sales, marketing, public relations, and other propaganda, whereby one attempts to instill feelings of fear, uncertainty, or doubt in consumers about the quality of competitors’ products. For example, in an advertisement for Microsoft Server 2003, Microsoft claimed that research had demonstrated “Linux was found to be over 10 times more expensive than Windows Server 2003.”26 Microsoft was asked to change the advertisement by the Advertising Standards Authority in the United Kingdom because the results of the study were deemed to be misleading to consumers.

In subsequent Halloween Documents, Microsoft employees claimed that a possible strategy for fighting Linux was patent and copyright litigation.27 Indeed, Halloween Document X, leaked in 2004, features an internal email from the SCO Group, which discusses, albeit somewhat vaguely, the relationship between the SCO Group and Microsoft.28 The email appears to disclose the amount of money paid to SCO on behalf of Microsoft. The SCO Group was a software company that

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became infamous for engaging in a number of legal battles over alleged intellectual property infringement in Linux-related software. The SCO Group went bankrupt in 2007, but the leaked document suggests that Microsoft was contributing money directly to the SCO Group as a way to support intellectual property litigation against Linux vendors.

The contractual agreements and vehement policing of its intellectual property allow Microsoft to derive revenue from licensing fees. Based on its 2014 annual report, nearly 70% of Microsoft’s revenue came from licensing fees.29 As such, Microsoft relies on strategies that increase its ability to derive licensing revenue, particularly by encouraging adoption of its technologies globally. For example, between 1999 and 2001, four Brazilian cities—Amparo, Solonopole, Recife, and Ribeirao Pires—passed a series of laws and directives that encouraged or required the use of free software in favor of Microsoft products.30 The rationale for switching to free software was primarily economic, as Brazil reported spending nearly $1 billion on software licensing fees to Microsoft between 1999 and 2004.31 By switching to free and open source software, Brazil estimated the savings at approximately $120 million per year.32

New Developments (Convergence, Integration, Expansion, etc.)

In recent years, however, Microsoft’s stance toward free and open source software has thawed a bit from its previous position. This is indicated by the creation of an entirely new subsidiary in 2012 called Microsoft Open Technologies, which is dedicated to “interoperability, open standards, and open source.”33 This contrasts sharply with statements made by Microsoft’s previous CEO, Steve Ballmer, when he claimed, “Linux is a cancer” in 2001.34 The reason for the shift in embracing open source is, in part, driven by the need for interoperability. Interoperability is particularly important because it enables various technologies to communicate with one another, regardless of its original manufacturer. Microsoft recognizes the need for its software to communicate effectively with other devices and systems, and the company can no longer rely solely on developing software that will only run on Microsoft devices. Rather, Microsoft’s software will need to be adapted to a range of devices that may be manufactured or managed by different organizations.

This change in perspective can also be contextualized within the company’s recent shift to prioritize mobile and cloud-based products and services. On a broader level, the shift in business strategy brings Microsoft in line with more general trends in the information technology market, exemplified by companies like Google, Amazon, and Facebook. These companies are increasingly trying to control various types of Internet infrastructure that they can lease to consumers and businesses as a way to provide access to increased computational power, unique applications or services, or to facilitate collaborative projects via the cloud. The strategy attempts to take advantage of demand for ubiquitous access to software and services across a range of different devices (i.e., laptops, tablets, gaming consoles, smartphones, etc.).

One can view Microsoft’s recent acquisition of the Nokia Corporation’s “Device and Services” business within this broader context. The acquisition allows Microsoft to integrate the production of mobile phones, smartphones, and tablets into its corporate structure. Furthermore, the acquisition makes Microsoft vertically integrated in telecommunications, although not completely vertically integrated in traditional forms of telephony. While the company does not provide a traditional telephony service to its clients, it does control Skype, which offers Internet-based voice and video communication. As of 2013, Microsoft claimed that Skype had approximately 299 million users worldwide.35

As of the time of writing, Microsoft was in the process of integrating many of its products and services into a single service. The service will be driven by development taking place within its Windows operating system. The new system, Windows 10, is being built as an integrated operating system that will function with all types of hardware, including smartphones, the Xbox

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gaming system, tablets, laptop computers, as well as Microsoft HoloLens. The HoloLens is Microsoft’s attempt to bring three-dimensional immersive computing to consumers with the use of holographic technology. By wearing a piece of headgear, users of HoloLens will be able to view digital displays within their physical environment. For example, users could build a hybrid digital-physical environment in their living rooms by playing Minecraft with the HoloLens, which would enable digital structures to be built on top of a couch or coffee table.36

Political Profile

Microsoft held its initial public offering in 1986, and it has remained a publicly traded company since that time. Currently, the ownership structure of Microsoft is composed of both institutional and non-institutional (or personal) investors. Institutional investors own approximately 72% of the company’s total shares, with the remaining 28% belonging to non-institutional members. Table 23.1 lists Microsoft’s top five institutional investors and the percentage of total shares owned by each company.

The largest institutional investor is Vanguard Group, Inc., a U.S.-based investment management company. The Vanguard Group’s investment portfolio shows that the company also holds the greatest amount of total shares for General Electric, Bank of America, Pfizer, Apple, and AT&T. However, the most valuable shares the company owns are those of Apple, where its 330 million shares are worth more than $42 billion.37

While Table 23.1 provides a snapshot of Microsoft’s top institutional investors, two individuals are the largest non-institutional shareholders. Former CEO, Steve Ballmer, owns more than 330 million shares in the company, while founder Bill Gates owns approximately 239 million shares.38

When considered in conjunction with the institutional investors, Bill Gates arguably holds the most power to control the direction of the company because he is its founder, a major direct investor, and a current board member. However, ownership is not always the same as control; rather, management and equity owners form a “community of interest” in which the strategic decisions are informed both by management and financial interests.39 Gates is somewhat unique in that he serves as a member of both communities, although this may or may not translate directly to control.

Complicating the analysis of Gates’ influence is the way in which his fortune is spread out through multiple other ventures outside Microsoft’s corporate structure. For example, Bill Gates controls Cascade Investments, LLC, which is a holding and investment company.40 Cascade Investments holds ownership stakes in companies across a range of industries, including food and beverage, transportation, waste management, biofuel, and real estate. Most notably, Cascade Investments holds a 7% ownership stake in Televisa, the Mexican media giant discussed in this volume.41 Another notable investment is the Four Seasons Hotels and Resorts, which Cascade Investments co-owns with Saudi Arabia’s Prince al-Waleed bin Talal’s investment company.42

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TABLE 23.1 Microsoft Corporation’s Top Five Institutional Investors

Company Percentage of total shares

Vanguard Group, Inc. 7.27 Capital World Investors 5.95 State Street Corp 5.93 FMR LLC 3.78 Barclays Global Investors UK Holdings Ltd 3.74

Source: NASDAQ, “Microsoft Corporation Ownership Summary,” www. nasdaq.com/symbol/msft/ownership-summary, accessed March 18, 2015

Corporate Board Members and Interlocks

On the other hand, Bill Gates has only recently returned to serve on the company’s Board of Directors. Table 23.2 lists the current board of directors and the corporate interlocks of the board members, but only lists the board members’ current and active involvement in other leadership positions. However, certain members previously served in positions that are worth mentioning here. John Wendell Thompson, the current Chairman of the Board, previously served on the National Infrastructure Advisory Council (NIAC), which was created in the wake of the September 11, 2001 attacks on the World Trade Center in New York City. The council provided advice to the President of the United States, through the Secretary of Homeland Security, about the security of critical infrastructures and may advise policies or strategies to keep those infrastructures secure.43 Mr. Thompson was also CEO of Symantec, a computer security company,

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TABLE 23.2 Microsoft Executive Board Members and Corporate Interlocks

Board Member Interlocks with Other Companies

John Wendell Thompson, Virtual Instruments (CEO) Chairman of the Board Liquid Robotics (Director)

PernixData (Advisor) Wetlands American Trust (Trustee)

Satya Nadella, Chief Executive Officer

Bill Gates, Corbis Corporation (Founder, Owner, Chairman) Founder & Technology Advisor Berkshire Hathaway (Director)

Bill & Melinda Gates Foundation (Founder, Co-Chairman)

Charles H. Noski, Avon Products (Director) Director National Association of Corporate Directors (Director)

Charles W. Scharf, Visa (CEO & Director) Director Johns Hopkins University (Trustee)

Maria M. Klawe, Broadcom Corporation (Director) Director Math for America (Director)

Mathematical Sciences Research Institute (Trustee) American Academy of Arts & Sciences (Fellow) Canadian Information Processing Society (Founding Fellow) Stanford Engineering Advisory Council (Member) Advisory Council for the Computer Science Teachers Assoc. (Member)

Garrison Mason Morfit, ValueAct Capital (President) Director

Helmut Gunter Wihelm Panke, UBS AG, Switzerland (Director) Director Singapore Airlines Limited (Director)

Bayer AG (Supervisory Board)

Teri L. List-Stoll, Kraft Foods Group (Exec. VP & Chief Financial Officer) Director Danaher Corporation (Director)

John W. Stanton, Trilogy Equity Partners (Chairman) Director Trilogy International Partners (Chairman)

Columbia Sportswear (Director) Year Up of Puget Sound (Chairman) Whitman College (Trustee) Seattle Foundation (Director)

and a member of the Financial Crisis Inquiry Commission, which was charged with investigating the causes of the 2007–2008 financial crisis.44 In addition, Charles H. Noski previously served in various leadership positions at other large corporations, such as Bank of America, Northrup Grumman Corporation, AT&T, Morgan Stanley, and Merrill Lynch.

Ties to the State and Lobbying Efforts

While corporate interlocks can provide a glimpse of Microsoft’s ability to negotiate strategic partnerships, they can also influence policies and regulations through its ties to the state and spending on lobbying efforts. Microsoft makes publicly available information about its participation in the political process. For example, Microsoft provides access to data on fees paid to consultants, lobbying expenses, and trade association dues spent on advocacy.45 The Center for Responsive Politics, through its OpenSecrets.org website, provides additional details about the connections between Microsoft and members of the United States government. During 2013–2014, Microsoft hired 113 lobbyists, 91 of whom previously held government jobs. Furthermore, 55 members of the United States Congress and Senate owned stock in Microsoft.46 These interlocks give a sense of Microsoft’s ability to influence legislation, particularly when paired with more specific details about their lobbying efforts.

In 2014, Microsoft spent more than $8 million on lobbying. The top five issues for which the company lobbied were (1) taxes, (2) immigration, (3) copyright, patent, and trademark, (4) telecommunications, and (5) computers and information technology.47 More specifically, the company most frequently lobbied support for the Immigration Innovation Act, also known as the I-Squared Act, which increases the cap on H-1B visa availability for specialty occupation foreign workers and also allows spouses of H-1B recipients obtain work visas.48 Microsoft’s support for the bill is directly related to its interest in hiring foreign workers with specialized knowledge.

Labor

As of 2014, Microsoft had approximately 128,000 full-time employees.49 Of these employees, approximately 62,000 worked in the U.S. and 66,000 worked outside the U.S. These figures include nearly 25,000 new employees that were part of the Nokia acquisition. Microsoft also provides details about how many employees work within each of its segments. Nearly 44,000 employees work in research and development, 30,000 in sales and marketing, 23,000 in support and consulting services, 20,000 in manufacturing and distribution, and 11,000 in administration.50

However, Microsoft were planning to eliminate nearly 18,000 jobs in 2015 as part of restructuring in the wake of the Nokia acquisition. This included nearly 12,500 professional and factory positions specifically related to Nokia products and services.51

In addition to the projected downsizing, Microsoft was also implicated in controversial labor practices related to its contract with Foxconn Technology Group, which is also known as Hon Hai Precision Industry Company Limited. Microsoft had a contract with Foxconn for assembly of its Xbox gaming console; after Foxconn announced that the production lines for the Xbox 360 would be closed, workers were told that they would receive severance packages. The company latter reneged on that promise, prompting workers to climb to the top of the six-story assembly plant and threaten a mass suicide in response.52 In response to the story, Microsoft conducted an independent investigation of the dispute. In the end, Microsoft determined that the dispute was “related to staffing assignments and transfer policies, not working conditions.”53 Microsoft also reaffirmed its commitment to a Vendor Code of Conduct, which includes specifications for ethical labor practices and a respect for human rights.54

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Social Marketing (Support for Certain Causes, Initiatives, Charities)

The Microsoft Citizenship Report, which is released annually, provides an overview of the company’s activities in supporting various causes, initiatives, and charities.55 These include workforce diversity inclusion programs to promote underrepresented populations in the science, technology, engineering and math (STEM) fields. For example, the Digigirlz program encourages high school girls to pursue careers in technology. The company also awards scholarships to members of the lesbian, gay, bisexual, and transgender (LGBT) community as well as students with disabilities as a way to promote involvement in the technology industry.

In addition to these programs, Microsoft’s philanthropic giving was more than $1 billion for the first time in 2014. These funds were primarily given for two broad initiatives: (1) providing access to technology and skills training for youth around the world, and (2) donating technology to non-profit organizations. For example, Microsoft donated more than $948 million worth of software and hardware to more than 86,000 non-profit organizations.56 Furthermore, the company encourages its employees to volunteer or donate to non-profits of their choice, and the com- pany will match the donations up to $15,000 per employee.57

Although not specifically a Microsoft foundation, the Bill and Melinda Gates Foundation is also associated with the company through Bill Gates. The Bill and Melinda Gates Foundation has an endowment of approximately $43.5 billion, and claims to have paid out approximately $3.9 billion in grants during the 2014 fiscal year.58 The Foundation also claims to support global health and development programs in all 50 U.S. states and more than 100 countries.59 Its development activities include financial services for those living in poverty, agricultural development initiatives, and aid for areas effected by environmental disasters. Its health initiatives include the Global Fund to Fight AIDS, Tuberculosis and Malaria as well as programs for research and treatment of other diseases including the promotion of vaccinations.

Cultural Profile

Microsoft’s place in culture is one that has been defined by its history of negotiating partnerships with equipment manufacturers, thereby leading to the ubiquity of its software in business settings. According to the company, more than 1.5 billion people use the Microsoft Windows operating system everyday, and more than 1.2 billion people use Microsoft Office, which includes Microsoft Word, Excel, and PowerPoint.60 These figures suggest that nearly one in every seven people on the planet use Microsoft products on a daily basis. However, the company’s image has generally been associated with “suits and megacorps,” which can be contrasted with Apple’s marketing that is directed at a younger and more fashionable audience.61 Indeed, Apple’s “Get a Mac” advertising campaign, which ran between 2006 and 2009, featured John Hodgman playing the role of a human incarnation of a PC. Hodgman was dressed in a suit and tie, and was typically portrayed as having a very dry personality, while Justin Long played the younger, cooler, and more relaxed Mac.

On the other hand, Microsoft is working to change this perception by trying to attract more start-ups and Silicon Valley entrepreneurs to its company.62 Microsoft is also striking back at Apple in its advertising campaigns. Microsoft’s advertisements for its Surface Pro tablet feature the Surface Pro side-by-side with Apple’s MacBook laptop computer. The advertisements extol the wide- ranging functionality and portability of the Surface Pro in comparison with the limitations of the MacBook.

Beyond Microsoft’s brand image, the company’s products still feature prominently in everyday life for many people around the world. Microsoft’s software products, particularly its Windows operating system, remain the global leader in the personal computing market. Outside of its more traditional operating system business, the growth of the global video gaming industry has been

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staggering, and Microsoft’s Xbox console has been a prominent player in the growth of this industry. When combined with the number of businesses that use Microsoft software, Microsoft truly constitutes a company that has become an integral part of both work and leisure time for many people worldwide.

Concluding Remarks

As illustrated in this chapter, Microsoft rose to power after it negotiated strategic partnerships with original equipment manufacturers to have its software pre-packaged on shipments of personal computers. These partnerships ensured the ubiquity of Microsoft’s software worldwide, and they still enable the company to collect licensing fees for use of its products. However, the bundling of Microsoft’s Internet Explorer web browser with shipments of its Windows operating system ultimately led to the company’s conviction for antitrust violations in 2001. The antitrust conviction marked a turning point in Microsoft’s history, and the company began to expand its product lines, including the introduction of the Xbox gaming console in 2001.

Beginning in 2007 with the smartphone boom, Microsoft began to fall behind competitors like Apple and Google in developing an operating system for mobile devices. But Microsoft is currently going through a period of restructuring along with a shift in its business strategy. This is reflected in its latest filings with the Securities and Exchange Commission in the United States. The company claims to be shifting to a “devices and services” company, which will reorient the company’s strategy to focus more on cloud computing platforms and mobile devices.

However, the company’s core strategy of locking customers into Microsoft technology as a way to earn subscription or licensing revenue remains the same, regardless of the device or method used to access that technology. When viewed this way, even Microsoft’s philanthropic activities support this strategy, particularly when it donates software and hardware to developing countries and offers training and education on how to use software and devices. The same might also be said of Microsoft’s shift to embracing open source software. Seemingly, interoperability is a technical concern, but it is also an economic imperative. In other words, charity, sharing, interoperability, and a greater appreciation for open source are suitable corporate objectives as long as they attract more people to Microsoft products and ultimately contribute to the company’s bottom line.

Notes

1 Kurt Badenhausen, “Apple, Microsoft, and Google are World’s Most Valuable Brands,” Forbes.com, November 5, 2014, www.forbes.com/sites/kurtbadenhausen/2014/11/05/apple-microsoft-and-google- are-worlds-most-valuable-brands/, Aaccessed January 28, 2015.

2 Kerry A. Dolan and Luisa Kroll, “Inside the 2015 Forbes Billionaires List: Facts and Figures,” Forbes.com, www.forbes.com/sites/kerryadolan/2015/03/02/inside-the-2015-forbes-billionaires-list-facts-and-figures/, accessed March 2, 2015.

3 The original name for 86-DOS was actual QDOS, which stood for “Quick and Dirty Operating System,” but Seattle Computer Products changed the name to 86-DOS once it began marketing the product.

4 Richard J. Gilbert, “Networks, Standards, and the Use of Market Dominance: Microsoft (1995),” in The Antitrust Revolution: Economics, Competition, and Policy, eds. John E. Kwoka and Lawrence J. White (New York: University of Oxford Press, 2004, 409–429).

5 A digitized version of the Joint Development Agreement is available at http://tech-insider.org/ os2/research/acrobat/871126.pdf, accessed March 12, 2015.

6 James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: Wiley, 1992, 373.

7 Wallace and Erickson, Hard Drive, 373. 8 See United States v. Microsoft Corporation, 84 F.Supp.2d 9 (D.D.C. 1999). 9 Michael A. Cusumano and David B. Yoffie, Competing on Internet Time: Lessons from Netscape and Its Battle

with Microsoft (New York: The Free Press, 1998, 9).

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10 Peter Elstrom, “Microsoft’s $8 million Goodbye to Spyglass,” Businessweek.com, January 22, 1997, www. businessweek.com/bwdaily/dnflash/january/new0122d.htm, accessed May 20, 2014.

11 William H. Page and John E. Lopatka, The Microsoft Case: Antitrust, High Technology, and Consumer Welfare (Chicago: University of Chicago Press, 2007, 26–27).

12 United States v Microsoft, 84 F.Supp.2d 9 (D.D.C. 1999), see Finding 158. 13 Sherman Antitrust Act, 15 U.S.C. §1 (1890). 14 Sherman Antitrust Act, 15 U.S.C. §2 (1890). 15 In addition, all the intellectual property rights previously held by the two businesses were to be transferred

to the Applications Division, which was required to grant a perpetual, royalty-free license to the operating systems business so that it could license, develop, and distribute modified or derivative versions of the intellectual property. However, the Operating Systems Division was prohibited from doing this with the intellectual property related to the Internet browser (Internet Explorer). Aside from divesting the operations of these two businesses, Microsoft was ordered to transfer all the assets from either one of the divisions into a newly formed company, for which the transfer of ownership was to be accomplished by a distribution of stock to shareholders not connected with Microsoft.

16 Joe Wilcox, “Jackson Exits Microsoft Discrimination Case,” Cnet, March 13, 2001, http://news.cnet.com/ Jackson-exits-Microsoft-discrimination-case/2100–1001_3–254049.html, accessed March 12, 2015.

17 United States v. Microsoft, Final Judgement, Civil Action No. 98–1232 (Nov. 12, 2002), www.justice.gov/ atr/cases/f200400/200457.htm, accessed March 12, 2015.

18 Sharon Pian Chan, “Long Antitrust Saga Ends for Microsoft,” The Seattle Times, May 11, 2011, http://seattletimes.com/html/microsoft/2015029604_microsoft12.html, accessed March 12, 2015.

19 For more information, see John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2002).

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