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Microsoft’s Business Environment

1.0 Introduction
Businesses are essentially concerned with converting inputs from their environment (for example materials, labour and capital) into outputs which consumers in the environment want to purchase (Palmer and Hartley, 2006). All businesses operate in an environment which affects, and is affected by, their operations and decisions. The environment can be categorised into three levels. The microenvironment is comprised of firms and individuals that an organisation directly interacts with. The macro environment consists of general forces, such as political, economic, social, technological and legal forces, that will eventually impact on the microenvironment. The internal environment includes other functions within the firm. These three elements of the business environment are interdependent and interrelated, for example in the microenvironment; members of the local community may also be customers of the firm.

A firm’s business environment changes over time. Firms need to anticipate possible changes in their environments in order to take advantage of opportunities and/or minimise potential threats (Worthington & Britton, 2003). Therefore, understanding its business environment and the effect the environment has on business operations is of vital importance in ensuring the success of a firm.

This report will examine the business environment of Microsoft. It will provide a history of the company and an overview of its operations. Microsoft’s legal environment will be considered and evaluated and the threats and opportunities that future changes to the legal environment may present for Microsoft will be discussed.

2.0	Company Overview
Microsoft is an international computer technology corporation. Microsoft develops, manufactures, licences, and provides support for a broad range of software products and for computing devices. Global annual sales for 2005 were $ 39.79 billion USD and it has 63,564 employees in 85 countries (www.microsoft.com). Microsoft Windows operating system and the Microsoft Office software are its most popular products and each of these products have achieved near ubiquity in the desktop computer market.

The business was founded in Albuquerque, New Mexico on April 4, 1975 by Bill Gates and Paul Allen. Its original objective was to develop and sell BASIC interpreters for the Altair 8800 computer. The company’s first international office was opened in Japan on November 1, 1978. Company restructuring on June 25, 1981 resulted in the business becoming incorporated and the name was changed to ‘Microsoft Inc.’.

In 1981, IBM assigned a contract to Microsoft to provide a version of the CP/M operating system to be used in future IBM Personal Computers (PCs). As more IBM PC clones were marketed, Microsoft used its position to dominate the home computer operating system market by licensing its own operating system MS-DOS (Microsoft Disk Operating System) for use on non-IBM PCs. Microsoft entered the computer hardware market with the ‘Microsoft Mouse’ and opened a book publishing division in 1983.

In 1986 Microsoft relocated to Redmond, Washington and became a public company. By 1993, Microsoft Windows became the most widely used GUI operating system in the world. In 1989, the successful introduction of the Microsoft Office business software suite provided Microsoft with a market share in excess of its competitors. Microsoft created its own research organisation in 1991.

Until 1995 Microsoft’s activities were mainly business orientated. However, with the release of Microsoft Windows 95 in August 1995, the company began a transition towards consumer-orientation. It expanded its product line into computer networking and the World Wide Web.

In 2005 Microsoft rationalised its business into three core divisions. Microsoft’s core product, the Windows operating system, is produced by The Microsoft Platform Products and Services Division. It provides an operating system, Windows Server 2003, and software suitable for network servers. MSNBC, its cable television network, and MSN Messenger, an instant messaging client is also part of this division. The Microsoft Business Division develops financial and business management software, such as Microsoft Office, for companies.

Microsoft’s Entertainment and Devices Division expands the Windows brand into many markets such as the PDA market with the use of Windows CE/ Windows Mobile 5 and the mobile market with the use of ‘Windows-powered’ Smartphone products. It also has footholds in other markets, with assets including the Microsoft Encarta multimedia encyclopaedia. The company markets home entertainment products such as Microsoft’s game console (the Microsoft XBox, XBox 360) and the television-based Internet appliance MSN TV. It sells computer games that use Windows PCs and video games are developed and published for Microsoft’s game console. Computer-related hardware products are marketed by Microsoft. This division also incorporates Microsoft’s Macintosh Business Unit. Apart from Apple, it is the largest developer of Macintosh software.

3.0 Legal Environment
Microsoft’s success has seen it become the focus of many legal challenges. The Windows operating system in its various forms is reported to be installed on over 90% of the world’s pc’s. (Information Week, 10th April 2006). This has allowed Microsoft to bring to the market other software products as part of or closely linked to the core operating system. This monopoly situation has resulted in various antitrust cases being brought against them by various government bodies around the world.

3.1 Summary of United States v Microsoft
This case was filed on 18th May 1998 and it was not until 30th June 2004 that the Department of Justice (DOJ) settlement was approved in a judgement from the courts. This case involved 20 states alleging that Microsoft were guilty of abusing its Monopoly power over other competing technologies. At the core of this case was the browser war between the Microsoft Internet Explorer browser and Netscape’s Navigator product.

Two main allegations were placed against Microsoft, firstly that they were abusing their monopoly power by bundling the browser with the operating system and secondly that they were unfairly restricting the market for competing products as they had to be downloaded which was slow and also that their application programming interfaces favoured their own Microsoft product.

The outcome of the initial case held in favour of the DOJ with the judge reporting that Microsoft had abused its power against other companies and technologies such as Apple, Java, Netscape, Lotus Notes, Real Networks, and Linux. The judge ordered that Microsoft be split into two companies one to produce the operating system and the other to produce other software products.

This decision was appealed and heard by the federal appeals court, which overturned the earlier decision. They did affirm in part the earlier judgement of monopolisation however on 6th September 2001 stated that they would not seek to split Microsoft but would pursue a lesser antitrust penalty.

The settlement finally approved on 30th June 2004 involved Microsoft sharing the Application Programming Interfaces with third party companies and appointing a panel that would have access to Microsoft’s records and source etc. for 5 years to ensure compliance.

3.2 Other Antitrust Cases
With Microsoft’s hold on the market other companies have taken cases against Microsoft and made similar allegations as in the case outlined above.

On 23rd January 2002 AOL Time Warner Inc. took a case against Microsoft for actions against Netscape (which AOL had acquired) and settled for $750 million on 29th May 2003.

On 8th March 2002 Sun Microsystems Inc filed an antitrust case against Microsoft, alleging extensive anticompetitive practices. This case involved the use of Java technologies. Sun later settled on 2nd April 2004 in exchange for a $1.6 billion payment from Microsoft.

With the increased use of audio and video, Real Networks on 18th December 2003 filed a case against Microsoft again accusing it of illegally using its monopoly position in this field. 11th October 2005 seen the companies settle the dispute in a deal worth $761 million to Real Networks Inc.

3.3 Microsoft and the European Union
Most developed countries have introduced law to try to remove market imperfections that are deemed to be not in the best interest of the consumer. The European Union (EU) is at the forefront of this battle to remove market imperfections. Therefore in 1998 when Sun Microsystems alleged to the EU Commission that Microsoft was abusing its dominant position within the PC operating systems market, the EU Commission ordered proceedings against Microsoft Corp. EU Press Release 03.08.2000 – The European Commission at the initiative of the Commissioner in charge of competition, Mr. Marion Monti, has sent a statement of objections to Microsoft Corp for allegedly abusing its dominant position in the market for personal computer operating systems software by leveraging this power into the market for server software.

At the time of Suns complaint Microsoft held 95% of the market share. Initial investigations by the EU Commission found evidence that backed up these claims. Then in 2003 the EU Commission addressed a final Statement of Objections that, according to Mario Monti (2003) ‘includes the identification of appropriate remedies and gives Microsoft a last opportunity to comment’ (EU Press Release 06.08.2004). In 2004 after a five-year investigation Microsoft was found guilty of breaking EU competition law, (EU Press Release (24.03.2004)) by leveraging its near monopoly in the market of PC operating systems (OS) onto the markets for work group server operating systems and for media players.

Microsoft was fined Euro 497 million plus ordered to disclose to its competitors the necessary information to enable the competitions products to be able to ‘talk’ with Windows OS. Microsoft Corporation had broken the ‘EU Treaty’s competition rules (Article 82) by abusing its near monopoly position. Palmer and Hartley (2006) explain ‘a monopoly means that one person or organisation has complete control over the market’. And in the case of Microsoft they had been found to have deliberately restricted the interoperability between Windows PCs and non-Microsoft servers giving them near complete dominance.

In order to comply with the EU Commissions directives Microsoft has developed the Work Group Server Protocol Program (WSSPP, or Program), which according to Microsoft enables competitors the use of its technology in the manner required by the EU Commission (Microsoft Implementation of European Commission Decision 25.01.2005 – Microsoft web-site). However in a press release dated 22nd December 2005 from the EU Commission, Microsoft had until 15th December 2005 to meet all obligations laid down by the EU Commission. Therefore it would appear that Microsoft had only reacted to another threat from the commission.

It would now appear that Microsoft has run in to more problems with the EU Commission. In an article in EU Business (29.03.2006) Microsoft have had to attend a hearing with the EU Commission regarding their failure to comply with the landmark 2004 competition ruling. Failure to comply this time will result in a daily fine of $2.4million dollars a day, back-dated to December 15, 2005. Microsoft’s top lawyer Brad Smith states in the article ‘we need clear guidance to find a solution. Ultimately, the point I think we’ll underscore is this: we have complied and we’re willing to do more’ (Microsoft battles to avoid daily fines in the EU standoff 29.03.2006 – www.eubusiness.com). In the same article the EU Commission warned that ‘it would open a new front in the standoff with Microsoft if its new delay-plagued Vista operating system did not respect anti-trust law’.

3.4 Microsoft and Asia
With Asia becoming one of the fastest growing markets in the world it is no wonder that Microsoft are heavily invested into it. It may not have the same legislative frameworks as the USA and Europe and there may be areas not as developed but Microsoft still has to conduct itself properly. The Japanese Fair Trade Commission (FTC) has investigated whether Microsoft attempted to illegally pressure Asian PC makers to use Windows XP. This in turn has prompted the Korean FTC to investigate Microsoft Korea. Korea, like the EU, issued Microsoft with an anti-trust ruling. Microsoft has rejected the ruling and is appealing in the best interests of the consumer. However Korea feels, like the EU, there should be two versions of Windows (Microsoft files formal Korea Fair Trade appeal by Ed Sutherland – 27.03.2006).

The Observer (March 28th 2004) commented that Microsoft had run into trouble playing its worldwide monopoly. It also suggested that Asia is risky territory for Microsoft and in particular China where the (free) Linux operating system has a better chance of appeal against Microsoft’s more expensive Windows software.

3.5 Intellectual Property Rights (IPR)
According to Daniels, Radebaugh and Sullivan (2002) is the creative idea, innovative expertise and intangible insight that give an individual company a competitive advantage. IPR can be broken into two sections: industrial property and copyright. In the case of Microsoft industrial property would be trademarks (symbol) and software. Primary areas of use for copyright would be web tools and software. IPRs enable the owners the right to exclude others from using or accessing their property. However in the case of software this is very difficult. Microsoft has very stringent guidelines for the use of any of its property.

In an article by Mark Webbink entitled “A new paradigm for intellectual property rights in software” he argues that the current US system for patents has many difficulties and states that Microsoft have currently 4,000 issued patents and more than 10,000 pending applications. He goes on to say that the “software industry is producing thousands upon thousands of inherently meaningless software patents of dubious value”. In addition to trivial patents he highlighted the fact that a third of software patents tested by litigation are invalidated. The article further comments on the lead the European Commission are taking to establish a uniform system for software patents across the European Union. Whilst the final outcome of this process is unknown at this time it is likely that tests for acceptance of new patents will be more stringent than that currently operated in the US. The article concludes arguing for reform of the US system and includes the General Council of Microsoft, Brad Smith and the author proposing a number of changes. These include harmonisation with Europe to narrow the scope of what is patentable.

It is interesting that this whole area of Intellectual property rights is key to the defence of Microsoft in their current case with the European Commission. The Commission demand that Microsoft share information about their systems so that other software makers can compete. Information Week (10th April 2006) report that

“Microsoft will argue that rivals were always able to make interoperable software and the Commission's demands threaten Microsoft's intellectual property rights. Microsoft will essentially argue that it should not have to give away its intellectual property, having spent effort and money inventing it, only because it became successful.”

3.6 Copyright in Europe
Microsoft has launched a legal fight with ‘phishers’ in Europe; similar to the legal campaign it has successfully started in the United States. These are fraudulent web sites claiming to be Microsoft sites in order to steal consumers’ private details. Neil Holloway (21.03.2006), president of Microsoft for Europe, has said ‘ Phishing is a crime. It undermines consumers’ trust in the internet and is an impediment to European policymakers’. Webopedia defines Phishing as the act of sending an e-mail to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft. Microsoft intends to pursue these people for copyright infringement. Microsoft has helped take down 4744 phishing sites worldwide by collaborating with police forces (Microsoft to fight phishers in Europe by Candance Lombardi – 21.03.2006). Microsoft knows that by ‘weeding’ out these criminals they are protecting their image and future. Palmer and Hartley (2006) feel that the Internet presents a serious risk of copyright infringement liability.

3.7 Piracy
Software Publishers Association estimated in 1998 that in Russia 92%, China 96%, Egypt 85% and Indonesia 93% [(source p249) Daniels, Radebaugh and Sullivan (2002)] of all software in these countries was pirated. According to Daniels, Radebaugh and Sullivan (2002) China in 2000 was estimated to have 25 CD laser manufacturing laser disc factories supplying 50 million pirated commercial CDs. Bill Gates (2006) has told business leaders at the World Economic Forum in Davos ‘that beating software piracy in China and India and getting compliance up to US and European levels will take 10 years’ (source Piracy a ten-year fight, says Gates by Ben Hirschler in Davos – 30.01.2006 – http//australiait.news.com).

The Chinese government have issued a decree on 31st March 2006 (Pak Tribune, 14th April 2006) requiring PC manufacturers to install a licensed operating system before the machine leaves the factory. It would seem that common practice before this was to sell ‘naked’ PC’s upon which the purchaser would install a pirated copy of the operating system. Microsoft have recently signed a number of deals with top PC manufacturers in China and included a $250 million 3year deal with the second largest PC manufacturer. It is expected that a similar deal will be struck with the largest PC manufacturer Lenovo Group Ltd. These and similar deals will help to protect Microsoft’s intellectual property.

In developing markets software makers are happy to turn a blind eye to piracy as this builds up brand recognition (source www.asiamarketresearch.com - 13.04.2006). In the UK Microsoft has a launched a campaign against software piracy – it is called ‘Keep IT Real’. Microsoft hopes to reduce the piracy level for Windows by 5% to 12% within three years which, it is hoped will help the UK economy (source Microsoft reveals piracy battle plan for the UK by OUT-LAW.COM – 20.02.2006). Microsoft has decided it is time to fight back.

3.8 Employment Law
Steven Ballmer, CEO Microsoft (2004), states that Microsoft employees are responsible for understanding and complying with the Business Conduct, applicable government regulations and Microsoft’s policies (source Letter from Steven A. Ballmer, Chief Executive Officer – 04.05.2004). With 65,000 employees worldwide, in the USA, Europe and Asia, Microsoft must be aware of all the different legislation governing these employees. Daniels, Radebaugh and Sullivan (2002 p332) cite governments discourage or legally restrict the number of allowable expatriates within a nation for political, cultural and economic reason. For this reason Microsoft must recruit from the countries they are setting up and cannot take ‘home grown’ employees. This can be viewed as a positive move as local managers will be best positioned to interpret the local legislation governing their area.

Microsoft offers equal employment opportunities to all employees as well as a safe and healthy work environment. Microsoft was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mother magazine (source http://en.wikipedia.org).

3.9 Codes of Conduct
Palmer and Huntley (2006) comment that all systems need rules if they are to operate efficiently and effectively. Microsoft has developed their Standards of Business (SBC) to ensure that all employees have a set of clear guidelines when doing business on behalf of Microsoft. From this Microsoft has developed further codes of professional conduct such as: Procurement Code of Professional Conduct and the Finance Code of Professional Conduct (source www.microsoft.com - codes of conduct 14.04.2006). Daniels, Radebaugh and Sullivan (2002) suggest that codes help clarify a collective attitude toward specific company practices – these codes in turn enable governments to pass restrictive legislation without fear of it being out of step with world opinion. By setting codes of conduct Microsoft is telling the world that their organisation works to ethical standards.

5.0 Opportunities
Microsoft hires many domestic American workers who are foreign workers with H1B visas – Bill Gates has criticized congress for the cap on H1B (source http//:en.wikipedia.org/wiki/Microsoft 14.04.2006) – is this done to enable the moving of these foreigners to their original country – complying with legislation?