Sticking a spanner in the chips: The rise of the computer firm Microsoft was dramatic. But was it fair? Tim Jackson reports

CORRECTION (PUBLISHED 20 JULY 1994) INCORPORATED INTO THIS ARTICLE

PERSONAL computers are one of the most fiercely competitive businesses in the world. Hundreds of computer makers and thousands of software firms jostle for advantage, offering products that do essentially the same job. Prices fall year after year; firms that cannot keep pace go under as swiftly as new ones start up.

Yet between the makers of the machines and the writers of the software that runs on them, one firm has carved itself a comfortable and highly profitable position. Microsoft, Inc supplies about nine out of ten of the world's PCs with the 'operating systems' that control the computer's memory and disc drives. Last year, it made nearly dollars 1bn in profits on sales of dollars 3.75bn. Its founder, Bill Gates, has become one of the richest men in the world. The question raised by an anti-trust investigation that has just been settled, however, is whether he did so by fair means or foul.

In 1980, Microsoft was just one of scores of struggling software houses on the West Coast of the United States, trying to make money from the transition from large office systems to personal computers. Then Gates struck one deal that changed his company's fortunes: he supplied an operating system for IBM.

The IBM Personal Computer suddenly made PCs respectable; and as others rushed to put out 'clone' machines, the operating system that Gates had sold - known as the Microsoft Disk Operating System, or MS-DOS - suddenly became an industry standard. Computer makers had to make sure their machines could run it; software companies had to make their programs compatible with it.

Gates's big break came by a combination of accident and design. IBM first went to another software house, but its owner was out, flying his private aircraft to another meeting. Not only was Gates in when IBM called; on being summoned to its headquarters, he abandoned his usual grubby T-shirt in favour of a shirt and tie. He was willing to promise IBM an operating system, even though he did not yet have one. In the event, he bought a system written by another company for a song, made a few changes, and licensed it on to IBM, standing on the giant's shoulders.

Over the next decade, as IBM's dominance of the PC industry ebbed, Gates diversified from operating systems into applications, launching a word-processing package, a spreadsheet, a database and scores of other programs. And with the introduction of Windows, he moved in on the last part of the market over which Microsoft held no sway: the sort of computing exemplified by the Apple Macintosh, which allowed users to dispense with the syntax of an obscure computing language, and instead tell the computer what to do by pointing at pictures and clicking a button.

The rise of Microsoft brought Gates admirers as well as billions of dollars, and the firm became a symbol of the new flexibility of American industry when its stock- market value overtook that of IBM. But the techniques the company used to stay on top soon began to cause disquiet. Competitors began to complain that Microsoft was abusing its dominant position in the software market, just as other competitors had alleged abuse by IBM in the hardware market. Microsoft, they said:

Found a way of making it uneconomic for computer makers to license operating- system software from other firms. Microsoft would ask each maker to pay a royalty based on its total production of PCs, rather than just the number in which MS-DOS was installed. This 'per-processor' deal meant the maker would be paying twice over if it installed a cheaper operating system from a rival firm on some of its machines.

Tied up software houses in non-disclosure agreements that were intended to protect Microsoft's secrets, but also effectively prevented their programmers working on rival operating systems.

Microsoft was also accused of resorting to less overt methods to preserve its position. A book published in 1992 alleges that Microsoft deliberately designed a new version of MS-DOS so that Lotus 1-2-3, then the world's most popular spreadsheet, would not work properly on it. This year, Microsoft was forced to pay dollars 120m in damages to Stac Electronics, a company that had invented a way of squeezing twice as much information on a computer's disc drive. The smaller company had been turned down when it tried to sell the idea to Microsoft - only to see the feature appear in the latest version of MS-DOS.

At the weekend, the US Justice Department and the European Commission dropped a wide-ranging anti-trust investigation against Microsoft that had been begun by the US Fair Trade Commission four years earlier. In return, the company undertook to change its contracts and business methods, notably its per-processor deals.

At first sight, the settlement seems a defeat. Microsoft will no longer be able to apply heavy-handed tactics and its competitors will now have a chance of success in markets from which they have hitherto been effectively sidelined. But Microsoft admitted no wrongdoing, and was required to pay no fines. So Gates can now return to running his company, free of the shadow of years of further legal action.

The result is that Microsoft's prospects are now as bright as ever. It has a new operating system up its sleeve to succeed Windows - codenamed Chicago - which should wrong-foot the competition. And while others in the industry are struggling to stay alive in personal computers, Gates's interests have already moved on. He and his company are moving into new areas: electronic reference books, smart photocopiers and telephones, and on- line information systems.

All this diversification may allow Microsoft to remain as successful in the next decade as it has been in the last. The company and its founder have no intention of suffering the same fate as IBM, whose arrogance turned into bureaucracy and then into decline. This flexibility is certain to keep Microsoft on top for some time to come.

(Photograph omitted)