The Microsoft Way: The Real Story of How the Company Outsmarts its Competition.

By Randall E. Stross Addison-Wesley, $25

In February 1995, federal judge Stanley Sporkin rejected the antitrust settlement reached a year earlier by the Justice Department and the Microsoft Corporation. Judge Sporkin set aside the consent degree, saying it was a mere wrist-slap that did little to curb the big software maker's "monopolistic practices." His decision, Sporkin explained, was based on his own study of the issues, particularly his recent reading of Hard Drive, a book that dealt harshly with Microsoft.

Bill Gates and Microsoft's legal team were aghast that a federal judge would be swayed by a book written by a pair of Seattle newspaper reporters, and, indeed, Sporkin's ruling was eventually overturned. Yet ever since that unnerving episode, the young software dynamos in suburban Seattle must have longed for a sympathetic treatment that would present Microsoft's case--in particular, the case Microsoft would most like to see made is that antitrust watchdogs, the courts, competitors, and some economists should stop fretting, lean back, and just let the markets of the information age work their magic.

It is impossible to imagine a book doing so more forcefully than The Microsoft Way by Randall E. Stross. In the author's view, the arguments of Microsoft's rivals are nothing more than self-interested carping; the Justice Department's antitrust officials don't grasp how high-technology markets work; and Microsoft won its dominant role in the industry fair and square. And, he asks, where is the public policy issue when the price of Microsoft's products keep dropping?

These points are all--more or less--reasonable. The trouble with the book is that Stross makes them with such histrionic overkill that they undermine his case. The heavy breathing begins with his depiction of Microsoft as generally hated--as, in his terms, "the apparent apotheosis of crude, ruthless, business power" and later as "the handy villain" His book then becomes a "revisionist view" set against the misguided popular opinion of Microsoft as the epitome of corporate nastiness. Of course, Stross is a professor of business at San Jose State University and a fellow at the Center for East Asian Studies at Stanford University, so perhaps at the Silicon Valley dinner parties he attends people despise Microsoft. But the last time I looked, Microsoft was one of the most admired companies in America, and Bill Gates was a national hero. He may not be Michael Jordan, but all across the country, many bright kids today want to be like Bill.

Its ostensibly villainous reputation has certainly not hindered Microsoft in itS recruiting efforts. And indeed, Stross does an excellent job of describing the "learning culture" that has been crucial to Microsoft's becoming a great company. The formula: hire the smartest young people you can find, challenge them constantly, force them to take risks, recognize mistakes quickly, and then correct them.

Not content to merely describe, Stross veers off to all but suggest that any criticism of Microsoft is merely the misplaced resentment of the lesser beings who reside outside the Olympus of intellect in Redmond, Wash. "To talk about Microsoft and public antipathy is to lay bare our longstanding national ambivalence about intelligence," the author writes at one point. Later, he asserts, "Knowing of the public's unease about smarts, Microsoft has had to police itself to suppress any signs of arrogance concerning its reservoir of above-average minds" Right. If Stross had found a deep vein of modesty or self-deprecating humor in Redmond, that would have been a revelation.

The author's penchant for this kind of overwrought froth is a shame, because it gets in the way of what is often a cogent narrative. When Stross sets aside his soapbox, he has a good story to tell--the history of Microsoft's expansion since 1990. The best chapters are the ones on how the company first stumbled and then vanquished the traditional encyclopedia industry; its courtship and competition with personal-finance software maker Intuit; and its corporate overhaul to address the challenge posed by the Internet.

The evolution in thinking of Microsoft's top management, detailed in e-mail memos to which Stross was given access, is fascinating Much of it comes from Nathan Myhrvold, a playful astrophysicist-turned-software exec who now heads Microsoft's research and development unit. The Myhrvold memos mirror the man, articulate, thought-provoking, and irreverent (only the last characteristic is rare at Microsoft). In one missive, he urges the company to invest heavily in products and services for the successor to today's Internet--the so-called information highway, which promises to bring to home screens everything from movies to news to volumes from the world's great libraries at the tap of a button.

Microsoft certainly has the money to invest, Myhrvold pointed out in a March 1994 memo, noting that the company was sitting on a cash nest egg of $2.5 billion that was being added to at the rate of $100 million a month. Microsoft, he advised, should take the lead in building an empire on the information highway. The company's technical skills, he added, should provide another advantage. "J.P. Morgan didn't really have to understand the process of steel-making very deeply to create U.S. Steel," Myhrvold wrote. "Would-be Morgans of the information highway may find that there are plenty of technical gotchas which give folks like us the edge"

Microsoft's financial muscle is a byproduct of its dominance of the software industry. The company clearly got a big boost when, in 1981, IBM chose Microsoft to supply the operating system for its personal computers. (An operating system controls the fundamental operations of a computer, and gives the machine its basic look and feel.) Still, Microsoft's stunning success over the years is mainly attributable to itS own efforts. What Bill Gates has demonstrated, Stross explains, is that he understood the economics of the software market earlier and to greater effect than anyone else. Time and again, he acted and bet heavily on that understanding--and won.

Simply put, Gates recognized that the PC software business tends toward monopoly. So aggressive price-cutting, deals with manufacturers, and other steps, however costly in the short term, are cheap investments if a company's product can become the standard in the industry. Once it does, as did Microsoft's DOS and Windows operating systems, and later its word processing and spreadsheet programs, the financial payoff and marketplace advantages are enormous. Customers are reluctant to spend the time and money to switch to a rival software product, especially since coworkers and friends use the existing industry-standard program. Economists describe these forces with terms like "network effects" and "positive feedback cycles"

When Microsoft entered the on-line business in 1995, the company used its new operating system, Windows 95, to market its on-line service. The icon for the Microsoft Network appeared on the screen, offering a point-and-click sign-up for the service. The tactic is known as "bundling" Competing services, like America Online, can have their icons bundled onto machines by personal computer manufacturers, but they must pay for the privilege.

Microsoft Network has not done as well in the early going as Microsoft's rivals feared. But to argue, as Stross does, that the bundling practice is thus not a marketing advantage for Microsoft seems a stretch. And similarly, to point out that Microsoft has successful competitors in segments of the software business, like Intuit in personal-finance programs, hardly proves that Microsoft's control of the operating program market is not an advantage.

Consumers, to be sure, benefit from technology standards. Standards work to lower prices and help accelerate the spread of new technology. Should Microsoft be punished merely because by dint of smarts, hard work, and luck it happens to dominate one of those standards? Absolutely not, argues Stross, who seems to think Microsoft is being persecuted by the Justice Department and the press. But so far, the Justice Department has agreed with Stross for the most part. The consent decree settling the government's antitrust investigation of Microsoft's operating system business was a wrist-slap, requiring only a small change in its licensing contracts. And although the Justice Department has looked at Microsoft's bundling of Microsoft Network on Windows 95 and has subpoenaed documents on the marketing of its Internet products, as of this writing, the government has taken no action on either front.

In economics, it is said, fairness is not an issue. But in matters of public policy, it often is. In Microsoft's case, the issue of legitimate interest to the government is not Microsoft's domination of current markets, but whether it uses that power to unfairly inhibit competition in new markets. So unless the Internet puts computing on its head, thus eliminating Microsoft's considerable advantages, the company will likely find that continuing government scrutiny is a fact of life.