How Microsoft Became Washington’s Favorite Tech Giant
President Brad Smith has taken an amicable role with regulators. Rivals say he also directs negative attention toward them. Microsoft’s Activision deal, under FTC review, will test the strategy.
www.wsj.com
When a congressional committee was preparing to publicly interrogate the CEOs of four tech giants in 2020, Microsoft Corp. President Brad Smith, whose employer wasn't on the hot seat, gave the lawmakers a private briefing. When Australia proposed a law to force Facebook and Google to pay for news articles, Mr. Smith endorsed it and offered Microsoft's Bing as an alternative. When the U.S. considered similar legislation, he went to Washington to testify in front of Congress to show his support.
Mr. Smith, a Microsoft veteran of almost 30 years and president for seven, has maneuvered his company to an enviable position in a regulatory environment that is increasingly hostile toward tech titans. Once an antitrust pariah itself, Microsoft is now widely seen by regulators as the friendly party among today's top tech companies, a status government officials and Microsoft insiders say flows largely from Mr. Smith's cultivation of friends in Washington.
Rivals say he is also skilled at directing negative attention toward competitors—to Microsoft's benefit.
The 63-year-old's influence is being tested as the company tries to smooth the way for its largest-ever acquisition, a $75 billion purchase of Activision Blizzard Inc. While regulators have yet to approve the deal, lawmakers and industry representatives say it is hard to imagine any of the other four biggest U.S. tech companies—Apple Inc., Amazon.com Inc., Google parent Alphabet Inc., or Facebook owner Meta Platforms Inc. —being in a position to even attempt to win approval for an acquisition of that size in the current environment.
"If this was any of the other four regular suspects, the blowback would be much greater," said Sen. Mark Warner (D., Va.).
Seniority and experience
Few other tech executives have Mr. Smith's combination of seniority within their companies and experience grappling with political and regulatory power centers. One of the longest-serving leaders inside Microsoft, he joined in 1993 and served as a legal adviser through its bitter antitrust disputes with regulators around the world in the 1990s.
Microsoft's general counsel in the '90s had a more confrontational approach with regulators, said former Microsoft employees. In 2001, Mr. Smith made a pitch to Microsoft's board of directors to become the next general counsel with a single PowerPoint slide that said: "It's time to make peace." He started the job the next year.
Mr. Smith's role changed again after 2014, when Satya Nadella, a soft-spoken engineer, became CEO and quickly moved to shift Microsoft's culture from combative corporate politics to more collaboration within and outside the company. One of his first public actions was to make Microsoft's Office productivity software available on Apple's iPad—a move away from tying its applications closely to its Windows operating system.
Clash with rivals
Since taking the president's job, Mr. Smith has become a more prominent public face of Microsoft. He relished the role—members of his team sometimes referred to him as "Governor Smith"—and often talked about having cell numbers of important members of Congress, said people who worked with him.
"We've tried to identify the concerns that people might have and then go address them proactively," Mr. Smith said. "I think that's going to serve us better in getting [the Activision] acquisition approved."
After the company announced the Activision bid early this year, Mr. Smith's team reached out to aides of Rep. Ken Buck, the top Republican on the House Antitrust Subcommittee, whom the tech executive has known for years.
Mr. Smith wanted to assuage any concerns the Colorado congressman might have about the impact of the deal on industry competition, an issue Mr. Buck has championed.
Mr. Buck, one of the most vocal critics of big technology companies in a Congress full of them, seemed persuaded. Within hours of the deal's announcement, he posted about it on his Twitter account, which he routinely uses to assail Amazon, Apple, Facebook and Google. "The assurances I've received from Microsoft are encouraging," he tweeted, adding that Microsoft said it would emphasize access to gaming titles and competition in the marketplace.
Focus on market power
In mid-2020, Mr. Buck and other members of the House antitrust panel were preparing for a contentious hearing with the CEOs of Amazon, Facebook, Apple and Google on the companies' market power. Subcommittee staff organized a virtual meeting with lawmakers of both parties, envisioned as a sort of pep talk before they faced the tech titans.
Mr. Smith was the guest speaker. Over an hour, he delved into Microsoft's history under Washington scrutiny. One takeaway for lawmakers, two attendees recalled, was that asking CEOs tough questions is a good thing.
Mr. Shaw, the Microsoft spokesman, said Mr. Smith's message was that the experience had taught the company it needed to address "heightened expectations" and "to get out and listen to what other people had to say and do more to help solve technology problems."
Executives at other companies privately fumed that Microsoft was a collaborator on the committee's investigation, rather than a target, according to people familiar with their thinking.
Microsoft annoyed Apple last year when Microsoft was an important witness for "Fortnite" maker Epic Games Inc.'s case against Apple, which claimed anticompetitive practices in the App Store. The case mostly swung in Apple's favor and is now under appeal. Apple accused Microsoft of being the puppet master behind the claims. "A reasonable observer might wonder whether Epic is serving as a stalking horse for Microsoft," Apple said in a court filing.
Activision in spotlight
The Activision deal puts Microsoft in the spotlight with regulators. Microsoft doesn't expect to close the deal until June 2023. It is being reviewed by the Federal Trade Commission, led by Chairwoman Lina Khan, who has broadcast her plans to increase scrutiny of mergers.
On Thursday, four U.S. senators sent a letter to the FTC citing concerns about the deal, saying it could undermine employees' calls for accountability over alleged misconduct at Activision.
Around the time the deal was announced in January, Mr. Smith said he woke up at 4 a.m. with his mind full of ideas. Unable to fall back asleep, he began sketching out a plan to blunt criticism by addressing competition concerns head-on.
He called Microsoft's gaming chief, Phil Spencer, at 8 a.m. to hammer out plans to contact Sony Group Corp. , Microsoft's main competitor in gaming, to let it know Microsoft would continue to make Activision games for Sony's PlayStation consoles.
Mr. Smith decided with Mr. Nadella, the CEO, to announce that Microsoft planned to pre-emptively make its app store more open than Apple's without government pressure, such as by not requiring developers to use a proprietary payment system.
The company saw this as part of a pitch to regulators around the world that it would be a good steward of a huge addition to its already big gaming business. The next month, it unveiled the new app store principles in Washington to lawmakers and the press.
"We're more focused on adapting to regulation than fighting against it," Mr. Smith told reporters. "We want to be clear with regulators and with the public that if this acquisition is approved, they can count on Microsoft to adapt to the rules that are emerging, and run our business in a responsible way."
