How Microsoft became Washington’s favorite tech giant

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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.).

Mr. Smith’s strategy has been to cooperate with regulators who often have Microsoft’s rivals in the crosshairs. He has criticized Apple’s operation of its App Store—as Microsoft tries to bring its “Netflix for gaming” service to the iPhone. He has supported measures to cut into Facebook and Google’s dominance of digital advertising—which could benefit Microsoft’s search and digital-ad businesses. His support of tech-sector regulations has cut against efforts by Amazon, Microsoft’s fierce rival in cloud computing, to fight constraints on its business practices.

His team pulled Microsoft out of trade associations created to help the tech industry speak with one voice on government actions, and let a truce lapse with Google under which the companies had agreed to stop lodging regulatory complaints against each other.

Kent Walker, Google’s chief legal officer, said in a blog post early last year that Mr. Smith’s stance on some issues smacked of “naked corporate opportunism.”

While government scrutiny and competition between the biggest tech companies have been increasing, the stances Microsoft takes aren’t calculated to undercut competitors, Mr. Smith said in an interview.

Instead, he said the company is looking to align itself with the coming regulations and principles the company agrees with—even if it creates more regulatory hurdles.

He drew a parallel to banks, which faced new rules in the 1930s following a series of financial panics. “It turned them from unregulated companies to regulated businesses,” he said. “Resistance proved futile.”

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.

Following a major settlement with the U.S. Justice Department in 2001, which placed a number of restrictions on Microsoft’s business practices, Mr. Smith pursued the resolution of dozens of cases with governments and companies around the world. The new amity became a weapon in Microsoft’s competitive arsenal.

In 2007, Microsoft lost out to Google in acquiring ad-tech company DoubleClick, which the rival bought for $3.1 billion. Steve Ballmer, then Microsoft’s chief executive, told Mr. Smith to ensure that Google faced the same regulatory scrutiny it had weathered, said former employees who worked with Mr. Smith.

Mr. Smith lobbied officials to block the DoubleClick deal over Google’s dominance in digital ads. The effort failed but ignited a nasty fight with Google, which was beginning to compete with Microsoft in areas such as office productivity software, a core strategic focus for Microsoft.

Mr. Smith created a new group, called the Office of Strategic Relations, made up of lawyers and lobbyists, to push antitrust cases against Google in the U.S. and Europe. It backed anti-Google groups and gave financial assistance and expertise to companies challenging Google, such as small U.K.-based price-comparison website Foundem, which filed an antitrust complaint in 2009. European officials fined Google nearly $3 billion in connection to the complaint in 2017.

Mr. Ballmer wanted even more aggressive action and tapped political strategist Mark Penn, who engineered an attack-ad series against Google from 2012 to 2014 known as the “Scroogled” campaign. One video ad pointed out that Google search results feature paid advertisements, saying: “Don’t get Scroogled, you may be missing out on the best prices and highest quality products. For an honest search, try Bing.”

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.

Mr. Smith became one of the most enthusiastic supporters of Mr. Nadella’s efforts, said former employees. The new CEO promoted Mr. Smith to president in 2015, giving him more clout to meet with government officials and to testify in congressional hearings. The following year, Microsoft and Google agreed to a five-year truce to end complaints against each other to regulators. Around then, Mr. Smith shut down the Office of Strategic Relations competition group.

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. He outlined his grand, global vision for the tech world, including a Digital Geneva Convention to govern cyberwarfare, in his 2019 book “Tools and Weapons.”

As regulatory scrutiny of big tech companies has intensified recently, Mr. Smith has again taken the gloves off with Microsoft’s competitors, throwing its name behind policy proposals that rivals strongly oppose—often in cases where Microsoft’s bottom line would be impacted least.

“Microsoft has pursued a strategy of trying to position itself apart from Big Tech and as the most responsible player,” said Adam Kovacevich, a former Google lobbyist who now leads the Chamber of Progress, a nonprofit advocacy group funded by Amazon, Apple, Google, Facebook and other tech companies.

Frank Shaw, corporate vice president of corporate communications at Microsoft, said, “No one is perfect, but we strive to be principled, and occasionally this creates an opportunity to separate ourselves from the competition.”

Lawmakers and congressional aides say Microsoft has been more willing than other tech giants to make both senior executives and expert staff available as they tackle thorny tech policy issues, such as responding to cyberattacks or sending user data across international borders.

“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.

Mr. Smith has cultivated a relationship with Mr. Buck for years—grabbing breakfast with him soon after the Coloradan was first elected to the House in 2014. Both men graduated from Princeton in 1981 but hadn’t previously met, Mr. Buck recalled. Since then, Mr. Smith has regularly shared his private feedback and public support on tech legislation.

“I think that Brad learned from his experience as an attorney representing Microsoft that the best way to deal with those folks on the Hill is to go visit them in person,” said Mr. Buck. “I just don’t get that kind of feedback” from senior executives at other companies.

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.

Part of Microsoft’s regulatory advantage over its rivals has been that the company leans toward business customers rather than consumers. It is largely the consumer-facing tech businesses, dominated by Apple, Google, Amazon and Facebook, that have attracted controversy and scrutiny in recent years.

Lately, Microsoft has invested in growing its consumer-focused segments, including a revamped Windows app store and especially videogames. Its planned Activision purchase is designed to supply more original content for a videogame subscription service, in which users would pay a monthly fee to have access to a library of games.

With lawmakers, Mr. Smith publicly and privately encouraged new rules for large technology platforms. He endorsed a bill specifically targeting app stores, which in part would allow “side-loading” of apps outside of stores such as Apple’s—a potential way to distribute Microsoft’s videogame streaming product despite Apple’s restrictions on such apps.

Behind the scenes, Microsoft lobbyists raised concerns with officials about a separate bill aimed at restricting acquisitions by big technology companies, which would pose a hurdle to the Activision deal.

“Disappointing that Microsoft would lobby so hard for a law targeting its competitors,” Google’s Mr. Walker said in a tweet about the app store bill, which would also affect Google’s Play store.

Mr. Smith riled Google early last year when it was in the middle of a standoff with Australia over legislation that would effectively force the search giant to pay news publishers for content. Google threatened to pull its search engine out of Australia if the legislation was approved. Microsoft said it would be happy to follow the proposed laws and offered its Bing search engine as an alternative.

Google escalated the fight this week, with a blog post saying government workers think the public sector’s overwhelming use of Microsoft products is making them less secure to cyberattacks, according to a survey that the company commissioned.

Microsoft’s Mr. Shaw called Google’s study “disappointing but not surprising.”

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.

In recent years, Microsoft began pulling out of tech industry associations, such as TechNet and Internet Association, which lobbied on behalf of the industry. Microsoft didn’t want to be lumped in with other tech companies, said a person familiar with Microsoft’s lobbying strategy.

Mr. Shaw said the move wasn’t about other companies but had more to do with changes in dues.

Microsoft still cooperates with rivals, Mr. Smith said. Last year Microsoft joined Google and Amazon to back a set of new standards governing how cloud companies protect customers’ data. He said that as the industry matures it will “involve an appreciation of the importance of working together, even while we may also disagree about certain issues at the same time.”

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.”

—Emily Glazer contributed to this article.

 

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