TRIPPING UP THE TITAN

Court documents do not record what Bill Gates said to Anne Bingaman on the telephone last July when the software titan and the trust-busting Assistant Attorney General finally struck a deal. Gates had made little secret of his anger at the Justice Department for looking into Microsoft’s empire and the sometimes ferocious tactics it has used to build it. At one point during an earlier antitrust investigation by the Federal Trade Commission, Gates lost his temper and started shouting at the commissioners. It was only after the Justice Department issued a “We’ll see you in court” ultimatum-and then let the deadline slip by a day-that Gates finally agreed last summer to settle.

In public statements issued afterward, the relief on both sides was palpable. “We got everything we could have hoped for,” said Bingaman. Microsoft, for its part, declared the deal “reasonable,” all the while insisting that the company had done nothing illegal and was going along only to avoid what could have been the biggest antitrust case since the government tried-and failed-to break up IBM in the 1970s. All that was required to seal the agreement was a review by a federal judge.

But what Gates and Bingaman could not have foreseen is that the case would land before the ornery intellect of Stanley Sporkin-a former chief of enforcement at the Securities and Exchange Commission who never learned the meaning of the words “It’s none of my business.” The more Sporkin learned about Microsoft in hearings that began last fall, the less he liked the settlement that Gates and Bingaman had worked out and the role that he, as the reviewing judge, was being asked to perform. “I will not be played for a fool,” he warned during a heated session last month.

Thus the stage was set last week for one of the most bizarre confrontations in the history of American antitrust enforcement-one that could derail the strategic plans of the world’s largest PC software company while raising questions about how effectively the U.S.-or any government-can control monopolies carved in silicon, software or the borderless regions of cyberspace.

On Tuesday, Judge Sporkin flatly rejected the consent decree-a rebuke of the kind not seen since 1982, when Judge Harold Greene ordered that the AT&T breakup agreement be modified to boost the competitive chances of the Baby Bells. Then, two days later, Attorney General Janet Reno appealed Sporkin’s decision, vowing to fight it, with Microsoft’s help, in court. In effect, the trust busters had become the allies of the trust they had vowed to bust.

While Sporkin’s decision may be on shaky legal ground, he gave voice to a growing concern in government and industry about the role Microsoft plays in the country’s fifth largest industry. And his pointed inquiries seem to have taken him closer to the heart of the problem than the ftc and Justice Department managed to get after more than four years of investigation. “It is clear to this court,” Sporkin wrote in an impassioned, 45-page decision, “that if it signs the decree presented to it, the message will be that Microsoft is so powerful that neither the market nor the government is capable of dealing with all of its monopolistic practices.”

No one-except Microsoft executives-disputes the fact that Microsoft is, in fact, a monopoly-at least in IBM-compatible computer-operating systems. Some 8 out of 10 desktop computers run the Microsoft software. Nor is there any question that Gates is a tough competitor, using every opportunity to leverage his hold on PC operating systems and extend his company’s dominion. The company has been known to offer deals to smaller companies and then threaten to put them out of business if they don’t accept the terms. But are such practices illegal? It depends. The Justice Department was convinced that Microsoft had violated antitrust laws when, for example, it required computer makers to pay a royalty for each machine sold that could run Microsoft’s software, whether or not it actually contained that software. But the settlement was silent on a broad range of complaints-including the central issue of whether the company that controls operating systems can fairly compete in the market for computer applications.

It was that discrepancy-between the breadth of Microsoft’s control and the narrowness of the settlement-that bothered Judge Sporkin. But when he pressed for an explanation about how the deal was struck and for more information on how to assess its effectiveness, he ran into a stone wall-both from Microsoft and from Bingaman. So he went on his own fact-finding mission, leaning heavily on a 49-page white paper submitted last month by three anonymous high-tech firms.

Although clearly biased and in some parts inaccurate, the white paper did supply details of how Microsoft allegedly used its profits from operating-systems sales to finance expansion into applications; how it cut prices to drive competing products out of the market; how it gave its own programmers advance information about the new operating-system features so they would have a head start over their rivals; how it made arbitrary changes in system specifications so that when new versions were released the products of its competitors would suddenly stop working.

Sporkin was particularly struck by what he called smoking-gun evidence that Microsoft had announced nonexistent software (“vaporware”) to discourage customers from buying competing products that were already on the shelf. It’s a game played by every high-tech company in Silicon Valley, but when the market leader does it, it can have the effect of shutting off the competition. IBM got sued for doing that in 1968, when it still dominated the computer market, and it was forced into a $100 million settlement.

But much has changed in the years since, and legal scholars say Sporkin’s thinking on antitrust matters seems not to have digested much of the jurisprudence of the 1970s, when IBM, Kodak and Xerox successfully fought off antitrust suits by smaller firms. “It was the same issues,” says William Kovacic, a professor of antitrust law at the Washington College of Law at American University. “They were preannouncing, manipulating design decisions, using aggressive pricing to drive competitors off the road. And with very few exceptions, they beat those plaintiffs into the ground.”

Most antitrust experts predict that Sporkin’s decision will be overturned on the grounds that he exceeded his limited authority as a reviewing judge. But the Justice Department is now under intense political pressure to take a hard look at everything Microsoft does-including its planned $1.5 billion acquisition of Intuit’s personal-finance-software business and the start-up of the Microsoft Network, two cornerstones of Gates’ drive to dominate the information superhighway. Last week the antitrust division was reassigning lawyers to the Microsoft case to do just that.

–Reported by David S. Jackson/ San Francisco and Suneel Ratan/Washington