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Microsoft Enjoys Monopoly Power…

14 minute read
Adam Cohen

It was 4:30 p.m. Friday when an Antitrust Division lawyer called from the courthouse, a hot-off-the-presses copy of the Microsoft decision in his hands. “What does it say?” asked an eager Joel Klein, head of the division, who was waiting in his conference room with the government’s trial team. “I’m on page 16,” replied the lawyer who was speed-reading his way through, “and it says they’re a monopolist!” “Great!” said Klein. “Keep reading!”

If you’re scoring at home, you can write Microsoft Corp. next to Standard Oil and AT&T on your list of the 20th century’s great monopolies. When the Justice Department squared off against Bill Gates & Co. in a Washington courtroom, it was no secret that things went badly for Bill. But even so, the findings of fact that Judge Thomas Penfield Jackson handed down were stunning in their breadth and their certainty: a blunt 412-paragraph j’accuse that nails Microsoft not only on the two most critical issues–that it has monopoly control over PC operating systems and that it wields that power in ways that harm American consumers–but on virtually every count brought against it.

It’s actually hard to imagine how, for Microsoft, it could have come out any worse. The ruling carefully lays out the factual basis for the major antitrust violations that seem certain to follow. And it paints an exceedingly dark portrait of one of America’s most admired companies. The Microsoft of Judge Jackson’s narrative is a deep-pocketed bully that uses “its prodigious market power and immense profits to harm” companies that presume to compete with it. And it presents Gates as a law-flouting monopolist who makes a “threat” to one rival considering getting into the software market and “berate[s]” and then “retaliates” against an executive from another company who dares to criticize Windows.

As the sweep of Judge Jackson’s ruling became clear, the anti-Microsoft camp had trouble containing its glee. James Barksdale, the folksy former Netscape CEO who testified at the trial that Microsoft tried to suffocate his company, hailed the findings of fact as “an 11 on a 10-point scale.” Michael Morris, general counsel for Sun Microsystems, crowed that “Microsoft is in deep, deep trouble, and they know it.” Klein, flanked by Attorney General Janet Reno at a celebratory press conference, declared that it “shows once again that in America, no person and no company is above the law.

Microsoft, for its part, deployed legions of spinners to argue that Jackson had it all wrong. The company had broken no laws and done no harm to consumers. The judge failed to appreciate the dynamic nature of the software business, which makes any dominant position inherently short-lived. The only lapse in Microsoft’s genetic self-assurance was a video press release the company rushed on the air immediately after the ruling came down. “We hope we can find a way,” Gates declared, “to resolve this and put it behind us.” For a moment, he seemed to be waving the white flag of settlement.

Unless that happens, there’s a lot more bad news yet to come Gates’ way. Jackson still has to issue conclusions of law–expected early next year–in which he’ll use these facts to decide if Microsoft used its monopoly power to violate the antitrust laws. Assuming he says yea–a near certainty considering Friday’s findings–he can impose a remedy as far-reaching as the total dismemberment of the Gates empire. And more potential bad news: these findings of fact could be used by a host of competitors to bring their own civil antitrust actions against Microsoft. The reverberations will be felt for some time throughout the high-tech world–and by the tens of millions of Americans who have a stake in this battle because they own Microsoft stock. (For what this means to investors, see Dan Kadlec’s Personal Time column.)

The finding that Microsoft is a monopoly was a legal no-brainer, once the court accepted the government’s narrow definition of the relevant market: PC operating-systems software. If Microsoft–which owns more than 90% of that market–isn’t a monopoly, then nobody is. Microsoft tried to argue that its Windows operating system was under constant threat and could be made obsolete at any moment. But the competitors it listed hardly seemed like giant killers. Upstart Linux, the open-source operating system that Microsoft speaks of so fearfully, currently runs less than 3% of all PCs. Even if you include Apple, which is undeniably on an upswing, Microsoft still has more than 80% of the PC market. Jackson wasn’t buying any of it.

The ruling goes on to detail the ways in which Microsoft used its monopoly power to bludgeon the competition. If you liked the trial, you’ll love the judge’s greatest-hits collection of Microsoft skulduggery: binding its Internet Explorer browser into Windows just to beat out Netscape, bullying Intel into staying out of the software market, polluting Sun Microsystems’ Java programming language to diminish the competitive threat it posed to Windows, threatening IBM. And Compaq. And Apple.

Microsoft likes to say its hypercompetitive business practices hurt rivals, not consumers. But Jackson found that Microsoft was so quick to crush any perceived threats that countless technology products that should have been developed died stillborn. “The ultimate result,” he wrote, “is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft’s self-interest.” Even more devastating, Jackson found that in its rush to make life tough for its competitors, Microsoft was actually willing to diminish the quality of its own products. Bundling a Web browser into Windows 98 did not benefit consumers, as Microsoft claimed. Rather, Jackson found, it slowed down the operating system, increased the likelihood of a crash and made it easier for “malicious viruses” to find their way from the Internet onto our computers. Ouch.

What do these thousands of facts add up to? More than likely an architectural blueprint for finding that Microsoft did indeed willfully and repeatedly violate the Sherman Antitrust Act. In their Friday-night spinathon, Microsoft’s legal experts hastened to point out that this conclusion is not a certainty. In fact, the judge could still find that the mountains of incriminating evidence he laid out don’t support a legal ruling against Microsoft. But don’t bet on it.

If Microsoft is found to have violated the law, then what? Klein and his troops are scrupulously avoiding talking about a remedy (though they’ve had experts on retainer for months sorting through the options). The gamut of possible outcomes runs from a mild go-forth-and-sin-no-more to the truly Draconian stuff: forcing Microsoft to share its Windows source code with its competitors or carving up the company into the so-called Baby Bills (see chart). A judge’s findings of fact are often a good indication of how far he’s willing to go. It’s like looking at a construction site in its early stages, says George Washington University law professor William Kovacic. “The depth of the excavation and the strength of the foundation tell you how big the building is going to be,” he says. Jackson, as Kovacic puts it, has poured a lot of concrete.

There was much conjecture on Friday that Jackson’s tough-minded ruling could be the cudgel the parties need to get them back to the negotiating table. Settlement is always a possibility. Intel staved off an antitrust suit of its own earlier this year by striking a quiet deal with the Federal Trade Commission in which it agreed to share more information about its processors with other companies. But despite a few stabs at working it out–including a round of quiet talks during the trial–Microsoft and Justice haven’t been able to get started. The sharpness of last week’s ruling could force both parties to dig in their heels.

Then there’s the appeal process. “Microsoft gets friendlier audiences from here on,” notes Kovacic. The D.C. Circuit Court of Appeals, which would review Jackson’s decision and remedy orders, is the same one that slapped the judge down last year when he ordered Microsoft to offer Windows 95 without the Internet Explorer browser. The Supreme Court is more of a wild card, but its current pro-business tilt suggests the government may get a skeptical hearing. But neither is likely to overturn Jackson’s findings of fact.

Meanwhile, Microsoft has been flexing its political muscle in new ways to help its cause. It recently asked Congress to cut the Clinton Administration’s proposed budget for the Antitrust Division about $9 million. Klein is in no danger of running out of paper to write his appellate briefs, but it showed that Microsoft was ready to play hardball. Microsoft has also formed the so-called Freedom to Innovate network, a “nonpartisan, grass-roots network of citizens and businesses” that happens to reside on the company’s website. And it has undertaken an aggressive state-level lobbying campaign–mindful, perhaps, that the suit against it is being pressed by 19 state attorneys general. Another political variable that argues for Microsoft to stall for time: the upcoming presidential race. If the Republicans take the White House, they may be willing to settle on more favorable terms than the Klein brigades would.

The fact is, United States v. Microsoft does have an ideology behind it. At some level, it’s a return to the good old days of trust busting, something scarcely seen in the U.S. since the government’s case against IBM sputtered out in the early 1980s. Emboldened by Judge Jackson’s ruling, the Antitrust Division could soon be prowling for more high-profile, high-tech targets.

Are lawsuits like this good for the country? To Microsoft’s defenders, the answer could hardly be more self-evident. Bill Gates drops out of college to found a little start-up that, by his 44th birthday, has grown into the most valuable company in the world. His success ensures that the U.S. is in the forefront of a global technological revolution, and he produces a product admired and used by millions. His reward for living the American Dream? Some smart Washington lawyers try to brand him a lawbreaker.

The Freedom to Innovate crowd argues that by bringing lawsuits like this one, the government is meddling dangerously with private industry and, consequently, the health of the entire U.S. economy. The most extreme remedies, they say, are a clear intrusion–a judge’s breaking up a company, or forcing it to share trade secrets with its competitors. But the milder ones–such as stopping a corporation from engaging in certain anticompetitive actions–may even be worse. “You’d have a judge in effect as CEO, micromanaging every decision,” warns Jeff Eisenach, president of the conservative Progress & Freedom Foundation. “It’s the first step down the slippery slope to government regulation of the computer industry.”

Supporters of antitrust law argue that decisions like Judge Jackson’s actually strengthen the free market. The new economy–and America’s unprecedented run of growth and prosperity–has been fueled to a significant degree by small start-ups founded by entrepreneurs with big dreams. These are precisely the sort of companies that can be crushed most easily by a brutal monopolist. When antitrust law works right, it can give these enterprising small firms room to grow. “There are a lot of companies that have for years operated in absolute terror of Microsoft,” says Sun’s Morris. The ruling, he predicts, will prevent “the dead hand of Microsoft from stifling competition.”

Well-executed antitrust lawsuits can energize broad areas of the economy. That’s the lesson of the AT&T case. The Justice Department’s suit against Ma Bell concluded in 1982 with a consent decree forcing it to spin off the seven regional Baby Bells. It wasn’t a panacea, but it kicked off a process that dramatically increased competition and improved service. And the Baby Bells have carried their competition into new areas like cellular telephones and Internet access.

If high-tech needs smart antitrust enforcement, that raises an even trickier question: Is the American legal system up to it? The wheels of justice have always ground slowly–and even today the courts have more in common with Dickens’ Bleak House than with the World Wide Web. By the lightning-paced standards of the computer industry, the law is positively glacial. After Jackson is done with the case, the appeals could drag on for two more years. That’s a lifetime in Silicon Valley.

Can the courts function on Internet time? The problem is particularly stark when it comes to crafting an effective remedy. Like every successful high-tech company, Microsoft is in constant flux. In the past year it has moved quickly to adapt to changing circumstances. In May it paid $5 billion for a chunk of AT&T–thereby guaranteeing that Windows CE-powered set-top boxes will have an inside track on AT&T cable systems. It also invested $600 million in Nextel Communications and bought a 30% stake in a British cable company. Even if Jackson gets a chance to issue a remedial order, he will be aiming at a fast-moving target. It’s not at all clear that he’ll be able to hit it.

Where does the case go now? The lawyers and the appeals courts will have their say. But ultimately, the most important actor in this drama will be Bill Gates. The Justice Department showcased just how central he was when it made the strategic decision to focus at the trial on his actions–and to make his video deposition and e-mails the public relations centerpiece of its case. Microsoft is Gates’ company, and he’ll decide how it responds to this latest challenge.

When Bill Gates was growing up, he and his family loved to play games, both intellectual and athletic. They were all competitive, but Bill most of all. “The play was serious,” his father recalled. “Winning mattered.” For Gates, business is a game, and what makes it superfun for him is that it’s superserious. He is a brilliant strategist with great bandwidth, as they say in Redmond, and he works hard to hire the brightest, most dedicated and most competitive associates. He created an atmosphere at Microsoft in which crushing the other guy was a crusade.

It was this Gatesean religion, this take-no-prisoners holy war, that got Microsoft in trouble with the antitrust division–and that runs as a leitmotif through Jackson’s findings. But if Gates’ character explains the past of this lawsuit, it may also foretell its future. Shortly after Gates hinted at settlement in his videotaped press release, he appeared at a press conference at Microsoft headquarters. This time he seemed more focused on winning–if not before Judge Jackson, then later.

“It’s important to recognize that today’s filing is just one step in an ongoing legal process that has many steps remaining,” Gates declared. Under questioning, he again professed to be interested in a settlement–but quickly veered off into a monologue about the importance of building “great software” and maintaining the freedom to innovate. If anyone in the audience was confused into thinking Gates was giving in, Microsoft general counsel Bill Neukom stepped up next to explain what his boss was really saying. No, the company had no intention of backing down. “We are in it,” he said, “for the long haul.”

–Reported by David S. Jackson/Los Angeles and Viveca Novak, Elaine Shannon, Karen Tumulty and Adam Zagorin/Washington

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