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Does Microsoft Play Fair?

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by Melissa Mortimer, Quincy Oxendine


To determine whether or not Microsoft plays fair we must look to the past and also what is going on now in the antitrust trial. The saga of events that have led up to the Microsoft antitrust trial started about ten years ago, in 1990, when the Federal Trade Commission began an antitrust investigation of Microsoft. They believed that Microsoft could have been illegally preventing competition through its hidden code in its operating system. Then in 1993, the FTC dropped the Microsoft probe, and the Justice Department announced that it was taking over the case. In 1994, Microsoft and the Justice Department came to an agreement that required the company to change a variety of its business practices, including licensing agreements with personal computer makers. But, then in 1995, U.S. District Judge Stanley Sporkin decided that the settlement did not succeed in ending Microsoft's anti-competitive nature ("Timeline" Washington Post). Then later in 1995, The Justice Department sued to block Microsoft's purchase of Intuit, maker of Quicken finance program, and Microsoft then abandoned that attempt (Cusumano and Selby 454). In June of 1995, a federal appeals court upheld the 1994 settlement, reversing Sporkin's judgment and removing him from the case. Then on August 8, the Justice Department announced that it would not block the release of Microsoft's new operating system, Windows 95. Also, in 1995, U.S. District Judge Thomas Penfield Jackson approved the settlement reached in 1994. So the tides seemed to be turning back in favor of Microsoft.

But things quickly changed again in 1996 when Caldera Inc., the company that sold DR-DOS, filed an antitrust lawsuit against Microsoft. They claimed that Microsoft was excluding them and other rivals from selling DOS operating systems (Rivlin 270). Also in 1996, Microsoft announced that the Justice Department was studying the bundling of its Internet browser, Internet Explorer, and PC operating system, Windows. This investigation would later turn into the central focus of the antitrust lawsuit.

In 1997, Microsoft continued enlarging its market. In August they got approval from the Justice Department for the purchase of WebTV Networks, which produces a system for browsing the Internet on television. Then, only one week later, Microsoft announced a $150 million investment in Apple Computer Inc., an operating system rival. This action quickly caught the attention of the Justice Department. Then in October of 1997, Microsoft was also being scrutinized by Europe; the European Commission officials announced that they too were opening an investigation of Microsoft. In the fall of 1997, some key turning points arose. The Justice Department sued Microsoft in October, charging the company with violating the court-approved settlement by requiring computer makers to install its Internet Explorer browser if they wanted to license Windows 95. Then in November, Texas became the first state to file a lawsuit against Microsoft, charging the company with hindering its investigation through non-disclosure agreements with business partners. This gave way to over 20 states opening antitrust probes of Microsoft (Rohm, 274). In December of the same year, Judge Jackson issued a preliminary injunction, prohibiting Microsoft from requiring computer makers to install Internet Explorer. Then about a week later, Microsoft responded saying that it will heed the court order by offering computer makers two new options, but they also mentioned that both options would hurt the computers performance. Two days later, the Justice Department asked Judge Jackson to hold Microsoft in contempt of court, claiming that the new choices did not fulfill the requirements of the court order ("Timeline" Washington Post).

In January of 1998 The Justice Department and Microsoft reached a settlement on the contempt charges. In May of 1998 the Justice Department, 19 states, and Microsoft announced that they were in settlement talks, attempting to prevent huge antitrust suits. Then later that month, the U.S. and the 19 states sued Microsoft (Rivlin 294). In June, a federal appeals court ruled that Microsoft did not violate its agreement with the government when it combined Windows 95 and Internet Explorer. Then in July, computer executives from IBM and other companies complained to the Senate Judiciary Committee that Microsoft was using unfair business practices. Also in July of 1998 Microsoft counter-sued the 19 states, claiming that the lawsuits were "completely groundless" ("Timeline" Washington Post). At the end of July, the Justice Department announced that Microsoft refused to make Gates available for questioning , turn over the source code for Windows, or allow 17 company executives to be deposed.

In August of 1998, The U.S. government started probing Microsoft even further to try to determine if Microsoft illegally pressured Intel and Apple. In September, Microsoft tried to get the two antitrust trials thrown out, but Judge Jackson rejected Microsoft's request. Then on October 19, 1998, the trial began at the E. Barrett Prettyman Courthouse in Washington, D.C. ("Timeline" Washington Post).

Before discussing both sides of the case, we would like to introduce the primary people and companies involved in the lawsuit. Microsoft is the world's largest software maker and a $250 billion company (Rivlin 15). In 1990, Microsoft became the first software company to sell more than one billion dollars worth of products in a single year (Wallace, Erickson, 2). Bill Gates is the Microsoft co-founder and former CEO. He is involved in key management, decisions, and also the technical development of new products. Gates is the country's wealthiest person, with a net worth over 70 billion in 1999. To put this in perspective, his net worth is greater than the collected net worth of the poorest 40 percent of the country (Rivlin 307). Gates even has the distinction of being the youngest billionaire in the history of America (Wallace and Erickson 2). In January this year, Gates handed the position of chief executive officer over to Steve Ballmer, but Gates remains chairman of Microsoft and also took on the role "chief software architect" ("Ballmer").

William H. Neukom is the Microsoft Senior Vice President, Law and Corporate Affairs. He is also Microsoft's chief counsel (Rohm xvii). Microsoft's outside counsel is Joe Warden of the law firm Sullivan & Cromwell. He made a name for himself when he defended Eastman Kodak in a precedent-setting private antitrust suit in 1979 ("Key Players" Washington Post).

On the side of the government, there is Joel Klein, Assistant Attorney General. Klein heads the Justice Department's antitrust division. He replaced Anne K. Bingham in 1997 (Rivlin, 320). David Boies is the Justice Department's lead attorney. He has tried a number of cases for the Justice Department, including U.S. v IBM. Stephen D. Houck is the lawyer representing the 19 states. He has been chief of the antitrust bureau of the New York State Attorney General's Office since 1995.

Microsoft's chief rival in the Internet browsing business is Netscape, who was a major competitor in the market until about 1998, when Microsoft's Internet Explorer overtook Netscape Navigator in the browser market share. Mark Andreessen and Jim Clark were co-founders of Netscape (Rivlin 118-121).

Presiding over the antitrust suit is Thomas Penfield Jackson, a Federal District Court Judge, who has been a judge for the U.S. District Court for the District of Columbia since 1982. He was assigned to the Microsoft case in 1995 ("Key Players" Washington Post). Jackson replaced Judge Stanley Sporkin.

The Justice Department and 19 states are currently in an antitrust suit with Microsoft because they believe that Microsoft has used its monopoly in operating system software to protect its dominance in the market and eliminate competitors. The government is claiming that in the long run, consumers will be harmed because there will be less competition and few choices. More specifically, the government believes that Microsoft has tried to maintain its Windows monopoly and by doing so is violating antitrust laws, including the Sherman Antitrust Act. For example, the government argued that Microsoft violated Section 1 of the act through some business agreements with Internet service providers and Internet content providers, which restrict their ability to promote non-Microsoft browsers. They also contend that Microsoft has violated Section 2 of the Sherman Act by engaging in anti-competitive actions to maintain its Windows monopoly and to extend that monopoly into the browser market. The government extended its argument to include that the company has employed its dominance in the operating system business, trying to monopolize the market for Internet browsing software. Moreover, they contend that Microsoft has engaged in other anti-competitive acts in the past (Chandrasekaran "Trial Basics").

Before further exploring the case, it is helpful to define some of the legal aspects and computer terminology that come into play. First, a monopoly occurs when a business has exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition (Neufeldt 879). The rule of thumb among lawyers is that anything above 70 percent market share constitutes a monopoly (Rivlin 197). The Sherman Antitrust Act, which was passed in 1890, was created to deal with monopolies. It has two sections. The first section prohibits contracts, combinations, and conspiracies in restraint of trade. The second section prohibits attempts to monopolize "any part of the trade or commerce among the several states, or foreign nations." It is not illegal to have a monopoly over an industry, but it is illegal for a company that has monopoly power to maintain its power through predatory practices. Violation of the Sherman Antitrust Act is a felony, and a company can be fined up to one million dollars per offense (Rohm 19-20).

Now, to define some computer terminology, an operating system is the program that, after being loaded into the computer, manages all the other programs in a computer (Whatis.com). Microsoft's Windows is an exapmple of an operating system. A Web browser is a special software that allows a user to view Web pages delivered from a client server situated at a particular URL on the World Wide Web (www.csus.edu). Microsoft's Internet Explore is an example of this.

First we will explore the case of the government. The U.S. Department of Justice and the 19 state attorney generals are trying to prove, among other things, that Microsoft attempted to squeeze Netscape Communications Corp. out of the Web software market and forced companies like America Online Inc. and IBM to use its software instead of its competitors' ("Ballmer"). The government used as evidence the fact that Microsoft tied its Web browser, Internet Explorer, to its operating system, Windows, in an effort to thwart the growth of Netscape Communications because it feared the competition (Trott 8). For example, The Texas attorney general had a number of concerns including that Microsoft's monopoly in computer operating systems and bundling of Internet services gave it an unfair advantage that would eventually make it impossible for independent Internet browsers to compete (Rohm 79)

According to the Berkeley Technology Law Journal, tying arrangements are per se illegal, that is illegal on their face, if there are three specific characteristics present. There must be: (1) "two distinctive products," (2) which are tied together, and (3) the seller must have "appreciable economic power in the tying market." It is quite obvious that Microsoft has the appreciable economic power in the market. The only point that gives rise to dispute is whether or not the Windows and Internet Explorer bundle are two distinct products. So Microsoft would therefore have to create the appearance that Internet Explorer was not a separate product but had always been intended to be part of the Windows operating system (Rohm 288).

But the tying arrangement is not the only argument that the government made against Microsoft. Judge Jackson also listened to testimony of the executives of many of the country's largest technology companies, such as International Business Machines Corp., America Online Inc., Intel Corp. and Apple Computer Inc. They have described how Microsoft threatened to raise prices and withhold crucial technical support from them if they did not meet the firm's demands. The government argued that Microsoft attempted to destroy any product that either competed directly with Windows or that helped to make rival operating systems more attractive to consumers (Chandrasekaran A1).

Boies' final argument in the case rested on the cumulative effect of the numerous company e-mails that he said proved that Microsoft "coerced, induced, forced many people in the industry to do its will." He also described Microsoft's motives in these actions. Boies said that Microsoft simply feared that Netscape would take the Net lead. He also used documents to show Microsoft set out to use its Windows monopoly to eliminate Netscape's browser. He stated that the "it's a changing world argument" would not "mitigate what Microsoft has done over the past several years" ("Justice").

Microsoft had quite a different perspective on their competitive behavior. They tried to persuade the judge that its tactics help to spur innovation, not hinder it. Moreover, it made no apologies for its "tough talking e-mails," telling the judge that "the antitrust laws are not a code of civility in American business." Microsoft also argued that it faces immediate competitive threats from a rival operating system called Linux, Sun Microsystems Inc.'s Java technology, slimmed down "network computers," hand-held organizers and other electronic devices (Chandrasekaran A1). Warden also pointed out the three way deal between AOL, Netscape, and Sun Microsystems, calling this a "large industrial alliance" that planned a "coordinated attack on Microsoft" by creating an AOL- based system to by-pass Windows. He also stated that AOL estimated that Netscape's browser use would more than double between 1997 and 2002, hardly evidence that Microsoft was harming the market ("Justice").

After hearing the arguments from the government and Microsoft, Judge Jackson made a "finding of fact" on November 5, 1999. In this he stated that Microsoft did indeed have monopoly power. Jackson concluded that Microsoft's dominance in the personal computer operating systems had hurt consumers, competitors and computer makers ("Microsoft Says"). Although the finding of fact has a significant impact, it is the "conclusion of law" that will actually determine if Microsoft has broken any laws (Wilson). Therefore, the "finding of fact" did not conclude whether or not Microsoft's aggressive business behavior violates the Sherman Antitrust Act.

As stated earlier, it is not illegal to be a monopoly under US law, but it is illegal to use that monopoly as a device to attempt to control competitors and win market share in other products. And Jackson believes that Microsoft has done this by trying to "leverage its leading Windows operating system into a similar advantage in Internet browsers." Jackson ruled that, "The ultimate result 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." In other words, Microsoft's actions have deterred investment in technologies and companies which jeopardize its success (Grier 1). The judge went on to criticize Microsoft for tying Internet Explorer to Windows, rather than treating them as separate products. He said that Microsoft harmed consumers because the free browser made Windows unstable (Cusumano 36).

Moreover, Judge Jackson sided with the government's descriptions of meetings and other interactions in which Microsoft delivered threats. He accepted the government's version of a June 1995 meeting between Microsoft executives and officials at Netscape Communications Corp. in which Microsoft was alleged to have urged Netscape not to make Internet browsers that would run on Windows because Microsoft wanted to control that market. Jackson wrote, "Had it convinced Netscape to accept its offer of a 'special relationship,' Microsoft quickly would have gained such control over the extensions and standards... to make it all but impossible for any further browser rival to lure appreciable developer interest away from Microsoft's platform." Perhaps one of the most crucial factual findings for the government was that Jackson rejected Microsoft's argument that its Internet Explorer browser is a fully integrated feature of Windows that benefits consumers. Instead, he said the two are separate products whose combination has actually inflicted "collateral harm on consumers." This went against a 1998 federal appeals court's ruling that said Microsoft could combine its browser and operating system so long as it helped consumers (Chandrasekaran A1).

Furthermore, Judge Jackson agreed with the government that Microsoft added Internet Explorer to Windows and gave the browser away free over the Internet with the intentions of undercutting Netscape because they feared that the Netscape browser was threatening Windows. The judge went on to say that Microsoft's "substantial discretion" in setting the price of Windows further demonstrated its monopoly power. Jackson cited a formerly confidential study that Microsoft conducted in November 1997 that determined the company could have charged $49 for an upgrade to Windows 98, but identified $89 as the "revenue-maximizing" price (Chandrasekaran A1). Jackson thought there was no reason to believe the $49 price would not be profitable.

One of the primary reasons that Jackson issued this finding of fact was to encourage both sides in the dispute to reach a settlement (Rupley 32). Jackson named Richard Posner as the mediator in the case to try to strike a deal between Microsoft and the Justice Department and the 19 state attorney generals. The two sides are negotiating in Chicago until February 22, when Microsoft and the Department of Justice will make their final arguments before Judge Jackson (Trott 8). The fact that Jackson found Microsoft to be a monopoly may increase the chance for settlement because of the many class action suits that could stem from the finding of fact and the antitrust trial (Berinato 14). Now companies will only have to prove they suffered financial damages to collect substantial sums of money from the company (Wilson).

Microsoft disagrees with much of Jackson's finding of fact. Bill Gates said he will, "vigorously contest" them, which will most likely result in appeals that could take years. In its reply to the Justice Department and 19 states, Microsoft argued, "Even accepting the court's findings of fact, plaintiffs still have not satisfied their burden under the governing law on any of their claims." Microsoft specifically disagreed with Jackson's finding of fact that it held monopoly power in the Intel-powered personal computer market. Microsoft stated that this narrow definition left out many of the most serious competitive threats that Windows faced, including Apple Macintosh, workstations running the Unix operating system, and soon "information appliances." Moreover, Microsoft insisted that it "cannot control prices or exclude competition for a substantial period of time." This directly contradicted Jackson's finding of fact that it never had to consider competitors when setting prices ("Microsoft Says"). This is an important argument because the ability to restrict output and control prices is a key factor in determining whether or not a company has an illegal monopoly (Trott 8). The reply went on to say that it never needed to give its competitor, Netscape, any information that would help it in competition. Microsoft stated, "Antitrust laws impose no affirmative obligation on a firm-- even one with a monopoly power-- to assist its competitors by predisclosing technical information about its new products prior to their release" ("Microsoft Says"). Alan Whitney, one of Microsoft's software development engineers, agreed that it would be unfair to force Microsoft to reveal its technical information and codes. He said, "To take the intellectual property of Microsoft and release it to the public would be unjustified. The people who write the code are the assets. Taking away the code is taking away assets of the company."

Despite the degree to which Microsoft disagrees with Jackson's finding of fact, Gates said, "From the beginning, we've said we would like nothing better than to settle this case" (Rupley 32). Gates does not expect the government's antitrust suit against Microsoft to lead to its break up, ("Gates") but that is how many legal experts, who have been following the case, expect Jackson to rule against Microsoft (Chandrasekaran A1).

If the sides do not reach a settlement, Jackson will issue his proposed conclusions of law in the case approximately 90 days after the mediation process ends (Berinato and Foley 14). There have been many sanctions proposed that Jackson could impose on Microsoft. One sanction that was proposed by government lawyers would include splitting Microsoft into parts. This could set the operating system business apart from the applications business. Some people even propose breaking Microsoft into three parts, making one an Internet/multimedia company ("Microsoft Way"). Another option for dividing Microsoft favors a solution similar to that of the Standard Oil case. Reback, Netscape's outside counsel, argued that Microsoft should be broken into a series of separate companies, each of which would retain the rights to Windows and Office. Then these fractured Microsofts would compete against one another, just as the Standard Oil of New York, Mobil, competed against the Standard Oil of Indiana, Amoco (Rivlin 312).

A different type of solution proposed would be to set broad limitations on Microsoft's business and licensing practices, or even force Microsoft to open the source code for Windows and other products so that competitors could develop and sell their own version of Windows, entering new competition into the personal computer operating system market (Chandrasekaran A1). There are also talks of another option, which would force Microsoft to sell Windows to all computer makers for the same price, removing any possibility of Microsoft rewarding certain manufacturers with lower prices for helping to keep Windows universal. (Rupley 32).

Steve Ballmer, new CEO of Microsoft said, "I think it would be absolutely reckless and irresponsible for anyone to try to break up this company," in response to some of the proposed solutions ("Gates"). Whitney agreed that the break-up would do more harm than good, especially if the company was broken up into several smaller companies. He said that it will be hard for the applications providers to make sure programs would work on all versions of Windows. Whitney said this is a great risk because the platform itself could become fractured. He believed it would be much safer to divide the company into separate operation systems and applications companies.

There are many people who have researched Microsoft and the antitrust case, and of course both the government and Microsoft have many supporters. Microsoft defenders say that the antitrust case represents government market influence of the worst kind. They say there are no competitors to Windows because operating systems are a dead business. All money and research are going into non-Windows based Web software and hardware. One antitrust expert, Robert Levy, says, "By the time there is any resolution in this case put in place things will have changed so enormously that the resolution will have no impact at all, other than diverting attention of the best and most creative minds in the business from creating new products" (Grier 1). So many supporters of Microsoft argue that there is no federal intervention necessary in the fast paced technology industry today ("Ballmer").

Also, Michael Cusumano, a professor at the MIT Sloan School of Management, has written two books on the subject and several articles. After his extensive research and knowledge of the subject, he argues that definitions of monopoly, power abuse, product boundaries, and consumer benefits are unclear, especially in markets that converge and overlap. He drew a comparison between computer hardware and software and VCRs. He said they both move towards a monopoly because consumers "find compatibility more useful than innovation." He went on to say that, "It becomes easy to overstep antitrust laws when dominant standards emerge naturally, when antitrust laws are subject to interpretation, and when competitors act aggressively to protect fragile positions." Cusumano defends Microsoft saying that they should have the right to compete aggressively and define the functionality of its products as Windows has satisfied millions of customers, and Microsoft has produced award winning software (Cusumano 36).

And perhaps this is true, but we must question the way in which Microsoft competes with other companies. Wendy Goldman Rohm, a noted journalist, states in her book, The Microsoft File, that Microsoft has "engaged in a pattern of predatory business practices over the past decade that have all but killed the market in operating system and applications software, and now likewise threaten to stifle free competition in the Internet and electronic commerce arenas." She draws a comparison between the behaviors of Bill Gates and Microsoft and that of John D. Rockefeller and Standard Oil. Rohm says that just as Rockefeller spread out to railroads, shipping, steel, gas, copper, banking, and trusts, Gates leveraged himself from computer operating systems to applications software, into the Internet, and travel business, financial services, the media and even further. She cites many instances throughout the book of "Gates' campaign to stymie free competition." Rohm gives the example of how Gates even took control in Germany where Vobis, Europe's largest computer manufacturer is located. Gates gave Vobis a bundle of Microsoft Word and Excel, along with Windows, but Lieven, CEO of Vobis, had to promise that, even if customers asked for it, he would not ship a single machine with the operating system DR-DOS (Rohm 63). Joachim Kempin, Senior VP, OEM sales for Microsoft even offered to buy all Vobis' DR-DOS holograms, like currency, as they were used for authentication when Vobis or other OEMs shipped a copy of DR-DOS. He said, "Even if you do have per processor licenses, even if you've already paid for DR-DOS, we don't want you selling it." Lieven testified that this was true, and in fact, he did not ship any more DR-DOS because Kempin "purchased the rest of the holograms."

Rohm also notes that Brad Chase, vice president of developer relations and marketing, wrote a memo entitled, "Winning the Internet Platform Battle." In this memo he described the importance of worrying about browser share even though it was a no revenue product. He wrote, "If you let your customers deploy Netscape Navigator, you [close] the leadership desktop." She says that this demonstrates Microsoft's predatory intentions in giving away free products. This is further proven by Chase's instructions to his colleagues, "You should be able to break most of Netscape licensing deals [with Internet service providers] and return them to our advantage because our browsers are free" (Rohm 237). So Microsoft was obviously extremely aggressive in its business tactics.

In conclusion, we believe that it is quite apparent that Microsoft has a monopoly over the market in operating systems, applications, and Internet browsers. Furthermore, they were most likely abusing the power they had to crush competition. We can infer this from their predatory practices that were exposed in the testimony of other top executives of competitors during the trial and also from evidence from interviews and company e-mails that journalists, such as Rohm, brought to light. So what Microsoft was and perhaps still is doing seems unjust and is probably harming consumers. As Rick Amstadt, Network Analyst for Stark Technical College, said, "There would most likely be better products with more competition." He went on to say that right now Microsoft often puts out products that are not up to par. In other words, they have an excessive amount of bugs in the programs. Amstadt said they often just put the programs out there and see what happens.

But even after deciding that Microsoft is a monopoly and that it is harming consumers, it is difficult to say what the solution is. Simply breaking up the companies would most likely not be very effective. Jim Clark, co-founder of Netscape, even said that Jackson's actions would not have much impact on Microsoft's dominance. He said that the browser wars were already over and Microsoft was the winner (Rupley 32). Amstadt had similar thoughts on the matter of breaking up the company. He said, "it probably won't make much of a difference." He drew a comparison to what happened to AT&T and how it was split up into the "baby Bells." The branches of Microsoft would probably still dominate the market.

But perhaps, to some extent, the antitrust trial has naturally fixed part of the problem. William Kovacic, George Washington University law professor and leading antitrust expert, said, "In several respects, this lawsuit has already generated its own remedy" (Grier 1). Rob Enderle, industry analyst with the Giga Info. Group in Cambridge Massachusetts has a similar view on the effects of the Microsoft case. He said, "The case has made Microsoft appear vulnerable...The terror of Redmond has abated. Firms are feeling more free to do what they want to do." For example, Dell Computer Corporation, longtime Microsoft ally, now offers pre-installed Linux operating systems on some of its computers. Also, PC firm, Gateway Inc., accepted $800 million from AOL to help produce cheap systems for Web browsing that will not need Windows software to operate. So some experts do believe that Microsoft has toned down some of its more aggressive actions. For example, last year the company dropped provisions from its contracts with Internet access providers that blocked them from promoting non-Microsoft browsers. The firm now also avoids exclusivity clauses when entering into new partnerships (Grier 1). Perhaps, the market is already in the process of restoring fair competition. So it is difficult to say what, if any, solution would be the correct one to ridding the computer industry of the Microsoft monopoly.



Works Cited

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www.csus.edu/indiv/g/golf/CAUGHT 97/sld010.htm.

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