A Long Simmering Antitrust Case is Finally Headed for Court

Last May 15th, a group of government attorneys sat waiting in the wood paneled conference room at the offices of Joel Klein, the assistant attorney general in charge of the U.S. Justice Department's antitrust department. After a half hour, the group learned that its expected visitors---negotiators from Microsoft---had gone to the wrong place, believing the meeting was to be held at the company's own law firm. The mistake was certainly a misunderstanding, but to at least one cynical observer it reflected a deep-seated notion: that Microsoft believed the world would come to them.

In fact, most of the computer-literate world does indeed come to Microsoft. The company has transformed itself from a hard-scrabble vendor in an embryonic industry into an American business legend. Microsoft is so pervasive a force that every computer company, whether a small startup or IBM, must factor it into its business plan. That success has attracted criticism, both from Microsoft's competitors and later from the U.S. government and state attorneys general, that Microsoft is expanding its markets not just through technological and marketing superiority, but from unfair competition.

And so on a Friday afternoon in May, with Windows 98 due to ship to dealers the following Monday, the opposing teams met to determine whether a peace accord could still be worked out. The two parties planned to discuss the most volatile issue that separated them: how much control could Microsoft exert over the Windows desktop, which some have called the most precious piece of "real estate" in the world. But when the group finally sat down to the bargaining table, it became clear that whatever room there was for negotiation, it wasn't room enough. "Did they lie to us before?," said one government official to The New York Times. "Not necessarily, but they certainly changed their position between Thursday morning and Friday....that's what it broke down over." The parties gave it one more try on Saturday before giving up and retiring to their separate camps: Washington state and Washington, DC.

The following Monday, the Justice Department --- and in a separate action, 20 U.S. states, including California --- filed law suits alleging that Microsoft had competed unfairly, discouraging innovation and unfairly leveraging its near monopoly of the desktop operating system. Appearing in a television interview that day, Joel Klein said that it was not Microsoft's monopoly per se that the government objected to, but that Microsoft wasn't competing on the merits of its products --- most specifically the Internet Explorer browser. "They already have a chokehold on the desktop," said Klein. "They control personal computers in the world today. Their operating system is essential. Now what they want to do is use that to leverage control over another chokehold, that is, access to the Internet, which is critical in terms of America's opportunity, in terms of developing competitive access to the Internet." Klein also accused Microsoft of tying up the distribution channel with unfair contractual restrictions that kept his competitors out. Online services, for example, were told that they could only get real estate on the desktop if they carried Internet Explorer and excluded Netscape, Klein said.

Microsoft competitors agreed, although most of them did so quietly. An exception was Sun Microsystems, which issued a press statement the day of the lawsuit praising the move and accusing Microsoft of illegal predatory pricing and exclusionary activities. "Microsoft could use its monopoly over the gateway to the digital economy --- the PC --- to stifle competition and innovation in sectors like telecommunications and TV broadcasting. American consumers need more than one on-ramp to the information superhighway."

For its part, Microsoft expressed deep disappointment that the feud had come this far. "This is a step backward for America, for consumers and for the personal computer industry that is leading our nation's economy into the 21st century," Gates said in an interview with the Los Angeles Times. Microsoft contends it is only giving its customers what they want: a reliable, consistent interface with easy access to the Internet. The company is particularly incensed by a government demand that it ship a copy of Netscape Navigator with every copy of Windows. "Such a demand is both unprecedented and unreasonable," Gates wrote in a Wall Street Journal commentary. "It's like ordering Ford to sell autos fitted with Chrysler engines. Not only would these proposals undermine our ability to compete, they run counter to the way every industry in America has evolved over the years --- and, more importantly, to what consumers expect from the products they buy."

Jeff Raikes, Microsoft group vice president for sales and marketing, argued that hardware manufacturers can already include Netscape Navigator if they choose to, and in fact, are free to customize the first screen. In a press conference demonstration, Microsoft showed the desktops for five different computers purchased off-the-shelf over the weekend, making the case that each was different. Raikes insisted that Microsoft had not only the right, but the responsibility, to proscribe the customers experience, just as McDonald's controls the dining experience for its restaurant franchise. As for competition with Netscape, Raikes argued that Internet Explorer had indeed gained marketshare on its merits and cited a number of industry reviews that judged IE 4.0 the superior product.

The immediate result of this legal clash has been considerable smoke, but no fire. A judge ordered that Microsoft had the right to ship Windows 98 as scheduled in late June. Unlike the computer industry, which runs at manic speed, the legal process in this country is a slow one. Microsoft asked for seven months to prepare its case. Judge Thomas Penfield Jackson of U.S. District Court set it for September. Klein himself believes that full scale litigation could take several years to complete.

An old law in a new era

To many observers both within and outside the U.S., the whole affair seems strange. Why would the government go after a company that has helped make the country a leader in software development?

Microsoft is accused of violating two sections of the Sherman Act, which dates back to 1890 --- 61 years before the invention of the first commercial computer, the UNIVAC I. A main provision of the Sherman Act is to foster competition by discouraging unreasonable restraint of trade. "Being a monopoly, per se, is not illegal," said Klein. "But if you use monopoly power in a way that is predatory or harmful to the market, that is the kind of thing we would obviously be looking into."

Companies in violation of the Sherman Act can be fined, and in extreme cases, can be broken up into smaller parts. While the latter event is rare, it has occurred. In 1911, the Standard Oil Company divested itself into 33 companies. In 1984, the government sliced off American Telephone and Telegraph's local calling service to create seven smaller companies --- called the "Baby Bells." Some suggest that the government should at least entertain the possibility of performing a similar operation on Microsoft. Lotus Development Corporation founder Mitch Kapor has written that the government should consider breaking Microsoft into a series of "Baby Bills" that separate the operating systems from applications, content and services. While such a move might currently be seen as overkill, "in the coming years, short of a sincere change of heart by Gates, it may well become the preferred solution." Kapor believes that "despite all of Gates's talk about the right to innovate, his company uses its power to limit consumer choice and impede a free marketplace."

On the other hand, many antitrust suits result in no action whatsoever. For 13 years beginning in 1969, the U.S. pursued an antitrust case against IBM, which ultimately came to nothing. IBM paid considerable legal fees, but for better or worse, emerged fully intact. Microsoft supporters point to this case as an example of the process run amuck, with government and corporate resources poured into a legal quagmire that, in the end, enriched only the lawyers. Critics argue that sixteen years after the case was dropped, IBM is no longer seen to have a lock on the market --- not because of government action, but because of changes in the market. And because the computer market is, if anything, changing even more rapidly, Microsoft's long-term position remains uncertain.

Who will benefit?

It's all too easy to label Microsoft as the Godzilla of the computer industry without recognizing that at least some of its success is due to superior products and marketing. For people upgrading from Windows 95, Windows 98 hardly seems like a villain. When I installed my review copy, my desktop was still recognizable --- with just a few icons added (which I promptly erased). The Channel Bar came switched off. My desktop color was preserved (rather than being switched to the cobalt blue version with the Windows icon). And my browser of choice --- the Norwegian-built Opera from Opera Software --- was still the default. Windows 98 didn't even ask if I wanted to reconsider.

But this litigation has less to do with experienced users than with less technically inclined people whose first encounter with Windows may come with their first home computer. These users, the theory goes, are much more likely to embrace the first technology they see on the opening screen. The fear is that the Windows desktop can act as a gigantic funnel, propelling the masses to use products developed or advertised by Microsoft, and away from any company that is not represented. If enough people do that, then the competition will fail and Microsoft will be the only remaining choice. The competition that has so benefited consumers with better products at lower prices would disappear, or so goes the theory.

Many users don't want the competition that the government is trying to foster. In a recent New York Times/CBS News poll, a majority of respondents said they had a favorable opinion of the company and that believed that Microsoft uses legally acceptable business tactics. These numbers are not surprising. Microsoft customers have gotten considerable value from the uniformity Microsoft has imposed on the industry. Having a standard desktop operating system means that people don't have to learn the fundamentals each time they work on a new machine or worry whether a given application is available for their computer. The dominance of Microsoft Word and Excel has enabled millions of users to exchange files without having to worry about conversion, and allowed people to change jobs without having to learn a whole new set of applications.

Moreover, Windows 98, like its predecessor, integrates several other functions besides browsing that were once offered as separate products: disk scanning and defragmenting, data backup, the TCP/IP protocol, fax and e-mail software. No one complains that these functions are integrated into the OS. As for browsers, while Netscape Navigator and Internet Explorer still offer slightly different feature sets and user interfaces, those differences are lost most people, who may just want to get the latest baseball scores or read a newspaper online.

In the end, I think it is extremely unlikely that the U.S. government will actually carve Microsoft up into smaller pieces. Such a move is too radical for the current Department of Justice --- which is overseen by the president. At this writing, President Clinton, a man beset with his own problems, has not even taken a public stand on the matter. And because Clinton cannot seek a third term in office in the year 2000, any decision would ultimately have to be approved by a new president and attorney general --- either of whom might refute the whole affair as a foolish move by his or her predecessor. The U.S. is also on shaky ground when it questions whether Microsoft should integrate IE with Windows, or whether it should give its browser away for free.

But I do think it important that Microsoft acknowledge that its role in the computer industry is unusual, that in "owning" the desktop, it has a power and responsibility that are unique in the industry. In the spirit of compromise, the company should at least consider including the Netscape browser. After all, both Navigator and Internet Explorer are free, and so are competing not over revenues but share of mind. Microsoft says it is simply protecting the "integrity of the Windows desktop" and trying to prevent "Netscape getting a free ride in Windows." But the Windows desktop would do just fine adorned with a Netscape icon, with the added advantage of offering customers a real choice between two well-respected products --- both of which carry the "Designed for Windows" logo. When Microsoft was younger, its protestations would be understandable. But when you are as ahead of the game as Microsoft is, it makes good business sense to loosen up. A photo of Bill Gates happily surfing the Web with Netscape would be a transforming image --- erasing his harsh edges and giving him the glow of a confident chief executive that would serve him well into middle age.

DoJ charges, Microsoft responses

The U.S. Department of Justice (DoJ) has made six specific points in its complaint document against Microsoft's business practices. When asked for a point-by-point response, a Microsoft spokeswoman would only refer to documents on the company's website --- documents that cover some, but not all of the issues. Here's a summary:

DoJ:

Microsoft participated in predatory pricing by giving away Internet Explorer. The complaint quotes Paul Maritz, Microsoft group vice president in charge of the Platform Group: "We are going to cut off their air supply. Everything they are selling we are going to give away for free." Said Bill Gates in June 1996, "Our business model works even if all Internet software is free....We are still selling operating systems. What does Netscape's business model look like? Not very good." (These quotes were referenced by Netscape CEO Jim Barksdale, in his testimony before the Senate Judiciary Committee last March.)

Microsoft:

In another context, Microsoft has pointed out that free software appears to have been part of Netscape's business plan, too. "In September 1994, four-month old Netscape posted an early version of its Navigator Web browser software to the Internet, free for anyone to download and use. Navigator was an instant hit, and within a few months most Web users had switched from the previous leader, the Mosaic browser. Netscape proceeded to distribute tens of million of free copies of Navigator to computer users, helping to fuel growing interest in the Internet and providing strong market position which Netscape is exploiting to sell other Internet-related software products."

DoJ:

Microsoft coerced PC manufacturers to license, preinstall, and distribute Internet Explorer as a condition for licensing Windows 95, thereby unlawfully leveraging its operating system monopoly.

Microsoft:

No apparent response.

DoJ:

Microsoft artificially excludes browser competition by integrating IE 4.0 into Windows 98, thereby making it more difficult to substitute a competing browser. Such integration forces OEMs to license or acquire the tied combination whether they want IE or not. The complaint states: "Microsoft's tying of its Internet browser to its monopoly operating system reduces the ability of customers to choose among competing browser products because it forces OEMs and other purchasers to license or acquire the tied combination," whether they want it or not. The complaint quotes Microsoft group vice president Paul Maritz as saying, early on in the competition, "I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective....We do not use our strength, which is that we have an installed base of Windows and we have a strong OEM shipment channel for Windows."

Microsoft:

The company argues that integrating IE into Windows 98 simply delivers what consumers want, a consistent interface across the local computer and the web. Microsoft has bristled at the suggestion that Windows offer Netscape Navigator in addition to Internet Explorer. "Coca-Cola is not forced to distribute Pepsi. McDonald's is not forced to sell Burger King hamburgers. And Microsoft should not be required to build competing --- and duplicative --- Web browsing technology into Windows.

DoJ:

Microsoft requires PC OEMs to adopt a uniform bootup sequence and desktop screen, an allegation Microsoft denied in its press conference. "Virtually every new PC that comes with Windows, no matter which OEM has built it, presents users with the same screen and software specified by Microsoft."

Microsoft:

"PC makers have complete freedom to load any software products they want onto their computers, including direct competitors to Microsoft products. They also have complete freedom to display the icons of any competitor's product right on the Windows desktop.... PC makers can use the large open space in the center of the Windows desktop (about 60 percent of the entire screen) to display their own branded content. They can include links to their own products and services. And they can also use this area to encourage consumers to replace the Windows desktop with a different user interface (or "shell"). Indeed, PC makers can include an icon for alternative 'shells' right on the Windows desktop. When the consumer clicks on the icon, the consumer can be asked: 'Would you like the XYZ Co. desktop to start automatically every time you turn on your PC?'"

DoJ:

Microsoft has entered into anti-competitive agreements with virtually all of the nation's largest and most popular ISPs. The selected ISPs are listed in a folder on the Windows 98 desktop --- one HTML page to an ISP. Click on the appropriate link, and you sign up for an ISP, assuming of course, you are already connected to the Net. "As a result, almost all of the largest and most significant ISPs in the United States have sought placement on the Windows desktop.

Microsoft:

No apparent response.

DoJ:

Microsoft has used channel buttons as part of its active desktop feature, that favor the content of certain providers.

Microsoft:

"PC makers can create their own content channel on the Channel Bar, and can enter into deals with content providers to create as many sub-channels as they wish. PC makers have the freedom to display the Channel Bar on the first screen, or to ship their PCs with the Channel Bar not displayed. And, of course, consumers can choose to display or not display the Channel Bar with a few clicks of their mouse, and to select any Web sites to be the "channels" on their PC."