Gates gets slammed
Proving that Microsoft broke antitrust laws was the easy part.
Now what's the remedy?
By Adam Cohen
April 10, 2000
Web posted at: 12:45 p.m. EDT (1645 GMT)
Bill Gates glad-handed his way through the corridors of power in
Washington last week. He dropped by the White House for a
new-economy conference, where President Clinton lauded him for
his "phenomenal" charitable contributions. And he roamed Capitol
Hill for meetings with more than 125 members of Congress,
including a private chat with Senate Commerce Committee chairman
John McCain. The tourists ate it up; the $100 Billion Man
attracted movie-star crowds wherever he went. But the whole
scene left Microsoft's critics fuming. "It just makes you wonder
what for," Senator Orrin Hatch groused. "I certainly hope it's
not to discuss the case."
The case, of course, is the government's landmark antitrust
lawsuit against Microsoft. And it's a fair bet the case was at
least one of the reasons for Gates' congressional group hug. Two
days earlier, Judge Thomas Penfield Jackson had issued a toughly
worded ruling that did just what everyone expected: it branded
Microsoft an "oppressive" monopolist and laid the legal
groundwork for imposing what could be draconian remedies in the
next few months. It was a sharp blow to Microsoft--the company's
shares plunged almost 15% the day of the ruling and helped set
off last week's rout of tech stocks.
Microsoft moved quickly to appeal Judge Jackson's ruling--to
Congress and to the court of public opinion--and it seemed to be
working. Senate majority leader Trent Lott called on fellow
lawmakers to investigate whether the Administration had pushed
the company too far. House majority leader Dick Armey (dubbed "MS
Dick Armey" for his pro-Redmond sympathies) said he'd "rather
break up the Justice Department" than Microsoft. Republicans put
Al Gore on notice that they intend to make an issue of the case
this fall, but Democrats seemed just as caught up as the G.O.P.
was in Gatesmania. New Jersey Senator Robert Torricelli lamented
that "only the U.S. would consider breaking up a company that has
done this much economically to advance our national interest."
Why the Microsoft lovefest? It could be, as Torricelli says, that
the company has done a lot of good. But it may also be because
Gates & Co., having shunned the political fray for years, have
become overnight capital insiders. Microsoft has made $1.7
million in campaign contributions so far this election cycle.
It's now the nation's sixth largest soft-money donor, and its
lobbying staff boasts four former members of Congress.
Gates' public relations offensive comes just as the gavel is
about to crash down. Having found Microsoft guilty, Judge Jackson
says he will move quickly--probably in the next three months--to
impose remedies to rein it in. Some hawks in the Justice
Department are expected to demand a "structural" remedy--breaking
the company up into smaller and less dangerous pieces. Microsoft
is likely to ask for "conduct" remedies--limits on its future
behavior.
But for all the legal wrangling, the battle over remedies boils
down to this: What to do about Windows? The heart of the
government's case was that Microsoft used its Windows monopoly as
a club to bully its way into other markets, such as Internet
browsers. Judge Jackson will be looking for a way to stop Gates
from unfairly using Windows for leverage in the future. Depending
on how bold he decides to be, he could let Microsoft keep its
monopoly but require it to play more fairly. He could force it to
share Windows with its competitors. Or he could tear the company
into smaller pieces.
Windows is the operating system--the brain and central nervous
system--of 90% of the world's PCs. That makes Windows not just a
monopoly, but a highly strategic weapon as well. It gives
Microsoft an unequaled platform from which to launch new
products, and it makes it easy for Gates to intimidate other tech
companies into doing things Microsoft's way. Software writers,
chipmakers and dotcom companies all have a lot to lose if they
don't stay on Microsoft's good side.
The law doesn't ban monopolies, even those as potent as Windows.
But Microsoft crossed the line, Judge Jackson held, when it used
Windows in a "predatory" way to protect its monopoly and build
new ones. A key Microsoft tactic: adding features to Windows.
Microsoft originally developed its Explorer Web browser as a
separate consumer item, but then it decided to include--or
bundle--the browser in Windows in 1995. The upshot was that
Windows users got a free browser when they bought their
PC's--making it awfully hard for Netscape to persuade them to buy
its competing program.
Microsoft says it bundles browsers and other applications to make
Windows better. And it insists it must have the right to continue
to innovate by adding any "functionalities" it wants. But Judge
Jackson held that Microsoft was simply using this innovation
argument--a "technological artifice"--in order to extend the
Windows monopoly into an Internet browser monopoly. And that, he
ruled, was illegal.
Access to the Windows desktop was another weapon in Microsoft's
war with Netscape. Microsoft wanted to persuade leading Internet
content providers--including the Disney, Intuit and National
Geographic websites--to side with Explorer. Microsoft offered them
a deal. If they promoted and distributed Explorer--and not
Netscape's Navigator--their sites would be listed on the Windows
desktop. That would give them free access to millions of Windows
users, an invaluable source of traffic for a fledgling site. All
this leveraging proved highly effective: Netscape's share of the
browser market plunged from 80% in 1996 to 30% today.
Microsoft also used Windows to punish companies that crossed the
software maker. When IBM insisted on developing products that
Microsoft saw as a threat, Microsoft withheld technical support
and raised the price it charged IBM for Windows. And Microsoft
used its Windows monopoly to help its applications division--the
programmers who write software like Microsoft Word--by giving them
preferred access to the complex Windows source code.
Non-Microsoft programmers have long asked for equal access to the
source code--but Microsoft has steadfastly refused to give it.
For any remedy to work, it will have to change how Microsoft uses
Windows for leverage. The least drastic approach--and the one most
likely to be upheld on appeal--would put restrictions on
Microsoft's conduct. Judge Jackson could fashion a set of rules
or commandments to live by: Thou shalt not sell Windows to some
PC makers at lower prices than others; thou shalt not use
placement on the Windows desktop as a bargaining chip; and so on.
The trouble with a conduct remedy is that almost nobody thinks it
would work. It's tough enough to craft rules to stop all the bad
things Microsoft has already done. It may be impossible for any
court to anticipate how the company might misbehave in the
future. "There's a real question about whether a conduct remedy
can be sufficiently forward looking," says Barry Jaruzelski, a
computer analyst at Booz, Allen & Hamilton, a consulting firm
based in McLean, Va.
And then there's the problem of getting Microsoft to obey the new
rules. "Conduct remedies require some degree of cooperation and
good faith--or a very significant enforcement apparatus," says Ed
Black, president of the Computer & Communications Industry
Association. Microsoft's critics complain that the company
doesn't act in good faith: they point out that this case was
filed in the first place when Justice determined Microsoft had
violated a 1995 consent agreement. Enforcement mechanisms have
their own problems. Almost nobody--inside Microsoft or out of
it--wants the Federal Government overseeing Microsoft's business
decisions and product designs.
One of the conduct remedies cited most often by Microsoft's
competitors is to force Gates to share the Windows source code.
"It would level the playing field and allow programmers to write
applications just as good as Microsoft's," says Bob Young,
founder and chairman of Red Hat, a Microsoft rival. Microsoft
could also be required to license Windows to competitors, who
could then sell Windows clones.
Microsoft's fiercest detractors insist that only one remedy will
address all Microsoft's misdeeds and ensure that it sin no more:
breaking up the company, much as AT&T was split into the Baby
Bells in 1984. In one scenario, Microsoft would be divided along
functional lines: one company that makes applications software,
one built around the Internet and other new media, and one that
just does Windows. A functional breakup would prevent Microsoft
from using Windows for leverage in the applications and new-media
markets, but it would leave the Windows monopoly intact.
The other leading scenario is to slice Microsoft into several
"Baby Bills": mirror-image companies that all have equal rights
to Windows. An advantage to this approach is that it would create
real competition in the operating-system market. Since the Baby
Bills would be fighting for market share, each would have a
strong incentive to improve Windows--to offer it more cheaply, to
make it more crash resistant, and so on.
Despite all of the breakup talk, the end result of the litigation
may well be less extreme. Microsoft's lawyers are working hard to
get Judge Jackson's decision reversed--and they'll fight fiercely
against any structural remedies. Courts are usually reluctant to
break up a company, and the D.C. Circuit Court of Appeals and the
U.S. Supreme Court, which would hear Microsoft's appeal, will be
no exception. "I don't think Judge Jackson's opinion will emerge
unscathed," says George Washington University law professor
William Kovacic. "And if it's diminished in significant ways, the
foundations on which to build a bold remedy begin to crumble."
In the meantime, Microsoft shows no sign that it is relaxing its
public relations onslaught. After Gates left Washington, he
showed up on TV, the star of his own feel-good ad campaign.
"Twenty-five years ago, my friends and I started with nothing but
an idea--that we could harness the power of the PC to improve
people's lives," Gates says earnestly. The closest he comes to
referring to Microsoft's legal difficulties is his send-off: "The
best is yet to come."
It's a soft sell, but it would be a mistake to conclude that
Gates has gone soft. Earlier this month--just a day after
settlement talks between Justice and Microsoft fell apart--he
reiterated his interest in bundling speech-recognition software
into a future version of Windows. That could prove just as
disastrous for IBM and Dragon Systems' competing
voice-recognition software as the decision to bundle the
Explorer Web browser was for Netscape. And it would give the
Justice Department yet another argument for dismantling the
Windows monopoly. --With reporting by Jay Branegan and Viveca
Novak/Washington
What's Next
Microsoft and Justice are likely to be fighting over remedies for
years
--REMEDY PROPOSALS By May 10 both Justice and Microsoft will
submit proposed solutions to Judge Jackson
--REMEDY HEARING On May 24 the two sides will square off in court
over how Microsoft should be punished
--THE RULING Judge Jackson is expected to decide quickly,
possibly by early July
--COURT OF APPEALS The appeals court could take a year to decide
the case, though this step could be bypassed entirely
--SUPREME COURT The case is likely to conclude with a ruling from
the high court, perhaps in early 2001 or 2002
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