Microsoft Antitrust Primer

FRAMINGHAM (03/31/2000) - The Microsoft Corp. antitrust case is down to the wire. If no settlement is reached, Judge Thomas Penfield Jackson could issue a verdict late next week. But the judge could also give both sides more time if progress is made. Computerworld reporter Patrick Thibodeau explains the possible outcomes in either a settlement or verdict.

Why is it going to be hard to reach a settlement?

The key problem in crafting a settlement is preventing Microsoft from stifling new companies and technologies in much the same way critics charge it attacked Netscape Communications Corp. The government alleged that Microsoft "tied" Internet Explorer to its operating system with the intent of crushing Netscape.

A settlement would likely include restrictions on what Microsoft can or cannot include in its operating system. Microsoft is unlikely to agree to anything that hurts its "ability to innovate."

What are other settlement issues?

If that first problem can be solved, a settlement is possible. Microsoft would likely agree to terms that would prevent it from using its operating system pricing power to keep PC makers in line. The company may also agree to terms that guarantee its application programming interfaces (API), which allow applications to work with the operating system, are available to developers.

Microsoft has also expressed some interest in opening up its source code.

Why should the government settle?

The government is expected to win big with Jackson, but an appeals court could reverse a lot of that. The major weakness in the government's case is its "tying" claim - that Microsoft included Explorer in its operating system for the sole reason of hurting a competitor. Microsoft says its decision to integrate Explorer - for free - was a clear consumer benefit. It made a strong case on that point, and the company has an earlier appeals court decision to back that up. If the tying claim is reversed on appeal, the government's case - and the need for draconian remedies - suffers a clear setback.

Why should Microsoft settle?

A verdict that establishes Microsoft as a monopoly and says it has violated the law to preserve that monopoly increases Microsoft's legal liability toward other parties that believe they've been harmed. The lawsuit is also a significant distraction for company executives and employees, and has obviously been affecting the company's stock price of late.

Why might the government have trouble settling?

The case against Microsoft involves 19 states as well the federal government.

Getting all 19 states to agree on settlement terms could be like herding cats.

What are possible remedies in the case?

The judge is deciding this case in three parts. First out was the findings of fact. Next is the verdict, or conclusions of law. The third part will be remedies. Jackson's verdict, expected shortly, won't include remedies. Although a large fine is possible, the goal of remedies isn't to punish a company, but to restore competition. The judge hasn't yet said how he will go about deciding a remedy, but it is expected that he will hold a remedy phase with a new series of court arguments. That would take the case well into the fall.

The possible remedies include:

Conduct remedy. A conduct remedy - the same kind of remedy that will be reached during a settlement - would impose restrictions on Microsoft's behavior. The company wouldn't be broken up. For Jackson, a conduct remedy is the safest route to take. But it includes a major liability for the judge: Microsoft would be subject to ongoing court scrutiny.

Structural remedy or breakup. No one has ever broken up something like Microsoft before. And although the judge has compared Microsoft to Standard Oil, that company was broken up along geographic and past merger lines (see story). Many antitrust breakups - and government-ordered breakups are relatively few - have split companies along previously merged lines or geographic boundaries. But how do you split up a company whose major assets are its employees and intellectual property with physical assets chiefly located on a "campus" in Redmond, Wash.?

Some believe Microsoft should be split along application lines - the productivity applications such as Word and Excel and tools would be separated from the operating system. This new application company would be free from the bounds of having to produce Windows-only versions of its Office suite, and that would give new life to competing operating systems such as Linux, while clearly helping established players like Apple Computer Inc., which may live or die on Microsoft's decision to keep producing a compliant version of Word. The argument here is that it's the applications that drive the user's choice of operating system.

Another breakup proposal would involve splitting Microsoft's operating system into three separate operating system companies. These three new companies would compete on price and features. Some believe such a solution would increase the cost of software development - and user cost - as developers try to port applications to three separate systems. How would the government split up Microsoft development teams? If no settlement is reached, this, among other questions, will be argued vigorously in court.

What happens if Microsoft wins?

Microsoft doesn't believe it has a monopoly in PC operating systems. It sees itself under constant competitive threat and pricing pressures from rivals, especially IBM and Sun Microsystems Inc., and from new and yet unknown technologies. It believes that the PC may ultimately be supplanted by other kinds of systems, such as Internet appliances.

The government disagrees. MIT economist and government witness Franklin Fisher said at the trial that if things remain as they are, "we're going to live in a Microsoft world, and it may be a nice world, but it's not a competitive world."

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