Busted! Judge Jackson lowers the boom on Microsoft

In a devastating portrait of Microsoft's business practices, Judge Thomas Penfield Jackson has found that Microsoft operates as a monopoly and has used its power to hurt both consumers and competitors.

In a devastating portrait of Microsoft's business practices, US District Court Judge Thomas Penfield Jackson found last Friday that Microsoft operates as a monopoly and has used its power to hurt both consumers and competitors.

Antitrust experts interpreted Judge Jackson's scathing "finding of fact" as a sign that harsh measures could follow.

Jackson's opinion on the facts presented at trial marks only the first step in his decision-making process. Next comes an assessment of whether Microsoft's actions broke antitrust laws. Then comes the phase in which he must decide from a plethora of remedies: from a slap-on-the-wrist warning to a potential structural breakup of the empire.

"This increases the likelihood that Microsoft will be found liable for a serious violation of the antitrust laws, and that will set up the conditions for a strong remedy that will restore the market" says Steven Salop, a professor specializing in antitrust law at Georgetown University Law Center. Salop, who has been doing work for Oracle on potential remedies, says his own opinion is that the finding of fact supports a breakup of Microsoft into smaller companies.

Other experts concur. "It, in general, adopts the government's view of the world. That's obviously not good for Microsoft," says antitrust attorney Joe Sims of the Washington law firm Jones & Day. "The thrust of the findings are sufficient to support a wide range of remedies, including structural relief."

In addition to the possible remedies that could be imposed by the court, the labeling of the company as a monopoly "opens Microsoft up to private litigation from Netscape and other companies," says attorney Stephen Houck, who headed the states' case until recently. "They now have 90% of their lawsuits proved. Microsoft cannot recontest these findings. All the other companies have to do is show damages.

As a practical matter for Microsoft, the company will be tied up in a series of litigation with ultimately very large damages and a lot of management time consumed with the litigation."

In the 207-page ruling, Jackson found that the facts presented at trial supported the government's allegations that Microsoft used its monopoly power to stymie numerous technologies that had the potential to compete with Microsoft products. "Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft," he wrote.

While acknowledging that Microsoft makes some useful products, Jackson found that the company's actions ultimately hurt customers. "To the detriment of consumers, however, Microsoft has done much more than develop innovative browsing software of commendable quality and offer it bundled with Windows at no additional charge," he wrote. "As has been shown, Microsoft also engaged in a concerted series of actions designed to protect the applications barrier to entry, and hence its monopoly power, from a variety of middleware threats, including Netscape's Web browser and Sun's implementation of Java. Many of these actions have harmed consumers in ways that are immediate and easily discernible."

Ultimately, the company's pattern of behavior stifled competition, the judge ruled. "Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry," Jackson continued. "Through its conduct toward Netscape, IBM, Compaq, Intel and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products."

Government attorneys say the ruling showed that the government met the key three principles for harsh remedies: Microsoft has a monopoly, the company has abused dominance, and consumers have been harmed.

Connecticut Attorney General Richard Blumenthal called Microsoft "a predator." He says the ruling showed "serious and far-reaching violations that should lead to serious and far-reaching remedies. And we do not rule out any of the remedies available."

US officials were more cautious. US Attorney General Janet Reno would only say, "This is a great day for the American consumer."

Justice Department Antitrust Division Chief Joel Klein added, "It shows once again in America that no person and no company is above the law."

Microsoft competitors were – not surprisingly – pleased with the ruling. "The thing I like is he got the stories right," says Intel VP of New Business Development Steven McGeady. "In terms of going through the chronology, he seems to have gotten it right."

"This is a very, very powerful opinion," says Michael Morris, VP and general counsel of Sun Microsystems. "Former President Ronald Reagan once said, 'Facts are stubborn things.' Microsoft is going to find these facts to be very stubborn indeed. The aura that has surrounded Microsoft that it cannot be stopped has been significantly eroded throughout this trial. This ruling goes further down that road."

But Mitchell Kertzman, CEO of Liberate, and former CEO of Sybase, says the battle isn't over. "I have been competing and doing business with Microsoft for years," he says. "I don't think that when we all go to work on Monday, life is going to be any easier. Microsoft is going to continue to act like Microsoft. This will require additional steps, including remedies, before Microsoft changes behavior, and it becomes a more competitive industry."

Former Netscape CEO James Barksdale was ebullient. "I don't know how you can get a stronger ruling from a court," he says. "We feel vindicated. We were witness to this [conduct] and now the judge has agreed with us. They have a monopoly, and they abuse it ... to stifle innovation. I think they should seek structural remedies and break the company in at least three parts."

The judge seemingly dismissed Microsoft's key argument in the company's summation: namely, that Netscape is worth several billion dollars to America Online, a company that controls 40% of the US Internet market and could overnight restore the Navigator browser to prominence.

"Were AOL ever to attempt to revive Navigator's usage share with the intention of building it into a significant platform for the development of network centric applications, that effort would not make any headway before Jan. 1, 2001, when AOL's obligation to distribute Internet Explorer on a preferential basis expires," Jackson wrote. He added that "there is no indication that AOL will try even after that date to raise Navigator's usage share substantially."

But Microsoft Chairman Bill Gates and his legal advisers indicated that the company has plans to appeal when the judge completes his rulings. "We respectfully disagree with a number of the court's findings," Gates said. "Microsoft competes vigorously and fairly. Microsoft is committed to resolving this case in a fair and responsible manner."

William Neukom, the company's chief counsel, says the ruling on facts was "one step in a legal process that will have a lot of additional steps."

Friday's ruling was the culmination of a trial that began more than a year ago, involved 76 days of testimony, 28 witnesses and thousands of pages of documents and e-mail placed into evidence. The case captured the attention of the business world with allegations of a monopoly that hearkened back to the days of the robber barons, inflammatory e-mail peppered with locker-room language, and angry accusations and denials from the witness stand about corporate misbehavior.

The case has taken on broad importance for the high-tech industry. Experts believe the ruling could set new ground rules for competition in the New Economy.

The legal markers directing the court were anything but clear. Major antitrust rulings over the past generation have involved very different types of businesses: newspapers, ski resorts and bowling alleys, to name a few.

The Justice Department and 20 states (South Carolina later dropped out) filed a far-reaching antitrust suit against Microsoft in May 1998. The suit alleged Microsoft illegally used its monopoly power in the desktop PC operating-system software market to gain strength in the burgeoning market for Internet browser software. The complaint charged Microsoft with a pattern of anticompetitive acts, includings requiring computer manufacturers to take the Internet Explorer browser along with the Windows operating system; leveraging placement on Windows screens in requiring online services and Internet service providers to offer IE; and attempting to coerce Netscape into dividing the browser market.

But within a month, the government's theory suffered a major blow. A federal appeals court overturned an injunction in a related case that ordered Microsoft to offer its Windows 95 operating system without requiring computer manufacturers to also take Internet Explorer. The ruling also stated that courts shouldn't be in the business of designing products, particularly when a company claims that integrating products results in business efficiencies or consumer benefits.

The appeals court ruling forced the government to retool its case. Government investigators came up with new evidence that Microsoft used its alleged monopoly to coerce other companies, such as Intel and Apple Computer, to drop products that were in competition with Microsoft products. The government argued that this was part of a "pattern of behavior" by Microsoft. These additional charges formed the basis for a much more compelling story to tell to the court and to the public. The theory: If even a corporate giant such as Intel could be cowed into canning a product due to a "credible and fairly terrifying" threat from Microsoft, as one Intel executive testified, then Microsoft's unlimited arm-twisting must be curtailed.

From the moment the government called its first witness – Jim Barksdale, then CEO of Netscape – the tide seemed to turn against Microsoft in the courtroom. Barksdale testified that in a June 21, 1995, meeting with Microsoft, the software giant tried to coerce Netscape into cooperating to divide up the browser market. "This fairly clear threat bothered me greatly," Barksdale testified. "If we refused to agree, Microsoft made it very clear that they would attempt to crush us."

The proposed findings of fact submitted by each side showed just how far apart the parties were. The government closed its exhaustive, 800-page written findings of fact with a quote from the government's chief economist, MIT professor Franklin Fisher.

"Microsoft has shown that it will decide the ways in which innovation takes place in this industry, and that any innovation which threatens Microsoft's platform monopoly will be squashed," said Fisher. "We will live, as it were, in a Microsoft world in which choices are the choices that Microsoft makes. I don't think that's good for consumers, but those effects have only just begun."

Judge Jackson saw it the same way.

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