I watched the trial of Microsoft from Stanford; what struck me was the quality of the judgment of a district court judge - such a refreshing contrast to the rambling, unfocussed, poorly argued judgments of Indian judges that I was used to. This is what I wrote in Business Standard of 27 November 1999.
THE MICROSOFT CASE
On 5 November, Judge Thomas Penfield Johnson of the District of Columbia district court made public findings of facts in the case filed by the US government and a number of State governments against Microsoft for abuse of power. This was not a judgment; the judgment will follow a couple of months later – unless something else happens in between. This judgment has been widely reported as being hostile to Microsoft. Actually, it is a model of drafting.
The 207-page statement begins by giving definitions and describing the contours of the software industry. It defines the personal computer, an operating system, the internet, internet service providers, internet access providers, etc etc. I had been reading about internet for years, but this statement gave me for the first time a complete and reliable picture of the industry.
It then defines the relevant market in relation to which Microsoft’s monopoly power must be judged. The test of the market is whether a consumer would substitute another product for a Microsoft product; the judge shows why other operating systems – for instance, software of server systems, Intel-incompatible systems, information devices like palmtops, browsers etc – cannot be counted as substitutes for Windows. Nor is a substitute likely to emerge, because of the enormous volume of software designed on the Windows platform – 70,000 programmes. The closest rival is Macintosh Apple, on which 12,000 programmes are based. Judge Johnson then lists the players who have tried to create competing operating systems – IBM, Mac, Be, Linux – none of which have succeeded. Given the variety of Windows-based programmes available, a consumer is bound to prefer Windows to other software platforms. Given his preference, every original equipment manufacturer installs Windows in his PCs. Judge Johnson calls this the applications barrier to entry.
Netscape Navigator and Sun Microsystem’s Java first seriously threatened this barrier. Navigator, Netscape’s web browser, was ported to fifteen operating systems; and Sun has designed programmes called Java virtual machines which permit Java programmes to run on other operating systems. Netscape Navigator was a hugely successful web browser, and it, together with Java, posed the first serious threat to Microsoft, especially since Navigator exploited the fast-expanding internet market.
Before Netscape Navigator was launched, Microsoft tried in 1995 to ensure that it, so to speak, joined the Windows family. Netscape was interested in making Navigator compatible with Windows; for that it needed access to a certain application programming interface. But the two sides could not agree on division of functions. Microsoft did not give the relevant API. That held up Netscape only for a while. Once it became clear that Netscape would not compromise, Microsoft launched its competing browser, Explorer; from 1995 onwards it spent over $100 million a year developing it. By 1999, over 1000 engineers were working on it; they had improved Explorer enough to whittle down the distance between it and Navigator. Throughout, Microsoft gave away Explorer free to all buyers of Windows. It introduced a term in the contracts of OEMs whereby they could no longer remove an installed icon from MS Windows. Compaq and Hewlett Packard had introduced booting sequences and tutorials which would make their PCs more user-friendly; Microsoft introduced a condition preventing the disturbing of the Windows booting sequence.
Compaq finally decided that discretion was the better part of valour, and came to an arrangement whereby it would use only Windows software in its PCs. In return, Microsoft signed a “frontline partnership” agreement with Compaq, and was believed to have given it the best terms of all hardware manufacturers as well as considerable technical and marketing support. IBM, on the other hand, had developed its own system called OS/2, and was consequently treated less generously. In Summer 1994 it asked Microsoft for the same terms as were being given to Compaq. Microsoft offered IBM a “frontline partnership” agreement if it mentioned only Microsoft products in its advertisements and preinstalled Windows 95 on at least half the PCs it shipped two months after Windows 95 was released. IBM refused; it vigorously advertised its own operating system; and in June 1995 it acquired Lotus and started promoting Lotus Smartsuite as a product competing with Windows. At the same time, it asked for a licence for Windows 95 in March 1995. Microsoft waited till July. Then on 17 July, it issued the mastercode for Windows 95 to all OEMs except IBM; on the 20th it told IBM that it would have to wait till Microsoft completed an audit of royalties due from IBM – a process which might take months, certainly far beyond autumn which is the peak marketing season for PCs in the US. IBM offered Microsoft a bond of $10 million. In a meeting on 9 August, Joachim Kempin, who was in charge of Microsoft’s OEM sales, asked IBM for a bond of $25 million, and said it could be reduced if IBM postponed installing Smartsuite on its PCs for six months to a year. IBM refused to accept the deal. Windows 95 was launched on 24 August; IBM was given the licence 15 minutes before the launch event, after giving a bond of $31 million. As a result it failed to cash in on the back-to-school sales in September.
In the following two years, Microsoft went berserk. First it made it impossible to uninstall Explorer. Every operating system, including Windows, has a button for uninstalling a programme; Windows provided one for every programme – except Explorer. Further, even when another browser was installed, Windows made Explorer the default browser; so users using Netscape would suddenly find that they had strayed into Explorer.
This massive evidence marshaled by Judge Johnson constitutes a damning indictment of Microsoft. Microsoft still hopes to avert an adverse verdict by arguing that it was all done to benefit the consumer. But that is not the only defence it is planning. It has already given $13 million to Presidential candidates last year, and $6 million this year. For next year there will be another President.