This column on Microsoft in Business Standard of 19 June 2000 is a sequel to the column of 27 November 1999 and carries the story forward as it developed in the court. America has been the home of many innovations. But innovations often give their owners advantage over their competitors, who use anti-monopoly laws to hold the innovators back. Netscape died in 2008 despite the courts' efforts to bale it out; Google had similar trouble later in the European Union. Innovators generally win the competitive race; governments only delay the elimination of inferior competitors.
THE VERDICT IN THE MICROSOFT CASE
I wrote on Judge Jackson’s findings of fact last
November. Microsoft’s subsequent submissions led him to change his mind on
nothing. He asked the plaintiffs – the US Justice Department and attorneys of
19 states – to propose a judgment, which he adopted almost entirely. He had
found the company to have violated Sections 1 and 2 of the Sherman Act of 1890.
In punishment, he ordered the company to be divided into two: one inheriting
Microsoft’s operating systems business and the other its applications business.
He had found the company to have used anti-competitive practices to drive out
Netscape and monopolize the browser business: briefly, it had embodied its
Explorer into Windows 98 and given it away free, made it impossible for
consumers to replace it with another browser, and denied Windows 98 to hardware
manufacturers who wanted to install Netscape. He has now ruled that Microsoft
must allow buyers to delete particular applications, and give them codeware underlying
the programmes so that they can do so. Although he did not agree with the
plaintiffs that its exclusive selling agreements were unlawful, he did agree
that they reinforced its monopoly. He now bans it from making such exclusive
selling agreements. He had found that by giving away the Explorer free to
buyers of Windows 98 it had used price discrimination to harm Netscape. He has
ruled that it will be have to have uniform price lists; the only exceptions
that will be allowed are bulk discounts and language premia.
How did Judge Jackson come to such a harsh judgment?
My impression when I first began to take an interest in this case, eight months
ago, was that he had it in for Microsoft: that it had no chance of a fair
judgment from him. But Microsoft had the opportunity to rebut his facts, and it
did not: what it said in rebuttal was that it was impossible to separate the
Explorer from Windows, and that it had done all it did to benefit the consumer.
The first assertion is simply untrue; in the compromise that Judge Richard A
Posner almost worked out, Microsoft actually offered to separate the Explorer
from Windows. And the second amounts to saying that if the consumer gets a
product more cheaply today, it is worth his while to forgo competition in the
market tomorrow. Arguable, but not convincing.
Now, after the judgment, details of the
behind-the-scenes events have begun to emerge which change the picture
considerably. The relationship between the press and the judiciary here is very
different from India. Here the press gets judgments in electronic form as soon
as they are given; some newspapers print the judgments in full. Judge Jackson
himself was talking to the press while the case proceeded: off the record, but
apparently with the understanding that it could go on record once the judgment
was given. And, of course, both the sides have been talking to the media,
giving press conferences and been on television.
Thus it emerges that Judge Jackson is no radical; he
is in fact an appointee of President Reagan in 1982 – a pro-business
conservative. And although the case was filed in 1998, its roots go back to
1994, when, in a consent decree, Microsoft had undertaken not to tie the sale
of one software and another. In 1996, it threatened to terminate Compaq’s
licence when Compaq wanted to put the Netscape browser on its machines.
Netscape filed a complaint with the Justice Department. Justice asked Microsoft
for papers relating to the Netscape matter, and received them without any
trouble. They confirmed Netscape’s complaint. Apparently, Microsoft officials
were most indiscreet in their e-mails; even after the e-mails were subpoenaed,
they were unimaginably indiscreet. One memo at the end of 1996 said that
although Microsoft was giving away Explorer free, Netscape retained an 80 per
cent market share. “We need something more: Windows integration.” In other
words, no one should get Windows without Explorer.
That led to the decision in 1997 to launch the
integrated Windows 98. To forestall it, Joel Klein, the Justice department
attorney in charge of the case, went to Judge Jackson, who issued an order. In
response, Microsoft went ahead and issued an integrated Windows 98 anyway; as
an unintegrated product, it offered the old Windows that Windows 98 had made
obsolete, and another untested product. Microsoft was complying with the order
without upsetting its schedule for launching Windows 98; but it thereby also
defied Judge Jackson.
Still, Judge Jackson would not have lightly
contemplated the breaking up of Microsoft. As he said in his judgment,
“Microsoft officials have recently been quoted publicly to the effect that the
company has “done nothing wrong” and that it will be vindicated on appeal. The
court is well aware that there is a substantial body of opinion, some of it
rational, that holds to a similar view.” Microsoft has enormous goodwill
amongst computer users and investors. It has paid billions in contributions to
politicians of both hues. But two things sealed Microsoft’s chances.
First, Bill Gates undertook to depose before Justice
department attorneys. Bill is not a great speaker. The attorneys put the
various charges to him; he was poorly briefed, and kept repeating that what
Microsoft had done was good for everyone. They later played the video of this interview
at various points in court.
Second, Microsoft did not accept any wrongdoing, and
did not propose on its own any change in its behaviour. It did undertake to
accept some restraints in the compromise Judge Posner constructed last
February; but when the compromise collapsed, it did not propose their adoption
to Judge Jackson. There was no proposal of its own to compete with that of the
Justice department.
By giving Explorer free to Windows buyers, Microsoft
was benefiting the consumers. It decided that was a sufficient argument and
justified harming its competitors. It dominated the market for operating
systems, and used the profits from it to subsidize applications software.
Now Microsoft will try to take an appeal to the
Federal Court of Appeals; it had won a similar case there in 1998, and
surprisingly, Judge Jackson contested its legal opinion in the present case.
Microsoft must expect that the Court of Appeals with overturn his judgment.
The Department of Justice, on the other hand, would
like to bypass the court of Appeals and take the case directly to the Supreme
Court, thereby reducing the chance of a reversal and shortening the time this
litigation is taking.
But meanwhile, the damage is done. The morale in
Microsoft is low; soon people will start leaving it. In this industry,
brainpower is all there is; if Microsoft loses it, even winning all the way to
the Supreme Court will not save it. Only in America would the government make
one of the country’s most valuable firms be so wantonly damaged by an
assortment of governments.
Even if Microsoft appeals, it will continue to bleed
until a final judgment is given and implemented. If I were in charge of
Microsoft, I would bifurcate the company straightaway as ordered by the judge
and appeal to ameliorate the other conditions.
