GUILTY! Microsoft slapped down with unprecedented ruling

Judgment day arrived for Microsoft Corporation in dramatic fashion Monday as Judge Thomas Penfield Jackson issued his conclusions of law for the company's antitrust trial. But the verdict, while not unexpected, was particularly harsh in its language and condemnation of Microsoft, which the court described as a bullying monopoly that illegally abused its power to harm competitors, partners, and consumers while it crushed innovation in the computer industry. While the government cheered its clear victory, Microsoft's camp rallied around the appeals process, which it hopes will offer a turnaround for the disastrous turn of events that has greeted it at every stage of the trial so far. For Microsoft, however, Monday was the darkest day of all: The company was finally found guilty of two of the three charges that were brought against it.

"The Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market," Jackson wrote in his ruling. "Microsoft also violated \[Section\] 1 of the Sherman Act by unlawfully tying its Web browser to its operating system. The facts found do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive."

The ruling begins with descriptions of the charges, and explains the conclusions in the findings of fact, which were issued in early November. "The \[government\] proved at trial that Microsoft possesses a dominant, persistent, and increasing share of the relevant market," the ruling states. "Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent." Of course, simply having a monopoly isn't a violation of U.S. law. The government maintains, however, the Microsoft maintained its monopoly illegally. The judge agreed, stating that Microsoft acted in a "predatory" manner to protect its monopoly, to the extent that it hurt competitors, consumers, and even some of its own products in an attempt to maintain its Windows dominance.

"Middleware \[such as Netscape Navigator and Java\] threatened to demolish Microsoft's coveted monopoly power," Jackson writes. "Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier. In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific APIs and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat, namely, Netscape's Navigator Web browser and Sun's implementation of the Java technology. Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits. Because Microsoft achieved this result through exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance of monopoly power by anticompetitive means."

Much of Jackson's ruling concerned Microsoft's successful attempt at destroying Netscape, which had previously refused a Microsoft offer to divide up the browser market. "Microsoft's campaign proceeded on three fronts," Jackson writes. "First, Microsoft bound Internet Explorer to Windows with contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system, and to increase the costs attendant to installing and using Navigator on any PCs running Windows. Second, Microsoft imposed stringent limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might enable OEMs to generate usage for Navigator in spite of the contractual and technological devices that Microsoft had employed to bind Internet Explorer to Windows. Finally, Microsoft used incentives and threats to induce especially important OEMs to design their distributional, promotional and technical efforts to favor Internet Explorer to the exclusion of Navigator."

Most damning is the rationale for bundling Internet Explorer with Windows, which Microsoft never explained to the judge's liking. During the trial, it was revealed that Microsoft delayed the release of Windows 98 for seven months solely so that it could meld Internet Explorer into Windows 98 and thus harm the market for Netscape. No benefit to consumers or Microsoft partners was ever considered in this decision, which prevented sales of Windows 98 during the lucrative Christmas 1997 season. The judge concluded that Microsoft would only have acted in such a manner--deriving even the company itself from additional revenue--if it was simply trying to protect its monopoly at all costs.

"Microsoft fails to advance any legitimate business objectives that actually explain the full extent of this significant exclusionary impact," the ruling reads. "The Court has already found that no quality-related or technical justifications fully explain Microsoft's refusal to license Windows 95 to OEMs without ... Internet Explorer, or its refusal to permit them to uninstall \[IE\]. The same lack of justification applies to Microsoft's decision not to offer a browserless version of Windows 98 to consumers and OEMs, as well as to its claim that it could offer 'best of breed' implementations of functionalities in Web browsers. With respect to the latter assertion, Internet Explorer is not demonstrably the current 'best of breed' Web browser, nor is it likely to be so at any time in the immediate future. The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position." Microsoft's copyright defense--which was feebly first brought up in the waning days of the trial was also dismissed.

With regard to Microsoft's contractual agreements with PC makers that prevented them from altering the Windows desktop or boot-up process, Jackson ruled that Microsoft coerced PC makers into restrictive contracts specifically to keep Netscape off of new PCs. Microsoft, the judge says, used the availability of Windows itself, as a bargaining chip to ensure that Netscape made no inroads in the lucrative market for new PCs. Microsoft entered into similar pacts with Internet Access Providers (IAPs) as well, in some cases simply paying these companies to choose Internet Explorer over Netscape. And Apple Computer was forced to sign a technology sharing agreement with Microsoft that kept that company from openly supporting Netscape on the Macintosh platform as well; Apple signed the agreement to ensure that Microsoft would continue developing its much-need Office software for the Macintosh. "By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft helped to ensure that developers would not view Navigator as truly cross-platform middleware," Jackson explained. "By granting \[Internet Content Providers\] and \[Internet Service Providers\] free licenses to bundle Internet Explorer with their offerings, and by exchanging other valuable inducements for their agreement to distribute, promote and rely on Internet Explorer rather than Navigator, Microsoft directly induced developers to focus on its own APIs rather than ones exposed by Navigator."

Microsoft, Jackson ruled, followed a similar tact with Java, Sun Microsystem's cross-platform development platform. By creating a version of Java that was secretly specific to Windows, Microsoft impeded the adoption rate of Java to protect its Windows monopoly from a perceived threat. "These actions cannot be described as competition on the merits, and they did not benefit consumers," Jackson writes in the ruling. "In fact, Microsoft's actions did not even benefit Microsoft in the short run, for the firm's efforts to create incompatibility between its JVM for Windows and others' JVMs for Windows resulted in fewer total applications being able to run on Windows than otherwise would have been written. Microsoft was willing nevertheless to obstruct the development of Windows-compatible applications if they would be easy to port to other platforms and would thus diminish the applications barrier to entry."

"Only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself," the judge continues. "In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers."

With regards to Internet Explorer, Jackson rules that Microsoft specifically and purposefully leveraged its Windows monopoly to enter a second market, that for Web browsers. And it did so by illegally tying the two products together, in clear violation of the Sherman Act. In the most compelling portion of the ruling, Jackson discusses the controversial appellate court decision that previously ruled that Microsoft's tying of IE and Windows constituted a legal "integration." Jackson's rulings against Microsoft have invariably been reversed during the appeals process, and it seems that he wanted to address the most pertinent appellate ruling head on. Essentially, Jackson concludes that the appellate ruling was "undemanding" and inconsistent with related Supreme Court rulings. Jackson says that operating systems and Web browsers are "distinguishable in the eyes of consumers."

Jackson's 26-page brief was delivered at 5:00 p.m. Eastern time Monday, setting off a frenzy of posturing on both sides of the fence. The Justice Department was up first, with a press conference featuring U.S. attorney general Janet Reno and Joel Klein, the DOJ trustbuster leading the fight against Microsoft. "We're pleased that the judge agreed that Microsoft abused its monopoly power, that it violated the antitrust laws, and that it harmed consumers," Reno said, introducing Klein. "Microsoft has been held accountable for its illegal conduct in a court of law."

"We are, of course, very pleased with the court's opinion," Klein said. "It will benefit America's consumers by opening the door to competition, increased innovation, and increased software choice in the software industry. This landmark opinion ... will also set the ground rules for enforcement in the information age. No company, no matter how powerful, or how successful, can refuse to play by the rules and thwart competition for America's consumers."

Klein admitted that no remedy had been decided on, but explained that the government would prevent Microsoft from abusing its market power as it had in the past. "The \[DOJ\] is committed to finding a remedy that will protect consumers, innovation, and competition by putting an end to Microsoft's widespread and persistent abuse of its monopoly power, and to rectifying its unlawful attempt to monopolize the Internet browser market."

About a half hour after the DOJ end zone dance, Microsoft president and CEO Steve Ballmer joined chairman Bill Gates in a press conference at Microsoft's Redmond campus. Though many analysts were expecting some sort of humility on Microsoft's part--Gates was himself responsible for the most embarrassing episode of the trial, a laughable taped deposition that clearly rankled the judge--both Ballmer and Gates were instead defiant, sure that the company would win on appeal.

"Today's ruling was not unexpected, given the court's earlier findings" Gates admitted. "But there are several steps ahead in this case. While we did everything we could to settle this case, and will continue to look for new opportunities to resolve it, we believe we have a strong case on appeal. The appeals court has already affirmed Microsoft's right to build Internet capabilities into the Windows operating system to benefit consumers. This ruling turns on its head the reality that consumers know, that our software has made PCs more accessible and affordable to millions ... As we look ahead to the appeals process, innovation will continue to be the number one priority at Microsoft. Our future success depends on our ability to keep innovating in the fastest changing industry on earth."

Gates alluded to Netscape's purchase by AOL and other "record breaking mergers" as examples of a constantly changing PC industry. He noted that the antitrust case was the responsibility of the legal team; the rest of Microsoft, he says, will work on building great software. Ballmer, meanwhile, spoke of his pride in the company, its technology, and its people.

"The ruling does not change the challenges and opportunities before us," Ballmer said. "At the same time, we do recognize that we have a special responsibility to set a positive example in our industry. We've spent the past twenty-five years thinking of ourselves as a small, aggressive company playing catch-up to industry giants, even though, at some point along the way, we became a large company."

Looking forward, Microsoft faces several months, perhaps, of trial time, during which it will face off once again against the U.S. government during the penalty phase of the trial. The company says that it is still "open" to a settlement, though ongoing talks are not currently scheduled, and certainly, it's still entirely possible to end the trial with a settlement. At this point, however, it seems that Microsoft's best chance now falls to the appeals round, which could drag on for years. And in the ongoing soap opera of the Microsoft antitrust trial, that's perhaps the most monotonous news of all

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