Analysis: Findings of fact in the Microsoft antitrust case

Now that we've had a bit of time to allow the judge's findings of fact to sink in, it's time to consider what the document really means. Does the judge understand the computer industry well enough to make a determination of culpability? And were the conclusions correct? Let's take a look.

Wading through the massive 207 page findings, it's sometimes hard to know where to begin. But the conclusions are obvious enough: Microsoft is a monopoly power in the computer industry. The company abuses this power to harm competitors, partners and consumers. I have no issue with any of these statements, as I've been following Microsoft for almost a decade and I've seen countless examples of each of these charges.

But the report also includes some speculation, which I'm not as excited about. For example, Judge Jackson suggests that "Microsoft wields so much power in the Intel PC market that it could charge a price for Windows that is substantially higher than it would be able to charge in a truly competitive marketplace." Also, "If Microsoft exerted its power solely to raise price, the day when users could turn away from Windows without incurring substantial costs would still be several years distant. Moreover, Microsoft could keep its prices high for a significant period of time and still lower them in time to meet the threat of a new paradigm." I may agree with these types of statements, but I don't feel that they have any place in a finding of fact. If they happened, that's one thing. But if they "could" happen, I think it's fair to ignore them.

That said, Judge Jackson's findings are as damning as they are obvious. Example after example is given to show Microsoft's attempts at protecting its vital market for Windows at all costs. Competitors are offered back-room deals, and even partners are threatened when they attempt to provide solutions that interfere with Microsoft's internal goals. And all along the way, it is the consumers that feel the brunt of this attack, since it is they who suffer as innovation is stifled and options are rubbed out. Anyone who has kept his or her eyes open in the computer industry has known about this for years. Now the whole world knows.

To corroborate these charges, let's take a look at some of the more compelling examples from the findings of fact.

  • Microsoft attempted to coerce Netscape into ceding the Windows 95 Web browser market to Microsoft. The company informed Netscape that it would be a competitor, not a partner, if it disagreed. Netscape refused to endorse this "special relationship" and went on to create a cross-platform Web browser that included its own set of APIs, not Microsoft's. But Microsoft also withheld vital programming information from Netscape for three months as a result of its decision. Thus, Netscape was unable to release its Windows 95 browser in time for the product's launch or the 1995 holiday buying season. Microsoft also withheld information about a Windows 95 dial-up networking issue that prevented Netscape from bundling its product with many Internet Service Providers until 1996. When it became clear that Netscape would not capitulate, Microsoft set out to create its own browser and destroy Netscape's business. Microsoft spent over $100 million a year developing Internet Explorer (plus an additional $30 million marketing it), a product it gave away for free. By 1999, over 1000 developers were working on improving IE. By the release of IE 4.0 in 1997, the product was generally considered equal to, or superior to, Navigator in every respect. Despite the opportunity to make a substantial amount of revenue from the sale of Internet Explorer, and with the knowledge that the dominant browser product on the market, Navigator, was being licensed at a price, senior executives at Microsoft decided that Microsoft needed to give its browser away in furtherance of the larger strategic goal of accelerating Internet Explorer's acquisition of browser usage share. Consequently, Microsoft decided not to charge an increment in price when it included Internet Explorer in Windows for the first time, and it has continued this policy ever since. In addition, Microsoft has never charged for an Internet Explorer license when it is distributed separately from Windows. Executives at Microsoft saw browser marketshare as the company's number one goal. Microsoft's handling of IE is discussed below in greater detail.

  • Microsoft asked Intel Corporation to stop development of its digital signal processing software that was designed to take advantage of the company's microprocessors. Intel was also developing versions of the software for other operating systems. Bill Gates admitted that he asked Intel CEO Andy Grove to "not ship" the product. Microsoft pressured PC makers to not include the software with their systems. Ironically, Bill Gates complained that he had a "fundamental problem with Intel using its profits in microprocessors to fund the development and distribution of free platform-level software." (I guess he hadn't heard of Internet Explorer yet). Faced with threats from Gates and other executives at Microsoft, Intel finally abandoned its software efforts.

  • Apple Computer creates a multimedia software player called QuickTime that it also sells for the Windows market. As a result, Apple competes with Microsoft's DirectX multimedia platform, which only runs on Windows. During 1997 and 1998, Microsoft promised to exit the multimedia authoring market if Apple abandoned the multimedia playback market on Windows, leaving the market to Microsoft's own Media Player. Microsoft told Apple that it did not object to Apple continuing to create a media player for its own Macintosh platform. Microsoft threatened to enter the multimedia authoring market and throw its considerable marketing weight behind a competing standard if Apple didn't comply. Apple's interim CEO, Steve Jobs, refused to accept the offer.

  • RealNetworks markets a streaming audio and video product called RealAudio that runs on a variety of operating systems, including Windows. Bill Gates identified RealNetworks as a target and authorized a $65 million investment in a competing company. Two weeks later, Microsoft offered to buy RealNetworks competitor VXtreme. Microsoft executive Bob Muglia informed RealNetworks executives that "it would be in the interests of both companies" for RealNetworks to abandon the streaming audio and video market on Windows unless RealNetworks wanted to work with Microsoft's APIs. In July 1997, Microsoft agreed to bundle RealAudio with Internet Explorer and make an investment in RealNetworks. But Microsoft thought that the agreement meant that RealNetworks would abandon its cross-platform streaming software for Windows. RealNetworks used the letter of the agreement to prove that it did not forfeit that right and it continues today to produce the top-selling streaming software for Windows.

  • Microsoft charged IBM a higher price for Windows 95 when it refused to stop selling OS/2. It also license Windows 95 to the company at a later date as a form of retribution. Microsoft offered to lower the price of Windows 95 $8 a copy if IBM did not mention any other operating system in its advertisements. IBM rejected the deal because it would have meant forfeiting advertising of its own operating system. Microsoft executive Joachim Kempin attempted to coerce IBM into not bundling its own Lotus SmartSuite with its computers. When IBM refused, Kempin informed IBM that the company would need to pay $25 million to settle an internal "audit." Otherwise, Microsoft would not be able to ship the golden master to IBM in time for it to compete in the back-to-school season in 1995. Ultimately, IBM refused to stop advertising and bundling OS/2 and SmartSuite and had to pay $31 million on the day of the Windows 95 launch to get the golden master from Microsoft. Because of the delay, IBM lost business during the back-to-school season because it was unable to offer Windows 95 on its systems. Because IBM considered to sell SmartSuite with its Windows systems, Microsoft refused to help IBM market its systems. An IBM survey concluded that this practice cost them at least $180 million each year.

  • A "no revenue product," Microsoft's Internet Explorer is touted by the company as an integrated part of Windows. However, the consensus in the software industry is that the functionality of a Web browser is distinct from the set of functionalities offered by an operating system. That is, they are two separate products. Many consumers do not want to accept the browser that comes bundled with Windows and many consumers would like no browser to be installed with Windows. Microsoft's decision to force the bundling of the browser on consumers, however, was done to harm Netscape, not help consumers. Microsoft's license with PC makers prevented them from removing any part of Windows, including Internet Explorer. Thus, a license for IE is "sold" every time a new PC ships with Windows. Microsoft's decision to replace the Windows "shell" with Internet Explorer was a marketing decision with no technical benefit (Microsoft executive Brad Chase: "We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience"). Since IE files replaced key system files, trying to remove IE would cripple Windows, giving the appearance that IE was somehow critical to Windows. In 1996, executive Jim Allchin argued that Microsoft wasn't bundling IE and Windows tightly enough. After conferring with Allchin, executive Paul Maritz agreed to delay the release of Windows 98 for eight months. The decision to do so was done to ensure that "Netscape never gets a chance on these systems," not for the needs of consumers. If anything, the decision harmed PC makers, which lost out on a new version of Windows for the lucrative holiday season in 1997. One executive asked in fall 1997 whether Windows 98 was going to be delayed for IE integration, even at the loss of Christmas 1997 sales. Maritz said yes, and added: "The major reason for this is to combat Netscape. We have to position the browser as 'going away' and do deeper integration on Windows." Thus, Microsoft delayed the debut of numerous features, including support for new hardware devices, that Microsoft believed consumers would find beneficial, simply in order to protect the applications barrier to entry. The company also ensured that users could not uninstall Internet Explorer, despite the fact that all other "integrated" (as defined by Microsoft marketing literature) features in Windows 98 could be uninstalled. The integration of IE with Windows has since been proven to be a security risk as well, opening Windows users to a variety of security breaches, which continue to this day. For users that have no need for Web features, the integration brings with it performance degradation, increased risk of incompatibilities, and the introduction of bugs. In corporate situations where it would be advisable to prevent employees from browsing the Web, Windows cannot offer such an option. In short, Microsoft has unjustifiably jeopardized the stability and security of the operating system. Specifically, it has increased the likelihood that a browser crash will cause the entire system to crash and made it easier for malicious viruses that penetrate the system via Internet Explorer to infect non-browsing parts of the system. Microsoft could offer consumers all the benefits of the current Windows 98 package by distributing the products separately and allowing PC makers or consumers themselves to combine the products if they wished.
It goes on and on. So Microsoft's abuses are public knowledge. And while we let these unsettling facts sink in, we await the next phase of the trial, the findings of law, where Judge Jackson will determine which laws, if any, Microsoft has broken. This is expected sometime in January. Finally, a decision will be rendered based on these findings. Speculation has run rampant that the DOJ will seek to have Microsoft broken up into several smaller companies, a rumor fueled largely by the fact that the agency has yet to rule out that possibility.

But we're getting ahead of ourselves here. Microsoft will probably do everything it can to settle the case before a decision can be rendered, because even though any decision could eventually be thrown out on appeal, the damage will have already been done. Microsoft's public image will forever be tarnished by this episode, so it makes sense to get out as quickly as possible.

Microsoft has always been the 800-pound gorilla of the computer industry for over a decade and most of its competitors aren't too worried about the company being knocked down a notch or two. But let's hope this trial doesn't lead to the wholesale destruction of the company: That's an outcome that could have ramifications far beyond the insular computer industry. It's one thing to curb the illegal practices of an industry heavyweight, but it's another thing altogether to have Washington micro-manage the most dynamic industry on the planet. Given a level playing field, Sun, AOL/Netscape, Linux, Apple, Netware, and hundreds of others are more than capable of competing on their own. It's high time we let that happen

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