Jonathan Huelman
CSC 540 Individual Project
19 April 2012
The Softening of Microsoft
When you have only one person or enterprise providing a specific commodity, you have a monopoly. A “trust” is the American term for one such enterprise, which uses its total control over the market of its particular commodity to gouge prices and engage in anti-competition practices. In 1998, the United States Department of Justice (USDOJ or DOJ) filed suit against Microsoft Corporation, claiming that Microsoft had monopoly power over Intel-based computer systems and was abusing that power, specifically with regard to the bundling of their Internet Explorer application with their Windows operating system. Over the course of the next four and a half years, Microsoft struggled desperately in the district courts to keep the DOJ from achieving their goal of breaking up the monopoly. In 2000 the Department of Justice would have had Microsoft break into two companies, and after being denied a hearing with the Supreme Court, an appeals court in the District of Columbia overturned the breakup in June of 2001. This case set a very important precedent in Microsoft’s history, as well as the history of the laws surrounding computing.
The first antitrust law passed in the United States was the Sherman Antitrust Act of 1890. The Sherman Act, often considered the most important antitrust law, was intended to combat the trusts of the American economy during the late nineteenth century, and is still the main foundation for antitrust legislation in the United States. The Sherman Act prohibits two broad categories of conduct. First, it declares to be illegal “every contract … in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Second, it bans efforts to “monopolize . . . attempt[s] to monopolize, or . . . conspiracies … to monopolize any part of the trade or commerce among the several States, or with foreign nations.” While the Sherman Act is broadly worded to apply to all limits of trade, the United States Supreme Court has interpreted the Sherman Act as applying only to unreasonable restraints of trade. Penalties for violating the Sherman Act can be either civil or criminal in nature. The United States Department of Justice has the authority to criminally prosecute individuals for violating the Sherman Act, but some states have criminal authority under their own state antitrust laws.
From Justice Douglas in the 1948 case of The United States v. Columbia Steel Co.:
“The philosophy of the Sherman Act is that it should not exist...Industrial power should be decentralized. It should be scattered into many hands so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men...That is the philosophy and the command of the Sherman Act. It is founded on a theory of hostility to the concentration in private hands of power so great that only a government of the people should have it.”
In 1914, Congress enacted two new antitrust laws. First, Congress enacted the Federal Trade Commission Act, which created the Federal Trade Commission and gave it the authority to enforce U.S. antitrust laws. Second, Congress enacted the Clayton Antitrust Act, which was intended to supplement and strengthen enforcement of antitrust laws. It added new forms of prohibited conduct, such as “mergers and acquisitions where the effect may substantially lessen competition”, and also gave state attorneys general the ability to enforce the federal antitrust laws. The Clayton Act has been amended several times over the years, first by the Robinson-Pitman Act of 1936, to ban certain forums of discriminatory business conduct, and then again by the Hart-Scott-Rodin Act in 1976, to require companies intending to merge to notify the federal government before consummating the transaction in order to enable enforcement agencies to review the competitive effects of the merger. Most states have enacted their own antitrust laws to prohibit anticompetitive conduct affecting commerce within their states and to supplement enforcement of federal antitrust laws. While state and federal antitrust laws are similar, the codification of state antitrust laws varies widely from state to state. For example, some state antitrust laws substantially track the language of their federal counterparts, whereas other states only incorporate select sections of federal antitrust laws, recite specific types of prohibited acts, or include new areas of substance entirely. In many cases, state antitrust laws are more expansive than the federal antitrust laws in terms of the amount and quality of prohibited conducted. The interpretation of state antitrust laws may, but will not always, substantially mirror the federal antitrust laws.
The United States Government first became aware of Microsoft Corporation’s anti-competitive practicesin 1994, due to its affiliation with OEMs (Original Equipment Manufacturers), such as personal computer manufacturing companies. Microsoft licensed Windows to computer manufacturers in an attempt to combat software piracy, which would pay royalties to the company for every computer sold with or without Windows as its operating system. Such acts stimulated questions regarding the corporations business practices for using exclusive licensing agreements to maintain economic dominance over the software industry. Despite this being in direct violation of section two of the Sherman Antitrust Act (which forbids "Monopolization, attempts to monopolize, and conspiracies to monopolize,") it was not until the release of Internet Explorer version 4.0 that Microsoft fell under advanced scrutiny about its anti-competitive practices.
“In 1995, Internet Explorer was introduced as a startup kit that was to be used with the latest and most popular, Windows 95 operating system. Although originally sold separately from all Windows systems, Internet Explorer soon became bundled into such programs. This was because Microsoft Office was such a success on the marketplace as a bundled program, and the company felt that Internet Explorer would be able to duplicate that success. While Internet Explorer 1.0's rival Netscape Navigator enjoyed early success, when IE 3.0 was introduced in the summer of 1996, a mass migration of users crossed over. Internet Explorer maintained a variety of new features including support for video and audio, Java applets, and more. Despite the fact that there remain debates at this time over web browser superiority, one distinguishable aspect set them apart; Netscape charged nearly $50 for its web browser, while Internet Explorer was virtually free because of its integration with Windows. By 1997, the extensive Internet Explorer 4.0 was introduced as an integration and bundle with the newest Windows 98, as well as full compatibility with all previous Windows systems since 95. This version contains the "Active Desktop" feature, which allows users to alter desktop wallpaper with images from the internet. Since it was completely bundled within the operating system, it could be integrated into other software such as Microsoft Office making it possible to actively incorporate its programs with the internet. Microsoft advanced and developed its internetbrowsertechnology for several reasons. First, it wanted to initially break into the web browser market. Second, Microsoft programmers saw the internet as the future of computing, and that web-based operating systems were not for from reach. If the company could gain a foothold on the web browser community, when web based operating systems became operational it would have an advantage over its competitors.”
On 18 May 1998, the federal government, 20 separate states, and the District of Columbia sued Microsoft Corporation, accusing the company of predatory practices to protect its monopoly in personal-computer operating systems, stating that Microsoft “illegally thwarted competition to protect and extend its monopoly on software.” The trial began in October of that same year, with U.S. District Judge Thomas Penfield Jackson presiding. After accusations that Microsoft was using its monopoly to bully and bribe others in the industry so that it could illegally expand its product, Microsoft responds by saying that the accusations are misguided and erroneous, and that the company has competed legally since its inception. As early on as December of 1998, the State of South Carolina dropped out of the suit, believing Microsoft’s claims, South Carolina Attorney General Charles Condon said he saw no need for the lawsuit, citing abundant competition among Internet companies. Condon specifically cited the proposed $4.2 billion merger of Microsoft rivals America Online (AOL) and Netscape Communications (NSCP) as proof there was plenty of competition among Internet companies. "Recent events have proven that the Internet is a segment of our economy where innovation is thriving," Condon said in a statement. "Further government intervention or regulation is unnecessary and, in my judgment, unwise."
On 5 November 1999, Judge Jackson issued a preliminary ruling that Microsoft did indeed have a monopoly on their industry, writing
“Three main facts indicate that Microsoft enjoys monopoly power… First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows. 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. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.”
This ruling was followed in April of 2000 with a ruling that Microsoft had to break up their company into two separate corporations: one to develop and distribute Windows and one for all of their other software. Microsoft immediately appealed this decision, which was rejected by the Supreme Court and handed down to the D.C. District Courts. It was in June of 20001 that the District Court ruled, in light of Judge Jackson’s bias and unlawful dealings with the media before the case was over, that the order to breakup be reversed and that Jackson be removed from the case.
Around this time, Microsoft began to settle out of court with the various plaintiffs involved in the suit. A $100,000 settlement was reached with New Mexico in July 2001, and in November of that same year, nine other states, as well as the Department of Justice itself, settled their own issues with Microsoft. The settlement terms were not too harsh: Microsoft had to share its applications programming interfaces (APIs) with third-party companies and appoint a panel of three people who would have full access to Microsoft's systems, records, and source code for five years in order to ensure compliance.California, Connecticut, Iowa, Florida, Kansas, Minnesota, Utah, Virginia and Massachusetts, and the District of Columbia, however, did not agree to this settlement, saying that these terms were not punitive enough. But on 30 June 2004, the U.S. appeals court unanimously approved the settlement with the Justice Department, rejecting objections that the sanctions were inadequate.Industry pundit Robert X. Cringely believed a breakup was now impossible, and is quoted as saying that "now the only way Microsoft can die is by suicide." Andrew Chin, an antitrust law professor at the University of North Carolina at Chapel Hill who assisted Judge Jackson in drafting the infamous“findings of fact,” wrote that the settlement gave Microsoft "a special antitrust immunity to license Windows and other 'platform software' under contractual terms that destroy freedom of competition. Microsoft now enjoys illegitimately acquired monopoly power in the market for Web browser software products."
Microsoft's obligations under the settlement, as originally drafted, expired on 12 November 2007. However, Microsoft later agreed to consent to a two-year extension of part of the Final Judgments and stated that if the plaintiffs wished to extend those aspects of the settlement even as far as 2012, it would not object. The plaintiffs made clear that the extension was intended to serve only to give the relevant part of the settlement "the opportunity to succeed for the period of time it was intended to cover", rather than being due to any "pattern of willful and systematic violations". The court has yet to approve the change in terms as of May 2006.
During the time it took this case to finally reach this settlement, however, many other groups stepped forward to grab a piece of the action. In 2000, the European Union announced they would be investigating Microsoft’s anticompetitive practices, and in 2002, Netscape, AOL Time Warner, Be Inc., Sun Microsystems, and Burst.com all filed suit; In settlement, AOL received $750 million, Californian consumers received $1.1 billion, Be Inc. received $23.25 million, Kansas received $32 million, the District of Columbia $6.2 million, and an amount totaling ~$200 million was paid out to North Carolina, Tennessee, North Dakota and South Dakota. All told, including fines and other smaller settlements and lawsuits, Microsoft ended up $6.83 billion out.
But what of it? Whatever sort of lasting effects the government may have intended this settlement to have on the industry leader; they might have been over sighted. Microsoft certainly took a huge monetary hit, but were their monopoly days over? It’s a tricky question, and an even trickier answer. In a New York Times editorial piece in May of 2011, shortly after the expiration of the terms of the settlement, it was written
“Did the biggest high-tech legal action of the 20th century make any difference, or was it a waste of money and time?Critics of the settlement… argue that the Microsoft case did little to change technological development; it was Google, the Internet and bad business decisions that put an end to the dominance of Microsoft. The conditions imposed by the court, to stop forcing consumers to use Internet Explorer and preventing rival software from operating properly on Windows, had little relevance to the future path of innovation. This seems too narrow a reading of history. It is, of course, impossible to say what would have happened had the Justice Department and 19 state attorneys general not taken Microsoft to court in 1998. But … the case did seem to alter Microsoft’s behavior, taming its ruthless drive. Government oversight not only swayed Microsoft to pull its punches, it sent a signal to other innovators that it was O.K. to work on technologies that Microsoft was interested in — something they might never have done before. Had Internet Explorer become as dominant as Windows, Microsoft could have held more sway over the development of new services on the Web.Today, Microsoft is way behind the curve. New innovators, like Google and Facebook, have emerged with big power over their respective markets. Yet the precedent of Microsoft’s antitrust case poses an important question about the future: Should we worry about dominant information technology companies, or can we simply wait for the next big thing to bump them aside?”
The article mentions that Microsoft itself is now worried about the dominance of Google in the industry, quoting their own letter in June of 2010 wherein they noted to the FCC their distress that “When a single entity achieves dominance and thereby becomes a gatekeeper, there is an inherent risk that it may have both the incentive and ability to place its own interests above consumers’ interests in access to a broad and diverse range of content, services and viewpoints.” It might seem laughable to see Microsoft worrying about monopolies when they themselves were so boldly put under the light for so long for the very same thing, but the complaint is legitimate, as an online article by Kaila Krayewski outlines, because they are “worried that consumers do not understand that natural search results can be affected by the value judgments of the search provider (and hence, the “Google is God” complex can be dangerous for the public).” They are also trying to warn people about the promotion that a search engine can give its favored publishers and the demotion of those they dislike. Their concern is also about an “ad network[that] could manage to suppress the smaller speakers who could not sustain themselves without ad revenue.” They call for “regulators who carefully monitor the search engine market” and “transparency, allowing users better knowledge of how exactly the online ecosystem works, and when vertical integration is causing a skew in search results, due to lack of neutrality.” In a very un-Microsoft move, they appear to be looking out for the people’s best interests.
My conclusion about this entire case falls in line with this. I think that underneath this legal battle is a very good lesson to be learned. Monopolies in the world of computing are just as detrimental to the rest of the world as monopolies anywhere else. It was a hard lesson for Microsoft to learn, but learn it they did. Internet Explorer’s usage has gone down from 85.8% in January 2002 all the way to 18.9% in March 2012. The Windows operating system has enjoyed great success all throughout its run, but other systems like Mac and Linux are steadily raising. Microsoft may not be “way behind the curve,” but they certainly have made way for other groups to come in and take their thunder.
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