Microsofts Collateral Damage

You may have thought that Microsoft Corp.'s antitrust lawsuit was only a battle over software, but anyone who buys Intel-compatible computers can find cause for genuine anger in the June 28th Court of Appeals ruling in this case.

You may have thought that Microsoft Corp.s antitrust lawsuit was only a battle over software, but anyone who buys Intel-compatible computers can find cause for genuine anger in the June 28th Court of Appeals ruling in this case.

Almost buried in pages of discussion of the Internet "browser wars" are a few short paragraphs about Microsofts offer to Intel of a mutually beneficial bargain, with Microsoft withholding support for AMDs 3DX instruction set in return for Intels withdrawal from cross-platform multimedia efforts. To protect its own software monopoly, in other words, Microsoft bargained to limit customer choice in hardware as well.

"If Intel has a real problem with us supporting [AMD]," warned Microsoft Chairman Bill Gates, "then they will have to stop supporting Java Multimedia the way they are." The appellate ruling concludes, without reservation, "we affirm the conclusion that Microsofts threats to Intel were exclusionary, in violation of §2 of the Sherman Act."

But wait, theres more.

In the weeks since the Court of Appeals made its ruling in the case, the metaphors have been flying. I was briefly startled by the imagery in one headline -- "Microsoft leaves suit behind" -- which made me visualize the company having been found to have no clothes. So to speak.

But now that weve all had time to read the 39,000-word document (and we have all read the whole thing, havent we?), I wonder if people realize how many bullets Microsoft did not dodge. Many of the most fundamental issues in this case, the ones that provoked the most vigorous debate about the legitimacy of the entire process, were decided against the companys positions.

Microsoft failed to persuade the court that its OK to kill off competitors as long as its done before theyre big enough to fight. Specifically, the company claimed that the District Court erred in finding that middleware (such as Web browsers) was not part of the relevant market in which Microsoft held a monopoly, while simultaneously finding that middleware represented a competitive threat that the company had acted improperly to contain.

The Court of Appeals said, "Nothing in §2 of the Sherman Act limits its prohibition to actions taken against threats that are already well-developed enough to serve as present substitutes ... [B]ecause middleware is not now interchangeable with Windows, the District Court had good reason for excluding middleware from the relevant market."

The rulings next paragraph then begins with a crucially important phrase: "Having thus properly defined the relevant market ..." Magnum bullet, direct hit.

Swinging the bat

Even assuming that "Intel-compatible PC operating systems" were the relevant market, Microsoft asserted that the "uniquely dynamic" nature of that market made it impossible to monopolize; further, that the companys own behaviors (such as charging low prices and investing large sums in research) refuted monopolization claims.

But the Court of Appeals rejected what it called Microsofts "bold and incorrect position on the law" concerning, for example, its right to use its intellectual property as it pleases. In language reminiscent of the District Courts colorful comments, the appellate opinion compared Microsofts argument to "the proposition that use of ones personal property, such as a baseball bat, cannot give rise to tort liability."

Why do I find myself thinking of gangsters collecting protection money from reluctant small-business "customers"?

The Court of Appeals found that "all the OEM license restrictions at issue represent uses of Microsofts market power to protect its monopoly, unredeemed by any legitimate justification"; that "Microsofts exclusion of [Internet Explorer] from the Add/Remove Programs utility and its commingling of browser and operating system code constitute exclusionary conduct"; that "Microsofts only explanation for its exclusive dealing [with Internet access providers and independent software vendors] is that it wants to keep developers focused upon its APIs -- which is to say, it wants to preserve its power in the operating system market. That is not an unlawful end, but neither is it a procompetitive justification."

Java developers will find their darkest suspicions vindicated by the Court of Appeals, which found: "Microsoft intended to deceive Java developers, and predicted that the effect of its actions would be to generate Windows-dependent Java applications that their developers believed would be cross-platform ... Microsofts conduct related to its Java developer tools served to protect its monopoly of the operating system in a manner not attributable either to the superiority of the operating system or to the acumen of its makers, and therefore was anticompetitive. Unsurprisingly, Microsoft offers no procompetitive explanation for its campaign to deceive developers. Accordingly, we conclude this conduct is exclusionary, in violation of §2 of the Sherman Act." Steel on target, as the sharpshooters say.

Breakup still on the table

Observers keep saying that "the breakup order is off the table" as a description of Microsofts so-called victory on appeal. Thats not what I found in this ruling. What the Court of Appeals declared was that "the District Courts remedies decree must be vacated for three independent reasons: (1) the court failed to hold a remedies-specific evidentiary hearing when there were disputed facts; (2) the court failed to provide adequate reasons for its decreed remedies; and (3) this court has revised the scope of Microsofts liability and it is impossible to determine to what extent that should affect the remedies provisions."

In other words, a breakup is still very much on the table, and the appellate judges even note that "divestiture is a common form of relief in successful antitrust prosecutions: it is indeed the most important of antitrust remedies ...

"On remand, the District Court must reconsider whether the use of the structural remedy of divestiture is appropriate."

In closing, Id like to thank the appellate court for one particular statement that we can all adopt as a standard for future IT industry behavior: "It would be inimical to the purpose of the Sherman Act to allow monopolists ... to squash nascent, albeit unproven, competitors at will -- particularly in industries marked by rapid technological advance and frequent paradigm shifts."

Only IT buyers vigorous investigation of promising new technologies, from small but truly innovative companies, can make these words a living principle -- before the next antitrust suit, which merely conducts an autopsy after the baby is dead in its cradle.