Old Game, New Rules for Microsoft

For months, even years, the experts said it could not be done.

For months, even years, the experts said it could not be done.

Antitrust laws, they said, could never react quickly enough to stop Microsoft from brutalizing the competition. But the sweeping, 125-page ruling handed down by the U.S. Court of Appeals for the District of Columbia Circuit has changed that thinking, probably for good.

Open price lists available to all comers, a prohibition against contracts that tell companies not to buy from others, a ban on withholding technical information from companies that do not do its bidding — these things and more could be in Microsofts future.

No matter Bill Gates insistence that Microsoft walked away from a raging antitrust bonfire only slightly scorched, free of the threat of a breakup and no longer at the mercy of a garrulous federal judge who had compared him to Napoleon.

No matter that Gates says Microsoft is emboldened by the ruling allowing it to add new technologies to its Windows operating system (OS), without having to worry about antitrust smoke-chasers looking over its shoulder.

No matter Gates insistence that Microsoft wont alter its plans for its next release of Windows or its grandiose .Net strategy to offer subscription-based Web services to businesses and consumers.

At the end of the day, the federal appeals court accomplished what competitors and federal prosecutors wanted all along: to prove, without doubt, that the worlds largest software company was guilty of abusing its monopoly power to maintain its OS market might.

Being branded a predatory monopoly, industry and legal analysts agree, irrevocably changes the way Microsoft will have to do business.

Its old tactics, in short, are now deemed crimes. And its prospects for continuing as before may be dim.

"Microsoft is, by judgment, a different company today than it was yesterday," said Rob Enderle, research fellow at Giga Information Group. "The burden of proof now resides with Microsoft. They now have to prove themselves innocent because it will be assumed they are guilty if anyone else brings forward charges about their practices . . . Thats going to significantly hobble Microsoft going forward."

A Surprise Verdict

Legal experts agree it is a new day for Microsoft. Going into the ruling, both sides seemed convinced that the libertarian-leaning appeals court would break new legal ground with its ruling — and both expected the court would interpret the law to give almost unlimited leeway for Microsoft to bundle whatever it chose with its OS.

Even Microsofts bully-boy tactics seemed likely to pass muster. Microsoft could continue as before, the legal experts said, if the court accepted Microsofts argument that monopolies cant exist in fast-moving technology markets.

Glenn Manishin, a partner at law firm Patton Boggs who has advised Microsoft opponents during the proceedings, predicted a "chill" on future cases if Microsoft won. "It could last 10 years or more," he said days before the ruling.

In fact, the appeals court dismissed the governments claim that Microsoft had tried to monopolize the market for Internet browsers. Yet, the court let stand every claim the government made to support its allegation that the company illegally maintained its lock on the PC OS market.

"This should give Microsoft pause," Manishin said after the ruling. "They cannot do whatever they want without antitrust scrutiny."

Eric Raymond, a leading open source advocate added: "Anybody who thinks this decision is a slam dunk for Microsoft had better think again." The ruling, he said, "leaves the door open to a dozen lawsuits by private companies for Microsofts anticompetitive behavior."

Perhaps as significant as the ruling itself was the court from which it came. Widely known for its love of free markets and hate of government intervention, the U.S. Court of Appeals for the D.C. Circuit ruled unanimously that the giant of Redmond was a monopolist that had broken the law when it threatened America Online, Apple Computer, Intel and Sun Microsystems. It had stifled innovation and, by implication, harmed consumers in the process.

"There was no court that was viewed as more hostile to antitrust and more friendly to Microsoft in the country," said Ed Black, president of the Computer & Communications Industry Association. "They are a monopoly company found guilty of violating the most serious antitrust law in the country. I think this is a clear indication that, whether you are in the Old Economy or the New Economy, you can expect enforcement of the antitrust laws.

"Im high-fiving all over the place," Black said.

Even Microsoft supporters said the ruling proves there are no high-tech exemptions for antitrust.

"The fundamental landscape of antitrust law remains very similar," said Hillard Sterling, a high-tech antitrust specialist at Chicago law firm Gordon & Glickson. "The court merely reaffirmed the high standards in technology [antitrust] cases. The holding is really directed at Microsoft specifically."

Robert Levy, fellow at the Cato Institute, which describes itself as a libertarian think tank, predicted that politics would drive future antitrust cases. "We are more likely to see fewer monopolization cases," Levy said. "But it is less a function of this ruling than it is of this administration. The current admin is much more likely to rely on the free market than were people like [former Assistant Attorney General of the Department of Justices Antitrust Division] Joel Klein or [former U.S. Attorney General] Janet Reno."

To Bundle or Not to Bundle

For now, the open question is Windows XP. Gates maintains its business as usual. That business includes development of the newest version of Microsofts OS. Due Oct. 25, Windows XP has already raised the hackles of the states and competitors. Microsofts latest software additions to Windows XP mirrors the strategy it pursued against Netscape Communications.

"Microsoft as an entity is moving ahead. Were continuing without any interruption, based on what the court has ruled today," Gates said last week. "Nothing in todays ruling changes our plans for our future products, including Windows XP."

Microsoft is armed with more than hubris. Despite being under antitrust scrutiny for the past four years, the company has $30 billion in cash on hand. Even Gates acknowledged that Microsoft has done "some of our best work during this time," achieving new levels of profitability and product success. (See "Microsoft Dominating All the While," this page.)

Yet Microsofts ability to add tentacles — or tie new technologies to its OS — is a key issue that remains unresolved by the appeals court, which remanded the tying issue to a lower court for review. The appeals court did set a higher standard for proving the tying charge, prompting speculation that Microsoft may be able to continue bolting on new technologies with impunity.

But thats not a given.

"Microsofts strategy with Windows XP calls very much into question whether they have a thorough understanding of the issues that brought them into [U.S. District Court] Judge [Thomas Penfield] Jacksons courtroom in 1998," said John Buckley, vice president at AOL. "The issues that brought them into Jacksons courtroom were all about the issues we face today."

Both Microsofts media player and the instant messaging software that the company says it will add to Windows XP have been stand-alone applications. In the case of the media player, Microsofts chief rival is RealNetworks, which popularized streaming technology on the Web. Microsofts IM rivals include AT&T, Odigo and market-leader AOL.

AOL knows first-hand how Microsoft uses its monopoly to conquer new markets.

In 1995, the company agreed to make Microsofts Internet Explorer the default browser for its online service in place of Netscapes then-dominant Navigator browser. Microsoft executives testified that AOL had good technical reasons to choose Internet Explorer over Navigator, yet both sides testified that AOL would not be distributed on the Windows desktop if it supported Netscapes browser. Microsoft got much-needed distribution for its browser in exchange for placing AOLs service on the Windows desktop.

AOL declined to comment on the ruling, but a source at the company said: "This is absolutely devastating for Microsoft. They expected a clean victory on tying, and the court left that muddy." He added, "They are a predatory monopolist whose execution was stayed."

RealNetworks also said it was not ready to discuss Windows XP. But it applauded the appeals court ruling. "While weve never built our business strategy around expectations of legal or regulatory decisions, a detailed reading of the ruling shows this to be a positive development for the industry and consumers," said spokesman David Brotherton. "The court has set some clear guidelines and rules of the road for the industry."

Sun, which wrangled with Microsoft over Suns Java programming language, also sees the ruling as positive for the industry, and said it supports measures that "protect Internet technologies from becoming the proprietary preserve of any one company."

Robert Lande, a professor at the University of Baltimore School of Law, said the ruling to send issues of tying and remedies back to a trial judge will give a boost to company opponents.

"In a remedy hearing, you can go beyond the illegal conduct to make sure that competition is brought to the marketplace," Lande said. "So while I think a breakup of Microsoft is unlikely, the conduct remedy could enjoin future integration of other software into their operating system, including some elements of XP.

"This will embolden the states in their XP case," he continued. "It will embolden the private plaintiffs, even the European Union in their Microsoft investigation."

The EU has become increasingly aggressive in challenging U.S. corporations aspirations and behavior. Just last week, the EU nixed the General Electric/Honeywell International marriage. The EU is also weighing action against Microsoft over the market for server software (see "Round Two: Europe," this page).

"This makes it a lot easier for the European Commission to come down on Microsoft, which has now been declared an antitrust violator in this country," said Stephen Houck, a partner at Reboul, MacMurray, Hewitt, Maynard & Kristol and former lead attorney for the states Microsoft litigation.

Its anyones guess where things go from here. Either side can appeal to the U.S. Supreme Court. They can argue the case again before a lower court, charged with devising a new remedy. Or Microsoft and the government can sit down and do what previous DOJ prosecutors could not: hammer out a settlement.

While U.S. Attorney General John Ashcroft and the new Assistant Attorney General for the Antitrust Division Charles James called the ruling a "significant victory" for the DOJ, James did not reveal his next move, saying only that the DOJ and the 19 plaintiff states plan to "digest the decision and determine a future course of action."

And while the Bush administration may wish to settle the case quickly — as evidenced by comments President George W. Bush made last year while running for office — Attorneys General Richard Blumenthal of Connecticut and Tom Miller of Iowa insisted they are prepared to continue fighting to ensure that Microsofts misconduct is stopped. Both said a Microsoft breakup or other structural remedy is still very much a possibility and one they will pursue, if necessary, in the lower court.

"The conduct by Microsoft in the last year repeats many of the things that were a problem here, and indeed, do it on a bigger stage with more at stake," Miller said.