Why the Microsoft settlement won't work

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    he Microsoft antitrust trial, probably the mostimportant technology-related legal case of ourtime, appears to be limping at last toward a con-clusion. Unfortunately, there is an excellentchance that the software colossus will win

    despite losing, without much to restrain it from going back tothe heavy-handed, anticompetitive tactics that prompted theantitrust action in the first place.

    Not just the competi-tors and would-be com-petitors of Microsoft Corp.will lose: you and I will,too. We will continue beingdenied innovations thatonly real and rigorouscompetition can bring. Inmany cases we wont knowwhat were missing, be-cause one sorry effect ofmonopolistic dominationis that many innovationsdo not even get the chanceto be tested in the market.

    Those of you who havelost track of the trial pro-ceedings can be forgiven.The trial began five yearsago as an action filed bythe U.S. Department ofJustice and 18 states and the District of Columbia. The suitsmilestones include the April 2000 decision of U.S. DistrictCourt Judge Thomas Penfield Jackson, who found Microsofthad violated U.S. antitrust laws. Two months later, he orderedthe company broken into two separate entities.

    In June 2001, the U.S. Court of Appeals upheld Jacksonsfinding of violations. But it overturned Jacksons order,removed him from the case, and turned the proceedings overto Judge Colleen Kollar-Kotelly, of the U.S. District Court forthe District of Columbia.

    Last October, Judge Kollar-Kotelly ordered the JusticeDepartment, Microsoft, and the states to negotiate a settle-ment. In November, Microsoft, Justice, and nine of the statesagreed on terms to settle the case (the others are continuingthe suit on their own). Under the settlement, Microsoft

    would not be split apart. Moreover, the restrictions that wouldbe placed on the company are so riddled with loopholes thatit is difficult to see how they could possibly rein in the com-panys entrenched anticompetitive behavior. At press time,observers were eagerly awaiting an announcement fromJudge Kollar-Kotelly about whether she would accept the pro-posed settlement or would insist on more rigorous measuresagainst the software giant.

    As it stands, the proposed agreement offers plenty of oppor-tunity for Microsoft to go on as it has. For example, one pro-vision would permit users to choose non-Microsoft software as

    the default on their com-puters. Microsoft, however,can dictate that the softwareuse Microsoft technologies.That caveat is just one ofmany in the settlement thatwould continue to blockcompetitively innovativesoftware.

    Anyone who has fol-lowed Microsofts historywill have little doubt aboutwhether the company willexploit these loopholes tocontinue bullying thosewho want to use or distrib-ute its competitors prod-ucts. Microsofts success inrecent years has come fromblocking users and devel-opers from innovations by

    other companies that could threaten Microsofts dominance.That is the essence of the companys violation of the antitrustlaws, and its bad effects continue to the present day.

    Web-browsing technologies are just one example. Count-less memos show that in the 1990s Microsofts senior execu-tives saw Internet innovation, especially so-called middlewaretechnologies that link the PC to the Web, as a threat to theirmonopoly position in Windows. From 1995 until the end ofthe browser war, they were particularly worried about losinguser and developer attention to Netscape CommunicationsNavigator browser, to Sun Microsystems Java architecture,and to other new Internet-related technologies.

    Microsoft came out with its own browser, Internet Explorer,in 1995, to compete with Netscape. But Explorers merits werenot enough by themselves to persuade people to choose it.MI











    eptember 2002

    Why the Microsoft Settlement Wont WorkTheres still not much to restrain it from engaging in anticompetitive practices

    S P E A K O U T

    TBY TIMOTHY F. BRESNAHANStanford University

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    That may surprise you, but there was never any doubt aboutit inside Microsoft. Many internal memos and e-mails, over theentire period of the browser war, explain convincingly how andwhy Netscape was going to win. The fundamental reason wasthat Netscape had too much of a head start.

    So to hang on to their supremacy, Microsoft executivesadapted classic monopolistic tactics to the particular circum-stances of the PC industry at the end of the 20th century. Basi-cally, what they did was systematically block widespread dis-tribution of superior new technologies and prevent thirdparties from collaborating with innovators.

    They also warned original-equipment manufacturers(OEMs) away from Netscape Navigator by threatening to revoketheir Windows license if they did not comply. They paid Inter-net service providers and firms like America Online to distrib-ute only Internet Explorer because they were concerned theywould lose all those side-by-side user choices, according toCameron Myhrvold, the products own marketing manager.

    When an OEM like Hewlett-Packard came up with valu-able innovations that let users easily set up their own com-putersand choose the browser they wantedMicrosoftbanned them. Similarly, the company forced Intel to with-draw its support for Suns Java, theoriginal Java and a rival to Microsoftsversion.

    Through these tactics, and more,Microsoft forced developers of PC soft-ware to favor Internet Explorer if theirsoftware worked automatically with abrowser, and to favor Microsofts Java iftheir product linked to Java. Those werethe tactics that drove the outcome of the browser and Javawars, which was (no surprise) a total victory all around forMicrosoft.

    The point of all this was to have the Windows monopolysurvive competition born on the Internet, as Bill Gates putit in 1995. Over a period of years, as Microsoft memos clearlyshow, executives concluded that the Internet threatened theirmonopoly position, and that they could not thwart it by pro-ducing better products. So they used unlawful tactics to keepcustomers from getting a chance to choose new technologies.

    They also imposed what insiders called a strategy tax ontheir own browser developersbrowser improvements thatwould benefit customers could nevertheless be nixed if theydidnt improve the strategic position of Windows and Office,Microsofts core products. With all of Microsofts talent, it isnot surprising that some of their own people complained bit-terly about these tacticsthey wanted to try to win on themerits of their creations rather than by brute force.

    The damaging and distorting effects of those tactics harmcomputer users to this day. The Netscape browser, Java on PCs,and multimedia technologies from Intel have all disappearedfrom the marketplace. Indeed, Microsoft goes on blockingdistribution of innovations by others, as documents intro-duced at the trials show. Examples include multimedia soft-ware from Real Networks and Nokia, as well as Nokia softwareto synch handheld data with your PC.

    When efforts to prevent competition kill an innovativeproduct or company, more than technology is lost. If Naviga-tor, for instance, were still robust, middleware entrepreneurswould have two choices of distribution partner: Microsoft andNetscape. As a result, we have lost the opportunity even to con-sider new technologies not approved by Microsoft.

    The bottom line is that, had Microsoft obeyed the law, wewould have had much more innovation and competitionover the last seven years. Moreover, much of that lost activ-ity would have focused on the interface between the PC andthe Internetan area where more innovation would havebeen particularly welcome.

    What next?

    We need a remedy that will reopen the market to competitionand innovation and give computer users and developers asmuch choice as they would have had without the violations.But the deal signed by Microsoft and the Department of Jus-tice last winter wont do it. It is chockful of escape clauses andother ways for Microsoft to pressure third parties, squelchinnovations from competitors, and block entrepreneurial start-ups from gaining access to your desktop.

    As for the states that are continuing the trial, they are nowintent on forcing Microsoft to disclose technical informationwith which software developers could create products thatwork with Windows. They also want OEMs to have more flex-ibility and freedom from restrictive contracts and retaliation byMicrosoft. Judge Kollar-Kotelly is considering these requests.

    I particularly like an idea that those states have reluc-tantly forsaken: spinning off the Office software suite, includ-ing the Explorer browser, into a separate company. Onlysuch a move would truly offer competitors to Windows anopportunity to enter and compete. For example, many morepeople would use the Linux operating system if it ran Office,especially an Office no longer subject to Microsofts strategytax. Meanwhile, middleware entrepreneurs could turn to theOffice company as a distribution partner if the Windowscompany tried to block them. Consumers and developerswould be given many more choices.

    Sadly, it probably wont happen. And there arent manyoptions in between this sort of divestiture and a slap on thewrist. The most promising of those is compelling Microsoftto publish protocols (and the code that supports them) sothat Internet software can work smoothly and transparentlywith Windows and Internet Explorer. The larger choiceamong innovations would leave users and developers worseoff than if the lawbreaking had never happened, but better offthan they are today.

    S P E A K O U T

    Microsofts success in recent years has comefrom blocking users and developers frominnovations by other companies that couldthreaten Microsofts dominance

    Index: CCC: 0-7803-5957-7/00/$10.00 2000 IEEEccc: 0-7803-5957-7/00/$10.00 2000 IEEEcce: 0-7803-5957-7/00/$10.00 2000 IEEEindex: INDEX: ind: Intentional blank: This page is intentionally blank