Judgement Day for Microsoft

As expected, the verdict in the Microsoft Antitrust case has gone against Microsoft. The remedy that the Justice Department and the states were seeking, i.e., the break up of Microsoft into two companies – one for the operating system and the other for all applications including web browsers — is the remedy that Judge Jackson has upheld. In his preliminary judgement, District Judge Thomas Penfield Jackson had held Microsoft guilty of monopoly practices and harming the interest of their competitors. He had asked the parties – the US Justice Department, the states (19 US states who are also parties to the case) on one side and Microsoft on the other – to hold discussions and work out a settlement. However, the parties could not come to any settlement as the only settlement acceptable to Microsoft was of a nature that were tried earlier and had failed. Hence, the final Judgement.

The issues in the Microsoft case are extremely important as it deals with software monopoly.  Hitherto, software has been dealt with as a homogenous activity and not differentiated as operating system, applications, web browsers, etc. The case before Judge Jackson was that monopoly in some of these areas result in monopoly over other areas as well. Therefore, for fair competition, Microsoft should not be allowed to continue as one entity.

It is acknowledged by everybody that Microsoft has a monopoly over the personal computer operating system – Windows. By virtue of this monopoly, Microsoft squeezed Netscape out of the Web browser market and forced all computer manufacturers to bundle the Internet Explorer along with Windows on their system. They also forced all PC manufacturers to pay Microsoft for a Windows license for each PC they sold. This, irrespective of whether the customer wanted Windows or not. The trial showed up clearly the extent that Bill Gates could go to hamstring and intimidate competition through sheer muscle power.

The case went badly for Microsoft right from the beginning. Their witnesses were repeatedly caught lying; they presented videos or two occasions that were exposed as doctored. The Justice Department produced as evidence a large number of emails sent by Bill Gates and other high-ups in Microsoft detailing their strategy towards competition. It was not surprising when Judge Penfield Jackson held that Microsoft was a monopoly that had harmed the interest of the consumers and their competitors. While a number of competitors have now gone out of business, and therefore this judgement will not help these companies to regain their earlier position, it will help them if they bring civil suits for damages against Microsoft. Current and future competitors will certainly be relieved after this judgement.

Before understanding the Microsoft Judgement, we need to understand how Microsoft leverages its monopoly over Windows to build a monopoly in any area that Microsoft entered. It is also clear that Microsoft is interested in every new area that is opening up: cell-phone based browsers, set-top boxes for TV so that the TV could be used as an Internet device and so on. It became clear to the industry that the strategy that Microsoft was adopting was similar to the one that had already given them a monopoly virtually over every domain of software. By offering to build a scaled down version of Windows for these devices, Microsoft would become the first layer between these device and the outside world. This, in turn, would ensure that Microsoft would get a head start over any software vendor writing applications for these devices.

Microsoft’s pre-eminent position in the software industry today started when they parted company with IBM and started marketing their Windows operating system software for the IBM PC compatible market. As Windows became the pre-eminent operating system in the PC market, Microsoft’s marketing muscle increased comparably. They first forced the PC manufacturers into contracts that prohibited them from carrying any other operating system. They also forced the PC manufacturers to pay them for a Windows license for every PC sold, irrespective of whether the customer wanted Windows or not. Any manufacturer who did not agree to such terms was threatened with withdrawal of the Windows license or a very high price for Windows. As Windows already had an overwhelming presence in the market, all PC manufacturers had to fall in line.

However, this was not all that Microsoft did. Microsoft’s operating system is the first layer of software on the PC; all the PC’s resources are controlled by the operating system. All software developers need to know the operating system fully in order to take advantage of the machine. However, Microsoft would not release the full details of the operating system to its competitors in products such as word processing, spread sheets, etc. Thus, it gave itself an advantage through its knowledge of the operating system that no other vendor shared. It also routinely bundled or forced the PC manufacturers to bundle its other products with the machine. Other software vendors complained that Microsoft routinely introduced bugs that would cause its competitors products to crash the system. By this tactics, Microsoft was able to build a second monopoly in the software industry: its word processor, spreadsheet and compilers also became the de facto industry standards.

The biggest challenge that Microsoft faced came with the Internet. It is now well known that Microsoft missed the Internet bus and came on board quite late. By that time Netscape was already well entrenched as the web browser software. Netscape was marketing its browser cheaply while hoping to make its money from the web site design tools that they could market to companies building web sites. Microsoft realised the long-term danger of a competitor who would be the market leader for net products. It decided to bundle Internet Explorer, its web browser, with its operating system software and give it away free. By this, it hoped to drive the much smaller Netscape out of business. This was what effectively happened with Netscape throwing in the towel last year and merging with America-On-Line, the premiere Internet service provider in the US.

The Justice department had filed a suite against Microsoft earlier also and had got assurances of good behaviour from it. However, as it was shown conclusively at the trial, Microsoft’s compliance was only for show – it never planned to accept the restrictions put upon it. That was the reason for the Justice Department and 19 states to charge Microsoft for misuse of its monopoly power, which the court has now upheld.

To many, the trial is already too late. The competitors have been already eliminated from all the three markets: the operating system, the PC applications and the web browser markets. The bifurcation of Microsoft into two companies is more likely to create two monopolies instead of one. Even if Microsoft fails to overturn the verdict, the chances are that Bill Gates will now have two of the most powerful companies in the world rather than one. The only challenge to Microsoft now comes from the Linnux community: those who have built a parallel operating system using joint effort of many of the world’s best programmers without any commercial interest. It is possible that Linnux, which is already a threat to Microsoft in the server operating system market, will become a competitor to Microsoft’s Windows and the current judgement will help this process.

A  interesting sideline is the current controversy in India on anti-monopoly legislation. A number of economists have argued that India does not need an anti monopoly law. The US example makes clear that free market generates monopolies and the state has to intervene in order to correct market distortions. The Microsoft case makes amply clear that the laws of supply and demand do not automatically ensure competition.