The Case of Microsoft

Microsoft is a remarkable company which has consistently rewarded its stockholders with impressive, quarter-after-quarter gains in market share, profitability and stock price. In the last five years Microsoft’s share value has gone up over ten times, while its market share of the desktop operating system market has increased to 95%. The employees pride themselves on competing as aggressively as is needed to in order to win — completely. This is instilled in the company from the top down — Bill Gates, CEO and until recently also the President, has always been extremely smart and driven, and has made sure everyone in his company is equally focused. To Gates, failing is simply not an option, even if the limits are pushed a bit.

It was this posture, and a lucky deal with IBM to supply MS-DOS, which resulted in Microsoft growing from just another software company into the largest company in the entire US economy. And it was also this posture which became a problem once Microsoft had reached a dominant market share.

In the United States there are laws, known as the Sherman Antitrust Act, which prohibit a company with a monopoly in one area from using that monopoly to gain control of another, or to prevent entry of a competitor into the area where the monopoly is already held. Enacted in the late 19th century to break up Standard Oil, these laws have been used when needed to deal with abuse of monopoly situations ever since.

Last year the US Department of Justice (DOJ) along with 21 state Attorneys General filed a lawsuit against Microsoft claiming antitrust violations. One state dropped out when Netscape was purchased by AOL, but the rest brought the case before Judge Thomas Penfield Jackson, who last month released his Findings of Fact (FoF).

In a 207 page document, the Judge has found almost entirely in favor of the DOJ and states’ claims that Microsoft holds monopoly power, that it used this power to maintain its position, and it harmed consumers and distorted competition doing so. The Judge has also been careful in his judgment, and has taken the unusual step of issuing the FoF before the Findings of Law (FoL). There are two reasons for this.

First, Jackson hopes that by showing Microsoft, the DOJ and the states what he has found factually he can encourage them to negotiate an out-of-court settlement. Unfortunately, because of Microsoft’s aforementioned posture, it is extremely unlikely it will agree to the terms which are being demanded by the DOJ and the states. Microsoft instead seems to be betting it can overturn the ruling in appeal.

Which is the second part of Jackson’s strategy — an appeal judgment cannot change any of the FoF, because the appeal judges will not re-examine the evidence. The appeal can only examine the FoL as derived from the FoF. And, as a great many legal analysts have said since the FoF were released, they allow only one conclusion. Further, Jackson has the option of bypassing the appeals process entirely, and requesting the supreme court hear to the case instead.

Presuming there isn’t a settlement, Judge Jackson will likely release his Findings of Law in late March of 2000. At that point Microsoft will legally be a monopoly in the desktop operating system market and the court will begin looking at ways to correct the abuse of the monopoly. These remedies could take on many forms, which we will be looking at in the next article. We will also examine the issue of Microsoft’s exposure to private lawsuits.

What I think is most unfortunate about the whole Microsoft trial is that it didn’t have to happen. If the Microsoft executives had simply accepted they couldn’t compete quite as hard as they used to, they wouldn’t find themselves where they do now. IBM and Intel were in similar situations and, through prudent self management, avoided what Microsoft now faces.

Published in the Victoria Business Examiner.

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