| BUSINESSWEEK ONLINE : FEBRUARY 22, 1999 ISSUE | ||||||||
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| SPECIAL REPORT
What Penalties for Microsoft? It's beginning to look as if the Feds may win serious remedies in court On top of its growing frustrations in the marketplace, Microsoft Corp. (MSFT) has an increasingly serious problem in Washington. Its witnesses are getting shredded by the Justice Dept. in the landmark antitrust suit, while its high-priced legal team is bumbling simple videotaped presentations. That doesn't bode well for Microsoft's big plans to turn products such as Windows 2000 and Windows CE into cash cows. As the company's legal fortunes slide, the odds are growing that trustbusters will be able to bar it from using some of the muscle tactics that helped to turn Windows 95, Windows 98, and Internet Explorer into such successes. More important, the lawsuit is likely to have a profound cultural impact on the software industry--no matter who wins. Now that Microsoft's behind-the-scenes arm-twisting has been exposed to regulators, judges, and the public, CEO William H. Gates III and his minions will probably never be able to intimidate other companies the way they used to. ''The marketplace will become a lot tougher'' for Microsoft, predicts Ernest Gellhorn, a professor of antitrust law at George Mason University in Washington, D.C. ''People will be more inclined to refuse deals, demand tougher deals, and sue them.'' EXTREME STEP. Although the antitrust trial is far from over, it appears as if Justice will win at least a partial victory. If that happens, Judge Thomas Penfield Jackson could impose a wide range of remedies on Microsoft. At one extreme, he could seek a ''structural'' remedy, such as breaking the company up or forcing it to divest assets. This solution, which used to be considered so radical that even Microsoft's enemies wouldn't defend it, has been receiving more attention in recent weeks. On Feb. 5, former federal Judge Robert H. Bork, a legal consultant to Netscape Communications Corp. (NSCP), advocated splitting Microsoft into three self-sufficient parts. But there's probably not enough evidence of competitive harm for the federal judiciary to take such an extreme step, says San Francisco antitrust lawyer Samuel R. Miller, who helped to draft the Justice Dept.'s 1995 consent decree against Microsoft. That leaves ''conduct'' remedies: restrictions on some of Microsoft's specific business practices. While far less onerous than a structural solution, they could still put a big dent in the company's plans to tighten its hold on the desktop and conquer the enterprise and consumer-electronic software markets. For example, one of the key ways Justice claims Microsoft gained market share in the browser business was by pressuring business partners such as America Online Inc. (AOL) and Compaq Computer Corp. (CPQ) to favor its Internet Explorer over Netscape's Navigator. To combat this practice, the government is expected to try to ban Microsoft from making exclusionary deals in the future--a remedy most experts reckon the judge might approve. That would be more painful than it might appear. Just last month, Microsoft partners Compaq, Hewlett-Packard (HWP), and Dell Computer (DELL) announced plans to sell server computers using Linux--a network operating system that is one of the leading threats to Windows NT. In the past, one of the ways Microsoft would have tried to counter such a development would be to give the PC makers special incentives to ignore Linux, such as price breaks, prime real estate on the Windows desktop, or perhaps ad subsidies. But if the government blocks Microsoft from making exclusive deals, such tactics would be off limits. Until a few weeks ago, a check on Microsoft's preferential deals was the only remedy most experts thought the Justice Dept. could pull off. But because of the surprisingly strong cross-examination of Microsoft's witnesses by David Boies, Justice's lead litigator, some now think the trustbusters could justify even stronger restrictions on the company's conduct. The key is coming up with remedies that don't require judges to make technical decisions about software or to get too deeply involved in supervising the industry. The committee studying potential remedies, led by Timothy Bresnahan, a Stanford University economics professor who is consulting with the Justice Dept. and the state attorneys general suing Microsoft, isn't talking. But sources in contact with the committee say that one possibility under close consideration is forcing Microsoft to license the underlying source code to the various editions of Windows. That would give competitors the power to make their own Windows clones, thereby loosening the company's dominance of the software market. But even though there's some precedent for this step--Xerox was forced to license copier patents in 1975--it's unclear if such a seizure of Microsoft's intellectual property would be upheld in the courts. Another option under review is blocking Microsoft from integrating new features into its various operating systems, or perhaps forcing it to carry other companies' products. But that path is a tough sell because it requires judges to make technical decisions for which they are ill-suited. In the end, whatever remedies Justice wins, it's clear that the lawsuit has permanently eroded some of Microsoft's power. When the government first started investigating the company in the early 1990s, competitors and business partners alike were so afraid of retaliation that they refused to cooperate with the trustbusters. That climate of silence is gone forever. If Microsoft misbehaves in the future, ''everyone in the industry now knows the phone numbers to call'' at the Justice Dept. and state attorney general offices, observes William E. Kovacic, visiting professor of antitrust at George Washington University Law School. NEW THREAT. Another factor that will limit how aggressively Microsoft can promote its new products is the threat of private antitrust litigation. Even if Justice wins on only some of its charges, Microsoft's rivals may be able to use many of the government's legal and factual findings against the company--dramatically cutting down the cost and risk of litigation. Notwithstanding a few suits by rivals in the past, that's a threat Microsoft executives have little experience managing. Finally, it's possible that the government litigation may bring about a softening of Microsoft's aggressive culture. While Gates is well aware of how Justice's antitrust suit in the 1970s weakened IBM's competitive resolve--and has repeatedly warned employees about this threat--the company is getting bashed in court. Kovacic believes that experience will ''inevitably make the company more tentative'' in the future. For example, it may be hard for executives who are being publicly vilified for doing things like threatening competitors not to think twice before making similar threats again. This factor is difficult to quantify, but it will inevitably play a critical role in determining the extent of Microsoft's dominance in the years to come. By Mike France in New York, with Susan B. Garland in Washington, D.C. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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