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JUSTICE VS. MICROSOFT: THE CASE OF THE MISSING PC MAKERS
Why the government couldn't persuade any to testify against Microsoft
For years, high-tech circles have been abuzz with Paul Bunyon-size tales of Microsoft Corp.'s power and the aggressive tactics Chief Executive William H. Gates III employs to get his way. Now, in its landmark antitrust case against Microsoft, the Justice Dept. is attempting to prove that these were not just computer-industry legends about a mean-spirited bully but proof of Microsoft's anticompetitive behavior to extend its monopoly.
But just when they need computer execs to come forward with stories to bolster their case, the feds aren't getting much cooperation. Justice's witness list for the upcoming trial, released on Sept. 4, contains a cross-section of high-tech corporate icons. But conspicuously absent are the most obvious victims of alleged Microsoft coercion--PC makers who are the most important vehicle for Microsoft products to consumers. Microsoft's efforts to prevent manufacturers from shipping rival products have been a cornerstone of the antitrust action against Microsoft, but the only PC maker to take the stand--Compaq Computer Corp.--is testifying for Microsoft. "That's the big hole," says Rich Gray, an antitrust attorney with Bergeson, Eliopoulos, Grady & Gray in San Jose, Calif.
So does that mean the Justice case is weak--or that PC manufacturers have no complaints? Not necessarily. Some industry insiders contend it is the very power Justice seeks to curb that has left it without certain key witnesses. "Nobody in the PC business wants to be near this," says one former PC company CEO. What it means, adds Gray, is that "they couldn't find anyone brave enough to come forward and risk the wrath of Microsoft."
Even giant Compaq is careful not to offend. A source close to the No.1 PC maker says that two years ago Microsoft pressured it to undo a deal with America Online Inc. that would have featured AOL's opening screen before Windows. Microsoft threatened, and Compaq backed down, the Compaq source says. Then, Compaq marketing execs argued that a fight with Microsoft was not worth it. The PC maker has also attested in depositions to Justice that Microsoft applied pressure when Compaq attempted to put Netscape Communications Corp.'s Web browser on its desktop with Windows. Now, however, Compaq is on Microsoft's witness list and not Justice's.CROSSFIRE. Privately, government officials confirm that because Justice could offer no real protection, PC makers were reluctant. No company wanted to be singled out, and attempts to band together fizzled. In May, Compaq, Gateway, Hewlett-Packard, Sony, and Packard Bell had scheduled a meeting with Justice. One by one, they dropped out, each concluding that the group was not big enough to protect against retaliation. The meeting was canceled.
Also missing from the Justice witness list are executives from Sun Microsystems Inc. and Apple Computer Inc., both of which figure prominently in court filings. The government alleges that Microsoft tried to stifle Java, the Sun programming language. Thanks to a private suit brought by Sun, Justice has access to considerable evidence to back its case, making executive testimony less necessary. In contrast, the omission of Apple is less clear. Here, Justice suggests Microsoft may have pressured Apple, in which it invested $150 million, into shipping its Internet Explorer browser, rather than Netscape's. It also claims Microsoft tried to persuade Apple not to offer competing multimedia software.
Microsoft denies that it threatens companies that attempt to defy it or that it retaliates against those that do. But such companies have a way of getting caught in the crossfire. Ask Rob Glaser, the CEO of RealNetworks Inc., a startup that makes software for sending video over the Internet. On July 24, Glaser, a former Microsoft exec, testified at Senate Judiciary Committee hearings that Microsoft placed a bug in a rival Windows program that "broke" RealNetworks' software. (A similar charge was made by Caldera, the owner of DR-DOS, which filed a private suit against Microsoft.) Microsoft denied the charges, setting off a public spat between Glaser and Microsoft. In its wake, RealNetworks' shares plunged 25%, from $44 on the day of Glaser's testimony to $33 the day after.
That lesson was not lost on other industry execs. "The biggest fear is not of Microsoft, but of your own shareholders and board members," frets Luis F. Machuca, executive vice-president for Packard Bell NEC Inc. "This thing with RealNetworks is a huge windfall for Microsoft. It will have a chilling effect."MEMORY LAPSES. That's not good news for Justice, which needs all the ammunition it can gather to bring its broadened monopolization case. Unless Justice swaps in a PC witness before the trial, it will have to rely on subpoenaed depositions and contracts--and on testimony by such Microsoft competitors as AOL and Intuit.
Neither the government nor Microsoft has called the most intriguing witness: Gates. After deposing the billionaire chairman in August, Justice lambasted his "astonishing lack of recall." For its defense, Microsoft will rely on midlevel execs it says were most directly involved in the alleged incidents cited by Justice--allowing Gates to duck cross-examination.
Microsoft, meanwhile, is still seeking the case's dismissal. It's also contesting what it calls an 11th-hour shift in Justice's case, and U.S. District Judge Thomas P. Jackson on Sept. 17 will rule on whether the expanded evidence is admissible. If it is, which experts say is likely, then Microsoft could seek a delay of up to six months to prepare its defense. In that time, more tall tales are likely to be told. The question is: Will anybody be willing to tell them to the judge?By Amy Cortese in New York, with Susan B. Garland in Washington and Steve Hamm in San Mateo, Calif.Return to top