Antitrust Legislation

     Preface In light of recent developments, I took a different approach to this
paper. The Microsoft Antitrust case has been somewhat of a phenomenon that has
become one of the most prominent cases in recent years. Because of this, I
decided to look at government intervention into individual markets, along with
antitrust law, via that particular case. I am of the opinion that we can learn a
great deal by using that particular ongoing litigation. Antitrust law protects
the public from companies that attain an undue domination of the marketplace via
mergers, tying 1 product to another, vertical integration, and other practices
tending to eliminate competition or bar entry into the market to newcomers. In
the early 1980s, Microsoft was a much smaller company than it is today. However,
it had already established a reputation of being a predator, a greedy predator.

They were known to terminate licenses mercilessly once they figured out a way to
clone a given technology, regardless of whether it was legal or not. Back then,

Microsoft had some enthusiastic competition. The biggest of which were Borland
(programming), Ashton-Tate (databases), Visicalc and Lotus (spreadsheets), as
well as Wordstar and WordPerfect (word processors). All of these companies have
now either merged out of existence or are completely defunct, with the
exceptions of Borland and Lotus (which are barely afloat). Microsoft now has the
leading product in each sector of the market once occupied by these firms. The
company was responsible for ridding itself of these early competitors by either
buying them out or simply driving them into the ground. This early disregard set
the tone for how Microsoft does business even today. Microsoft’s advantage
comes from their domination of operating systems (OS). "By definition, if the

OS maker creates applications, they will run better with the OS than a third
party’s, and the OS owner can, over time, create modifications that will make
this even more so," (Rapacious 1). Microsoft has the power to leverage their
dominance in operating systems (Microsoft currently has its Windows software in
over 90% of all PCs) to gain a large market share in the various application
sectors. They have always been able to do this and as a result have been able to
get, or achieve, whatever it is that they have wanted. This is the vertical
integration that the antitrust laws talk about. In a July 1994, settlement, the

Justice Department came to an agreement with the software giant over the
antitrust charges it had filed against the company. The charges were brought
after the department found out that Microsoft was giving personal computer
manufacturers a discount on their OS when the PC manufacturer would pay the
company a royalty for each computer sold, including those without MS-DOS or

Windows software installed. "The practice gave PC makers little incentive to
install competing programs since they would have had to pay a royalty to both
the competitor and Microsoft," (Ramstad 1). The settlement only dealt with
this single count and left Microsoft alone to continue performing its numerous
other anti-competitive practices. In the spring of 1995, Judge Stanley Sporkin
rejected the deal that the Justice Department settled on. He did so on the
grounds that: 1. The government refused to give the court enough information
about the agreement; 2. The deal was too narrow; it failed to deal with issues
like OS/application leverage, and allegations that Microsoft intentionally made
changes to Windows that made third party applications hard to run; 3. The
parties did not adequately consider anti-competitive issues; 4. The deal was
unsatisfactory when it came to enforcement and compliance mechanisms. Around the
time of the settlement, some suggestions started to come about how to deal with

Microsoft. Stewart Alsop suggested "that Microsoft be forced to document the

API’s in Windows, so that other companies could legally clone it. That would
still leave Microsoft an eighteen month head start on each release,"
(Rapacious 3). It was also suggested that the company be broken up. This way,
the operating system and the applications would be separated into different
companies and the playing field would become more level. In late August 1995,

U.S. District Judge Thomas Penfield Jackson ended what had become a
thirteen-month judicial review by signing the agreement Microsoft and the

Justice Department had come to. The review had been elongated by Judge

Sporkin’s rejection of the deal. The signing, however, did not take the heat
off Microsoft’s proverbial back. The Justice Department had already begun
investigating some of their concerns about the company’s practices regarding
new software and whether they were complying with the agreement. This
investigation became the court case we have all been hearing about in these last
few months. By the time the Judge Jackson signed the agreement, the government
was already looking into Microsoft’s decision to include access to its on-line
service, the Microsoft Network, into its Windows 95 operating system.

Competitors were afraid that this would allow the company to once again take
advantage of its monopoly power in operating systems to gain a large share of
the on-line market. A mere three months after its release, the company announced
that the Microsoft Network had already enrolled more than 525,000 members. They
also had projections putting them over the 2 million member mark by the end of
the next year (1996). This went on to fuel its competitors worst fears. America

Online, Prodigy and CompuServe were among those that had long been arguing that

Microsoft had an unfair advantage with its on-line access included in the OS.

"’The industry’s fears are partially correct. Having a button on the
desktop works. People click on it,’ said Adam Schoenfeld, of Jupiter

Communications," (Cooper 1). Microsoft’s response to the situation at that
time was merely to suggest that there was no evidence showing MSN’s close
connection to Windows 95 had tilted the tables into its favor. In September of

1996, Microsoft received a written request for information, (this is known as a
civil investigative demand) from the Justice Department. Netscape had accused
the company "of going beyond vigorous competition into the realm of illegal
tactics in the browser war," (Just. Dept. Examining 1). Netscape also charged,
through letters to the Justice Department, that Microsoft had violated its 1994
consent decree (settlement) with the government by offering PC manufacturers a
$3 discount on Windows 95 for giving their browser, Internet Explorer, a more
prominent place on computer screens than Netscape’s browser, Navigator.

Further complicating Microsoft’s problems, they received another civil
investigative demand in May of 1997. This time, the Department of Justice was
seeking internal documents having to do with Microsoft’s planned purchase of

WebTV for $425 million. "WebTV is a start-up producer of set-top boxes that
bring the Internet to television sets," (US Requests...1). A major industry is
expected to develop from the delivering of the Internet via television and other
home appliances. So, the opportunity to be among the first in a very promising
market is what attracted the company to WebTV. About the same time the
government was looking into Microsoft’s purchase, Oracle (another software
producer) announced it was buying control of Navio Communications Inc. Navio was
developed by Netscape Communications, which, "[facing] ever-stiffer
competition from Microsoft...decided to conserve it’s financial resources and
shed Navio," (US Requests...2). Microsoft officials pointed to this move by

Oracle in response to the government’s most recent allegations. They claimed
that the deal was a sign that their purchase of WebTV was prompting capable
companies to get into the market, thereby promoting competition. Drawing further
attention to itself, Microsoft invested in Apple Computers. They purchased $125
million in non-voting stock. This act was seen by many, upon first glance, as an
effort to further dominate the computer market by swallowing another competitor.

However, if one were to consider the pressure that Microsoft was, and is,
enduring from the government, one can see an entirely different motivation for
the investment. Apple was struggling and this purchase of non-voting stock was
designed to help keep the company afloat. As long as Apple remains intact, the
computer giant we know as Microsoft has another "competitor" that it can
point to in its fight against antitrust violations. In October of 1997, the
government finally asked a judge to order Microsoft to stop requiring PC makers
to include Internet Explorer when they install Windows 95 in their computers.

Attorney General Janet Reno, who referred to the company as a monopoly several
times in her press conference, claimed that the company had violated the 1994
settlement, and that the Justice Department would seek a $1 million per day fine
if they didn’t stop the practice. She said, This administration has taken
great efforts to spur technological innovation, promote competition and make
sure that the consumers have the ability to choose among competing products.
[This} action shows that we won’t tolerate any coercion by dominant companies
in any way that distorts competition. (Labaton 2) The government’s petition
was designed to receive an order that would bar Microsoft from compelling PC
manufacturers to accept their browser as a condition of receiving operating
system. It also asked the court to order the company to notify Windows 95 users
that they can use any compatible Internet Browser, as well as provide
instructions on how to remove Internet Explorer from their computer. In response
to the petition, Bill Gates, Microsoft’s chairman and chief executive, said
that his company was not violating the antitrust agreement. He proclaimed his
belief that his company had every right to improve and add to the basic features
of Windows. He went on to say that he hoped to further improve Windows by adding
new capabilities, such as speech recognition and machine vision. The Justice

Department has several key issues that it has to deal with in its case against

Microsoft. By deal with, I mean they have to get around Microsoft’s answers to
their charges. First, the department is accusing the company of threatening
computer makers who delete the Internet Explorer icon. The company answers this
by claiming that "...computer manufacturers are free to ship any competitor
product they wish, but they are not allowed to disable features of our
products," (Just Dept v MS 2). Second, the government is contending that the
terms of Microsoft’s non-disclosure agreements are an obstacle in the way of
their attempts to gather evidence for their investigation. Microsoft says that
their non-disclosure agreements are no different than those of most companies
within the software industry, as well as outside it. Finally, there is the
matter of the competitive browser possibly representing a threat to

Microsoft’s key product, its operating system. Company officials claim that by
not allowing them to include their browser with Windows, the government is
preventing innovation. They say that the pace of the competition will quickly
pummel a company that stops innovating, and that the consumers win because
competition drives firms to deliver better products at lower prices. In essence,

Microsoft is claiming that by not allowing them to include the browser, the
government is stifling the competition that it is trying to protect. Orin Hatch,
chairman of the Senate Judiciary Committee, held the first of what he claimed
would be several hearings on the Microsoft antitrust petition in the first week
of November 1997. At this hearing, the Senator produced an exclusivity agreement
between Microsoft and Earthlink Network, Inc. It called for Earthlink to offer
only Microsoft’s Internet Explorer and prohibits them from implying that
another browser is available. "’What you have set forth appears to be a
classic example of an artificial entry barrier. It is not designed to enhance
the product. It is designed simply to hobble the competitor’ said Kevin Arquit
(former general counsel of the Federal Trade Commission)," (Clausing...Senator).

After the hearing, Microsoft asked a federal judge to throw the government’s
petition out. They filed their response to the Justice Departments allegations
with Judge Thomas Penfield Jackson (the same judge that signed the antitrust
settlement two years earlier). The company is claiming that the government’s
case is without base, is implausible and is a perversion of the truth. According
to what their claims, the original decree allows them to develop integrated
products. The response also claims that the company "...realized long before

Netscape was even a company that [Microsoft] needed to build this type of
functionality into Windows for consumers," (Clausing...Microsoft 2). Netscape
was founded in 1994. The first version of Internet Explorer wasn’t released
until July of 95, and that was a limited beta version. In May of ’98, the DOJ
and the attorneys general of 20 states filed a pair of antitrust lawsuits
against Gates’ company. The suits claimed that Microsoft used Windows to
attempt to force customers to use their other software products, the most
important of which was their Internet Explorer (IE) web browser, as well as
targeting contracts used by Microsoft that required companies to put up a"first screen" that was created by the OS creators. The states and DOJ also
sought an injunction that would have required Microsoft to strip IE from Windows

98, which was due on shelves at the end of June that year. Microsoft’s
response to the injunction request was to claim that the IE browser cannot be
taken out of Windows 98 system without severely damaging the functionality of
the entire product. The injunction failed, had it been granted, though,

Microsoft would have been required to remove the browser or include a copy of

Netscape’s Navigator and another competing browser with the OS. The lawsuits
were to be heard by Judge Penfield Jackson, the same judge who heard the first
lawsuit over the browser. According to Michael Martinez of ABC News in his May

1998 article, comments were made by representatives of the DOJ, the states, and

Microsoft. Attorney General Janet Reno said, "Consumers and computer
manufacturers should have the right to choose the software they want installed
on their personal computers. We are acting to preserve competition in the
software industry." New York Attorney General Dennis Vacco, who was heading up
the states’ case along with the attorneys general from Iowa and Connecticut
added, "...it is Microsoft who is acting like an Orwellian big brother by
controlling the range of products available to consumers." The Microsoft
response to the new allegations was to claim that attacking them for integrating
their software was an attack on innovation. "By going after the basic
principle of integration, the government can conceivable go after a very broad
set of things," Gates said (Martinez, Government). Opponents of the renewed
allegations were swift in coming to the defense of Microsoft. They point out
that it was Netscape who dominated the browser arena early on and forced

Microsoft to play catch up and aggressively market IE. Many people are of the
belief that rivals of the software giant might have been better off focusing
their attentions on improving their products rather than seeking refuge in the
courts. Mark Schmidt, the Director of Programs for the National Taxpayer’s

Union Foundation (NTUF) argued against the claims that "Microsoft’s
‘anti-competitive conduct has resulted in higher consumer prices, less
consumer choice, and decreased levels of innovation’" made by Iowa AG Tom

Miller, in a September 1999 article (Schmidt, Lawyers). Mr. Schmidt claims that
after figuring in inflation, the costs to computer manufacturers of installing
the Windows and MS-Office programs have actually decreased. In response to
claims of anticompetitive behavior, he quotes Mitchell Kertzman of Microsoft
rival Sybase as saying "Basically, all the big companies, all the companies
that have won, are run by bloodthirsty killers," (Schmidt, Lawyers). As for
decreased innovation as a result of Microsoft’s practices, well I must say
that he has a very persuasive argument, ...The integration of Windows with

Internet Explorer was an important advance for software users, who would almost
surely find it easier to use an Internet Explorer that looks similar to and
operates like Windows... Even Ohio AG Betty Montgomery, who is suing Microsoft
admits, ‘Many Ohio consumers have benefited from the innovative products
marketed by Microsoft of the past 19 years.’ (Schmidt, Lawyers) One of the
proposed sanctions that would be placed on Microsoft should the DOJ and the
states win their case would be to force them to sell or license its Windows
source code (a blueprint of sorts, one that lays out the foundations of a piece
of software). George Washington University Law School Professor William Kovacic
warned, "It also reduces incentives to innovate if a dominant firm is forced
to share its hard-won assets—like intellectual property in the software
business—with other companies," (Schmidt, Lawyers). Schmidt also pointed out
that in May of 98, 26 CEOs of major computer companies sent a letter to the

Justice Department asking that they refrain from filing any additional charges
against Microsoft (Schmidt, Lawyers). On March 24th of this year, the Wall
street journal reported that Microsoft sent a detailed proposal to the
government’s attorneys in an effort to settle the case. It was expected that
the proposal contained price changes, separation of the Internet Explorer
browser from the Windows OS, as well as some access to parts of the source code.

It is believed that the proposal was brought about after weeks of talks because

Judge Penfield Jackson said that if a deal wasn’t reached soon, he would issue
his findings of law. After ripping Microsoft in November (’99), it seems that
the Judge will find for the DOJ (WSJ, Microsoft). There are questions as to how
effective any of this antitrust litigation will be. If one looks back to some
previous cases, it looks to be rather unnecessary. In 1969 the government went
after IBM for allegedly violating antitrust laws. That case was dropped thirteen
years later when their market share started to drop with emerging companies
(including a young Microsoft) gaining. Schwinn Bicycle actually lost an
antitrust suit in 1967, but foreign competition relegated the firm to bankruptcy
in 1992. RCA, a once dominant radio and television producer was made to license
products. They followed the Justice Department mandate and directly licensed to

Japan, who now is the leader in the electronics industry. (Schmidt, Lawyers)

There are going to be very definite repercussions to the Microsoft case, no
matter what the verdict. We have to weigh the cost of these trials against what
usually ends up being short term dominance by a powerful firm. If Microsoft is
broken up, Bill Gates isn’t going to be the only one that is affected. If
they’re not broken up, it seems Netscape will have to suffer only moving 160
million units of their browser. It seems to me that the majority of consumers
have benefited from Microsoft’s dominance and progress in software. Government
intervention just doesn’t seem to do anything but hinder that benefit.

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