TOPICS > Economy

Microsoft Ruling

November 1, 2002 at 12:00 AM EDT


MARGARET WARNER: Ray Suarez looks at the Microsoft decision.

RAY SUAREZ: Today’s ruling comes two and a half years after the software giant was found to be a monopoly. In April of 2000, district court Judge Thomas Penfield Jackson ruled that Microsoft violated the Sherman Antitrust Act. That June, he ordered the breakup of Microsoft into two companies. But a year later, in 2001, an appeals court threw out the breakup order, citing Jackson’s comments during the trial, and the case was transferred to Judge Kollar-Kotelly.

Then, a new twist: The Justice Department reached a settlement with Microsoft in October of last year. Nine states joined in the settlement. Nine others, plus the District of Columbia, continue to press their cases. Late this afternoon, Judge Kollar-Kotelly issued her ruling. Here to tell us about it is Andrew Gavil, professor of domestic and international antitrust law at Howard University, and Peter Coffee, technology editor at "e-Week," a weekly newspaper covering the Internet business world.

And, Professor Gavil, I think we’re willing to stipulate that this is a lot of paper and a lot to digest in just a very short time. But what’s your first reading of the decision?

ANDREW GAVIL, Howard University Law School: First reading is it’s a stunning victory for the federal government and for the settling states and for Microsoft. In large part, their narrow reading of the court of appeals decision of June 2001 has been vindicated by the district court. She has agreed with them, that the remedies that they crafted in the settlement agreement that they proposed are in the public interest, which is what the standard provided by the statute is, with only one minor detail having to do with her jurisdiction; she has essentially approved the settlement.

She calls it a "conditional approval." She needs the government and Microsoft to agree to her one suggested change. But, frankly, it seems very unlikely they won’t do that. It’s really quite a significant victory for them.

RAY SUAREZ: Let’s see if I understand this correctly. I kept looking for places where some sort of hook was in there for Microsoft, some sort of punitive part of this decision, but really it was more about controlling Microsoft’s future behavior and getting it to stop what got it in trouble in the first place than it is about punishing the company, isn’t it?

ANDREW GAVIL: Very much so; very much so. And the judge, in explaining her decision, looks carefully at the court of appeals decision. She finds that the realm of her discretion is fairly narrow, that there was no desire on the part of the court of appeals to really punish Microsoft. They reversed some of the liability, upheld significant parts of it.

But in upholding those significant parts, they really instructed the district court to craft a remedy that matches the scope of violation. She repeats that several times, that she is looking for a remedy that matches the scope of the violation. She finds that the federal settlement does that. And in the second companion case, she really quite strongly rejects the views that the litigating states took, that an adequate remedy would have to be far broader.

RAY SUAREZ: And also rejects Judge Jackson’s understanding of the seriousness of the offense.

ANDREW GAVIL: In a sense, she just has a completely different reaction to the record in the case. Where Judge Jackson had a very profound reaction to Microsoft’s conduct — that it really warranted a severe and strong penalty — the tone of her decisions, both of them, is quite different.

RAY SUAREZ: Let’s go to Andrew Coffee… Peter Coffee, excuse me. If you are in the computer business today, if you make competing software, if you manufacture equipment that uses Microsoft systems, has your business been changed very much by today’s ruling?

PETER COFFEE, e-Week: I would say the business has been proceeding on the assumption that something very much like this was going to happen. I think the ruling upholding the settlement was, shall we say, "fully discounted," as the stock market people would put it. It was part of what people were anticipating.

I don’t believe anyone anticipated a major breakup of the company. It would have been good news for the smaller software vendors if something like the request of the non-settling states had been granted, that Microsoft be required to offer the Windows product in a more menu kind of fashion, instead of one big Windows product, to offer the basic package and then to offer other things on top of that. That is not going to be imposed upon Microsoft. All that’s going to be required is that they make it easier for those competing products to have equal standing with whatever components of windows Microsoft might choose to include in the basic package.

RAY SUAREZ: There was a lot of attention paid to the OEM’s, the Original Equipment Manufacturers– I guess, the Dells, the Gateways, the Sony’s, the IBM’s. How has their relationship with Microsoft changed based on what is in this ruling?

PETER COFFEE: The ruling absolutely and very strongly prohibits Microsoft from punishing in any way a manufacturer of PC’s that chooses to include operating systems other than Microsoft’s in its product line or to offer a PC, for example, that will boot up into either of two or more different operating systems. It also requires that Microsoft license Windows on a uniform basis with discounts that are published and objective rather than being able to reward its friends and punish its enemies with secret and favorable licensing terms to one rather than another. In that sense, it levels the playing field for the PC builders.

RAY SUAREZ: And if you want to reduce the end purchase price of your PC by using Microsoft products more a la carte and taking on board other people’s products, that’s easier now under the terms of this agreement?

PETER COFFEE: Not as I understand the ruling, no. As I understand it, there will not be any requirement that Microsoft offer a multi-tiered pricing option. That is not something I think we can expect. Nor does the settlement really require Microsoft to open the door to innovation in making Windows look and behave differently to perhaps be a more interesting experience for people, because one of the few things that Microsoft can still restrict is any change to Windows by a PC maker that substantially changes the appearance or function of the Windows interface. That’s pretty much what Windows is, is an interface.

RAY SUAREZ: Another big category of company that was prominent in this case were those that were competing with Microsoft in non-equipment services: Internet access providing, Web streaming, a variety of other functions that Microsoft has developed over the years. How does their relationship, both to the equipment makers and to Microsoft, change?

PETER COFFEE: Again, the settlement puts very definite boundaries in place, saying that Microsoft may not reward or punish the companies with which it does business in ways that encourage those companies to provide exclusive arrangements to offer only a Microsoft product in return for some favorable treatment. That kind of thing is clearly anti-competitive and is definitely proscribed by the agreement made today.

RAY SUAREZ: And if you are a consumer, when you get home, a desktop or a laptop or a PDA, has your world changed any?

PETER COFFEE: It is important to realize that the settlement defines a personal computer in a pretty pedestrian way. It defines it as a device that uses a keyboard and a display and defines a personal computer operating system as the software that runs that kind of device. The space that incorporates the set top boxes, the other interactive appliances, Microsoft’s own Xbox, for example, is really pretty much outside the scope of this. Now, that’s good in the sense that that’s an area where there is a lot of competition, a lot of innovation, but anything that we might think Microsoft might do based on past behavior, they may very well try in these other spaces as well. That’s really very much to be seen.

RAY SUAREZ: And, Professor Gavil, let’s turn our attention to those states that weren’t already included in the settlement, the ones that wanted to continue to push for a tougher set of new guidelines. What kind of choices are they facing tonight, having gotten this ruling?

ANDREW GAVIL: Well, they did win some concessions out of the court. In a sense, she approved the federal settlement, and then in the second case, the state’s case, she supplemented it with some additional provisions. But they didn’t get very much.

So the choice they’re facing right now is the decision whether to appeal, whether to take on the basic philosophy that is reflected in the judge’s decision that an adequate remedy was at hand, that more drastic kinds of solutions were not warranted, and that the states failed to establish by evidence that they were warranted.

So they have a hard decision on their hands. These sorts of situations where the district court has a lot of discretion are very, very difficult to challenge on appeal. But there are some specific legal technicalities and legal bases that she relied upon that I think do provide some basis for appeal. It will be very interesting to see if they continue to pursue the case.

RAY SUAREZ: On whose behalf were they suing, those nine states and the District of Columbia? They’re major purchasers of computer products themselves, but it wasn’t on their own behalf, was it?

ANDREW GAVIL: No, it was in their capacity as representatives of the people in their states that they were suing.

RAY SUAREZ: So it was on behalf of the consumers that might be in their jurisdiction?


RAY SUAREZ: And how is life different, Peter Coffee, for those consumers– if we look at the road that Microsoft was on before the federal government set out after them as a monopolist, to prove they were a monopolist, and where we are today, four years and change later, is the array of products that greets them at the store, is the price structure any different from what it might have been otherwise?

PETER COFFEE: I would guess that anything Microsoft hoped five years ago they might accomplish in the five years to come, I think they’ve pretty much achieved it and probably more. They have not really been deterred, I don’t think, by any of the process that’s taken place so far.

As to how things might look if Microsoft had not adopted the tactics that it had, you can try to look at other consumer electronics markets and see if you can find any parallels. If you look at digital cameras, for example, the different companies’ cameras look very different and have very different mannerisms of operating them, different software interfaces to the user, and that has been a vigorous competition and many people can find what they’re looking for. Personal Computers tend to look more similar. Microsoft has been very definite in its statements to the PC builders, that they decide what the Windows look like, not the individual PC makers.

At the same time, Microsoft would argue that the reason the PC industry is as open to many entrants as it is is because there is the common platform, and that rather than buying a package of software with one disk of software and ten disks of the different interface software you would need to talk to many different operating systems, now you can pretty much write for that one platform, the Windows standard, and that the social benefit of that should be considered as outweighing whatever tactics they may have employed.

It seems as if that’s pretty much been decided by the judge, I think, when she ruled it was in the public’s interest to go forward. I think she was probably comparing that not against some theoretical impossible ideal of rolling the industry back and letting it try the game all over again with different rules, but saying what needs to happen now for the end street to be able to move forward.

RAY SUAREZ: And very quickly, were those companies that said Microsoft wouldn’t give them a look at the codes that would help them write codes standing on a Microsoft platform, do they get any relief?

PETER COFFEE: There are many loopholes in which Microsoft can say certain code is involved in rights management for copyrighted material and other specific issues like security, you have to prove you’re a "viable company," which would take any of their perhaps most threatening novel innovative competitors and say, "well, we don’t have to treat you seriously." I think that is going to be a attorney’s job security act for sometime.

RAY SUAREZ: And, Professor, as everybody digests what’s in this ruling, are there any other chapters yet to play out?

ANDREW GAVIL: There are. I would say, just to add to the comments already, that the collective impact of the decision today is to put an end to the worst of Microsoft’s behavior, but as has been pointed out, most of that had already stopped. But it leaves fundamentally untouched their dominance in the industry. And that was what the states were really trying to get at, some kind of more fundamental restructuring that would introduce greater competition in the industry. They didn’t get that, but I suspect that’s going to be the basis for their appeal.

RAY SUAREZ: Professor Gavil, Peter Coffee, thank you both.