Breaking Windows

June 7, 2000 at 12:00 AM EDT

JIM LEHRER: Now some analysis of the decision, the reaction, and the potential fallout. William Kovacic of George Washington University Law School, Ken Auletta, who covered the Microsoft trial for the New Yorker Magazine; Lise Buyer, director of Internet New Media Research at the investment firm Credit Suisse First Boston, and Harvard Business School Professor David Yoffie, author of Competing on Internet Time, which was about the earlier Netscape-Microsoft battle. Ken Auletta, first, how do you read Bill Gates’ reaction to this just now?

KEN AULETTA: Well, what Gates said is that this case is all about a browser and whether Microsoft had a right to include a browser in with its operating system. In fact, the trial was about much more than that. Initially, the issue between the government and Microsoft was about whether they had violated a 1994 consent decree by including a browser in with its operating system. The trial was about — also about Microsoft’s behavior and what the judge found to be predatory behavior. That was not addressed in the remarks of Bill Gates that we saw earlier — in the program earlier.

Microsoft’s credibility issue

JIM LEHRER: What about, what do you make of the judge’s strong remarks about Microsoft, the untrustworthiness and the fact that this was the only way he could get anything done, was just to order them to do it?

KEN AULETTA: This was a case… You know, Microsoft made the argument in court throughout this trial that this was a case about facts. The government made a different case. They argued that credibility, as well as facts, mattered. This judge clearly found, and every ruling he’s issued — he’s issued three now: His findings of fact, his conclusions of law and now his remedy proposal — or order I should say. In each of them, he’s attacked Microsoft’s credibility. So therefore, their facts have been undermined about what he found to be their lack of credibility.

JIM LEHRER: Professor Kovacic, you followed this very closely, too, as did Ken, the trial itself. What do you think is at the heart of Judge Jackson’s finding on that? Why did he find Microsoft to be so… whatever… untrustworthy, whatever that… the fact that they had no credibility? What caused him to feel that way?

WILLIAM KOVACIC: I think it goes back to the 1997, 1998 proceeding that the Justice Department brought to challenge what they thought were violations of the 1995 consent decree that Microsoft signed with the government. Throughout that proceeding, Judge Jackson revealed a deep suspicion of some of the Microsoft witnesses, and at several fairly key points expressed utter disbelief that the company was acting in good faith. I think, although I couldn’t prove it in a rigorous way, I think to some respects, Microsoft lost the mind and the heart of this judge in 1997 and early ’98.

JIM LEHRER: Lise Buyer, first of all, the immediate reaction. What do you think the financial markets are going to make of this, and does it matter?

LISE BUYER: Gosh, this is not really… today’s announcement is not much of a surprise. We’ve really been dealing with this since November, so I suspect the markets will act a little bit uncertainly. There will be those who will be happy that some decision has been reached, and there will be others who will say, wait, we’re just beginning the appeal process. So who knows? So I think for the financial markets, we’re still in a wait-and-see sort of a pattern.

Industry reaction uncertain

JIM LEHRER: Because they already reacted because there was no question that the judge was going to probably break them up, right?

LISE BUYER: In the beginning, there was quite a bit of a question, in November.

JIM LEHRER: No, but I mean, in the last several weeks.

LISE BUYER: In the last several weeks, there’s been little doubt that is where we were going.

JIM LEHRER: What about the industry itself? How does the industry now adjust to this… first of all, there’s an immediate order, but there could be an appeal. We’ll get to that in a moment. But there’s also all kinds of ramifications of an immediate… what happens now within the industry?

LISE BUYER: I think we’re going to have a whole range of immediate reactions. On one hand, you know, “ding-dong, the witch is dead,” or at least the company that has been proven to have competed unfairly has now been pushed back. On the other hand, we’re dividing it in two and bringing up two incredibly well-positioned, very strong, you know, the wicked witch’s ugly sisters are now appearing. I mean, the two companies that will come out of this, assuming that the appeal process goes through and the decision remains, will be equally strong, perhaps more entrepreneurial, more motivated, more rapidly acting competitors. So there’s that side of it. On the other hand, there were many businesses that couldn’t be funded over the past five or six years because venture capitalists or others who would help them get on their feet looked ahead and said, “you’ll run smack into a Microsoft and you’ll never win.” I think some of those businesses, particularly in the operating system segment, particularly for new handheld hardware devices, probably have an entire new lease on life because of this.

JIM LEHRER: Mr. Yoffie, would you agree with that, and that most of this is going to happen because there will be an assumption within the new industry that whatever… It may take months or years, but this breakup is in fact going to happen?

DAVID YOFFIE: I think that it’s going to take a while. I think that we… In the first place, nothing’s going to happen for at least three months. And then the conduct remedies will kick in.

JIM LEHRER: No, I know that. But what I mean is, is there going to be an assumption? If you were in the computer business today, any part of the computer business, would you make long-term plans based on the fact that this company’s going to be split in two?

DAVID YOFFIE: I don’t think anybody’s going to make long-term plans until they find out how the appeal court actually rules on this. And that may be the first… the appeals court or the Supreme Court. No one’s going to make very significant long-term investments if they think that Microsoft in the end potentially will be able to come back in full force as an integrated company.

JIM LEHRER: So what would be the impact of that? Does that freeze a lot of things in the industry?

DAVID YOFFIE: That’s the big fear. The big fear is that a lot of companies will simply hold off and wait and see what happens. I think particularly the businesses that are very close to Microsoft’s core are not likely to respond with a lot of innovation in the short run. That’s going to take until at least the final judgment is ultimately entered.

JIM LEHRER: What kind of companies are you talking about?

DAVID YOFFIE: There are a lot of companies that would do applications that are very closely connected to the operating system that historically have been very hesitant. They would be utilities, things like disk compressors that would allow you to save more space on your hard disk. Those kinds of companies are still going to be very, very resistant and slow to respond very aggressively because Microsoft will still have the ability potentially to be able to put them out of business if they were to start running very fast right now. Similarly, a lot of companies that compete with Microsoft’s Office suite or very closely connected to that will also be very resistant because that potentially will be a very strong company and will still be able to compete very aggressively.

JIM LEHRER: Ken Auletta, how do you read the immediate impact within the industry? Do you think it’ll freeze things up?

KEN AULETTA: No. I think in many ways it doesn’t. I think already we’ve seen a thaw. If you look at what’s happened with Linux and a number of companies that were aligned with Microsoft, including Dell, including Intel, including Gateway, have announced deals where they are going to use the Linux system.

JIM LEHRER: Explain what the Linux system is.

KEN AULETTA: That’s an alternative open source, they call it — potentially free-operating system that competes with Microsoft Windows, which the judge deemed to be a monopoly. And when you start seeing computer companies and chip companies that have been aligned with Microsoft begin to make deals with Linux, then you see it’s not frozen, that things in fact are moving. In fact, one of the basic issues here, Jim… This judge assumes, as did the Justice Department, that Microsoft will be able extend its monopoly from the PC to all other devices, from handheld devices to telephones, to servers connected to the Internet. There’s a body of… there are people out there in the industry who don’t feel frozen in place, who feel that’s wrong, that Microsoft will not be able to extend its monopoly. And that’s one of the basic battles that’s going to take place. One of the reasons the judge decided he had to resort to a structural remedy is that he felt there was no other way to prevent Microsoft from extending its monopoly, but there’s an argument that they will not be able to do that. In fact, they’re very weak in many of those other device markets.

JIM LEHRER: How do you see that particular thing, Ms. Buyer?

New opportunities with new electronic devices?

LISE BUYER: Gosh, on one hand, the world has changed, given the mass adoption of the Internet. On the other hand, the company that controls the operating system in, you know, let’s call it 70 percent, 75 percent of the marketplace still has an incredibly strong hold on the desktop of both corporate America and consumers.

JIM LEHRER: So the separate company, the new half of Microsoft that controls that, is still going to be a powerful company?

LISE BUYER: Absolutely. But now the applications side, including the browser side, has to compete with others. And I think that can only serve consumers well.

JIM LEHRER: Is it possible, Ms. Buyer, for a new company to come along and really compete against Microsoft in the operating systems area?

LISE BUYER: I think we’re about to see an explosion of hardware devices, things different from just the desktop computer. The desktop computer has been won by Microsoft, and Windows works fairly well and we’ve all adopted it and there’s something to be said for standards. But what about the operating systems in our new cell phones, or new, again, handheld devices or appliances that haven’t really taken off yet? And that’s where I think there’s an opportunity for somebody new.

JIM LEHRER: And this decision, or this potential decision, could open that up right now?

LISE BUYER: It could open it up. No one will succeed unless they have a good product and a good marketing team and a good engineering team. So no one wins unless they have a good product, but now they have a shot. And it looks like in the past they might not have had that opportunity because of the strong bundling arrangements and deals Microsoft could work out given its strangle hold on the operating system in the desktop.

JIM LEHRER: Unless I miscounted, Mr. Yoffie, you’re outvoted on this.

DAVID YOFFIE: Well, I would argue it a little bit differently. And I think that Ms. Buyer said it correctly, which is that the core business, the desktop computer Microsoft still owns. On the other hand, I agree completely that in the new alternative devices, whether it be cell phones or PDA’s, like the palm pilot, those are opportunities which, in fact, will be more opened up and they’ve already started, it’s already happened. And that’s not going to stop. And in fact, this decision probably will make it easier for some of those companies because Microsoft is going to be distracted by this case and will make it easier for these other companies to be able to compete.

Microsoft’s decision to appeal

JIM LEHRER: Okay. Now, finally Professor Kovacic, back to you on what happens next — just procedurally. There’s notice of appeal and all of that. What’s the time frame here that we’re looking at before this thing could be finally resolved?

WILLIAM KOVACIC: One of Microsoft’s first steps will probably be to go to the court of appeals and ask the court to suspend the application of all of the interim remedies that we’ve been talking about this evening, to impose no severe sanction until all of the appeals are completed, so there will be a skirmish before the court of appeals, before the implementation of these interim remedies.

JIM LEHRER: Now, how long would it take?

WILLIAM KOVACIC: I suspect that would probably generate a decision by the end of the summer. The court of appeals tends to have a quiet time in July and August, but I suspect by the early fall, we’d have a ruling from the court of appeals on the applicability of these interim remedies. The second step would be for Microsoft to file a notice of appeal to take on Judge Jackson’s decision as a whole. That would set in motion the possibility that the Department of Justice will go to Judge Jackson and ask that he request the Supreme Court to review the case immediately, leapfrogging the court of appeals.

JIM LEHRER: And that, then, could have could result in a decision when?

WILLIAM KOVACIC: If the Supreme Court decided to take the case, and it’s very difficult to tell whether they would, they would probably announce their intentions in late September or early October. They would probably schedule the case for argument at the end of this calendar year or the beginning of 2001, and they would issue a decision roughly one year from now.

JIM LEHRER: Ken Auletta, finally, what do you think the chances are that Bill Gates and Microsoft will fold its tent before it comes to that?

KEN AULETTA: I think if they were going to fold their tent and reach a settlement, an out-of-court settlement as the judge said in his ruling today, he gave them five months to do that and all the legal incentives, as Bill knows better than do I, were for them to do that before the judge entered a judgment which can which can now be used in all the civil cases being brought against Microsoft. So it makes much less sense to settle today than it would have before this judge had issued his ruling.

JIM LEHRER: Okay, well, thank you all four very much.