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Microsoft Ruling

April 3, 2000 at 12:00 AM EDT

MARGARET WARNER: Both the company and the government reacted swiftly to judge Jackson’s ruling.

JOEL KLEIN, Assistant Attorney General: We are, of course, very pleased with the court’s opinion today. It will benefit America’s consumers by opening the door to competition, increased innovation, and increased consumer choice in the software industry.

This landmark opinion, and in the history of antitrust this is indeed a landmark opinion, this opinion will also set the ground rules for enforcement in the information age. It demonstrates once again that no company, no matter how powerful or how successful, can refuse to play by the rules and thwart competition for America’s consumers.

Competition has been at the heart of America’s economy, and protecting economy at the heart of antitrust enforcement for a long time. And those critical concerns are every bit as important today as they were more than 100 years ago when the antitrust laws were first enacted. We now turn to the remedy phase of these proceedings, and while no final decision has been made, the department is committed to finding a remedy that will protect consumers, innovation, and competition by putting an end to Microsoft’s widespread and persistent abuse of its monopoly power, and to rectifying its unlawful attempt to monopolies the Internet browser market.

BILL GATES, Chairman, Microsoft: Today’s ruling was not unexpected, given the court’s earlier findings. But there are several steps ahead in this case. While we did everything we could to settle this case, and we’ll continue to look for new opportunities to resolve it, we believe we have a strong case on appeal. The appeals court has already affirmed Microsoft’s right to build Internet capabilities into the Windows operating system to benefit consumers.

This ruling turns on its head the reality that consumers know, that our software has helped make PC’s more accessible and affordable to millions. We started with just a few simple ideas, and the results have helped bring lower prices, improved productivity, and enormous benefits to consumers. As we look ahead to the appeals process, innovation will continue to be the number one priority at Microsoft. Microsoft’s past success has been built on innovation and creativity, and our future success depends on that ability to keep innovating in the fastest changing marketplace on earth.

MARGARET WARNER: Now some additional analysis of today’s decision and to Ray Suarez.

RAY SUAREZ: Here now to tell us what the verdict means, C. Boyden Gray is a partner at Wilmer, Cutler & Pickering, a Washington law firm; he filed a brief on behalf of the Microsoft Corporation. Peter Coffee is technology editor at PC Week, a newspaper covering the information industry. Glenn Manishin is a partner at Patton Boggs, a Washington law firm. He is a former antitrust attorney at the Department of Justice, where he served from 1982 to 1985. And Stanley Liebowitz is a professor of economics at the University of Texas at Dallas, and author of Winners, Losers, and Microsoft: Competition and Antitrust in High Technology.

Glenn Manishin, given what you know about the way these courts behave, is what until recently was the world’s most highly-valued company now a day closer to facing break up?

GLENN MANISHIN, Parton, Boggs LLP: Well, even if it faces break up, Ray, it may still be the world’s most highly valued company. In fact, break ups end to increase shareholder valuation. But the Supreme Court made clear, as well back as 1909 in the Standard Oil case, that the preferred remedy in a case of monopolization, one that is cleaner, surer and less intrusive for the entire industry, is the divestiture, because it permits the court to increase competition without engaging in detailed, day-to-day regulation of the defendant.

RAY SUAREZ: And, Stanley Liebowitz, what do you make of today’s decision and its impact?

STANLEY LIEBOWITZ, University of Texas at Dallas: Well, until we hear the remedies, it’s going to be hard to know exactly what to make of the decision. The fact of the matter is that when we talk about remedies, the structural remedies, it’s the death sentence here. It’s a very strong and in this case really unwarranted type of remedy. What you have to remember is that there are a lot of consumers out there who use this product.

To some extent, the judge has the tiger by the tail now. We have a guilty verdict, and what we have is a situation where it’s not clear what the government or the judge can do to actually keep from harming consumers through their remedy that they impose on Microsoft, and should they decide to break Microsoft up, they will impose a cost on consumers that may come back to haunt them, because there are a lot of consumers of the product who may get very unhappy when they discover it’s more difficult to buy products and the prices may start going up.

RAY SUAREZ: When you refer to structural remedies as the death penalty, what about controlled behavior in a conduct-based decision? Doesn’t that mean that a government overseer ends up sitting on the company’s shoulder?

STANLEY LIEBOWITZ: To some extent, yes, but I think you can have a behavioral remedy that doesn’t impose too much detailed day-to-day control over the company. So some of the proposals that were being talked about when we were hearing about settlement talks would be something like a published price list that Microsoft would make available to all OEM’s that would allow them to know what price they were going to pay for Windows, and that would eliminate the problem of supposedly Microsoft pressuring one OEM to behave in a particular way since all OEM’s would be assured of getting a product at a particular price.

It’s also the case that Microsoft can do other things like make sure everyone knows what API’s, what are known as application program interfaces, something that was claimed in the case Microsoft was keeping secret to harm its competitors to some extent, to make sure that in fact everyone has free access to that.

RAY SUAREZ: Sharing its codes?

STANLEY LIEBOWITZ: It’s not exactly sharing its codes. It’s sharing the secrets on how to use the code. And if they were to do that, it may be some cost in doing that, but certainly it would be far less than say $10 billion a year, which is an estimate that I came up with of what the cost might be if you were to break Microsoft up.

RAY SUAREZ: Peter Coffee, earlier in the program we heard some possible timelines, all of which stretch far into the future. This is a fast-moving marketplace. Does Microsoft inevitably operate under a cloud now until this is nailed down?

PETER COFFEE, PC Week Magazine: I think Microsoft is under a cloud already. Some of their key people have departed the company or reduced their involvement in day-to-day affairs during the time that this has been in progress. And I think that behavioral remedies would accelerate the departure of good talent from Microsoft. I don’t think that creative people would want to work under that circumstance. I think the structural remedies in fact would allow more continuation of innovative behavior, and ultimately would produce a better Windows and better Windows applications if the operating system and the applications were being produced by separate companies.

RAY SUAREZ: C. Boyden Gray, let’s talk about some of the risks involved in not getting a settlement last week and going on with the appeals process.

C. BOYDEN GRAY, Wilmer, Cutler & Pickering: Well, I think the risks to Microsoft are fairly obvious. They have this cloud hanging over their head for a longer period of time. But I think the risks the government faces is equally severe, maybe even greater. They may risk getting absolutely nothing at all at the end of the day if the courts disagree with the judge here. And I think it’s important to point out that the ruling I believe is very, very vulnerable.

On the time claim, I think he’s running against the rulings already against him in the court of appeals. And on the other more important charge, the illegal monopoly maintenance, what the judge is saying is not that Microsoft abused its Windows position, but that it invested too much innovation, it forewent too many profits, and it sacrificed some of its own Internet service facilities, MSN, in order to promote its browser. And if that is to be punished, that sends a terrible signal to the rest of Silicon Valley about investing in innovation and in research. And that is a very puzzling thing to control if you’re trying to figure out a remedy. How do you stop someone, or do you want to stop someone from investing in research and innovation? So I think fashioning a remedy here is difficult, and I think winning in the appeals process is going to be difficult for the government.

RAY SUAREZ: Having a monopoly is not illegal in and of itself.

C. BOYDEN GRAY: And the judge so found that it was not illegal in and of itself, yes.

RAY SUAREZ: So it becomes a question of how you used it once it’s been judged that you had it?

C. BOYDEN GRAY: That’s correct. And the judge’s findings here are not that they misused their monopoly in Windows, but that they invested too much in research and innovation in the browser market. And I do not think that will stand up on appeal.

RAY SUAREZ: Peter Coffee, when we move forward, there are some new product lines that are making a big hit in the market, hand-helds and products that allow you to compute on the back of your cell phone and such. As we move forward into the next 12, 18 months, is Microsoft constrained from playing in some of these new playgrounds because of its current legal difficulties?

PETER COFFEE: I don’t see anything that would prevent Microsoft from leveraging its proven expertise in writing software that people find attractive and capable and bringing those skills to new platforms such as the hand-helds. If anything, I believe that’s one of the best arguments for a structural remedy in this case. I think Microsoft would have leveraged that expertise in these new areas more quickly if it did not have the internal need to promote the Windows platform — you have the applications promoting the platform, the platform enabling the applications. That integration has, I believe, limited Microsoft’s otherwise likely moves into these new areas.

RAY SUAREZ: Stanley Liebowitz, how about you?

STANLEY LIEBOWITZ: I think that it’s actually fairly easy to see what the impact of the structural remedy would be by looking at who’s most strongly supporting it. Companies like Sun, which compete with Windows, with the platform, are the most vocal proponents of breaking Microsoft up.

Now, I hear from time to time the critics of Microsoft saying how consumers would be better off if we had a structural remedy, that we’ll have more competition in those markets. But if that were the case, it would be bad for Sun, and it would be bad for some of the other competitors to Microsoft.

Why are they in favor of a remedy that’s supposed to be bad for them? And the answer is they’re not in favor of a remedy that’s bad for them. They know that type of remedy will be good for them because it will be bad for the Windows market and bad for Windows consumers, and that will give them, Sun and Oracle, more business.

RAY SUAREZ: Glenn Manishin, you’re shaking your head.

GLENN MANISHIN: I’m shaking my head because that’s precisely wrong. If Microsoft’s competitors wanted to benefit from a remedy, they would want a remedy that put Microsoft in handcuffs. They want a detailed conduct remedy so that the government essentially had to second guess all of Microsoft’s product design decisions, and precisely contrary to what Professor Liebowitz said, a conduct remedy would most benefit Microsoft’s competitors. The fact that they are not in favor of a conduct remedy shows they’re not favoring their own pecuniary interest, their own commercial interest, but are rather really looking for a solution that in the long run can solve this monopoly problem while limiting the degree of government intervention into high-tech, which is something that all companies, Microsoft and its competitors, should agree upon.

RAY SUAREZ: Boyden Gray?

C. BOYDEN GRAY: Well, the fact of the matter is this is a marketplace that is changing rapidly, growing rapidly, bursting at the seams, providing the greatest economic boom this country and the word has ever known, and for that, Microsoft is being put on the block: It doesn’t really make any sense at the end of the day to punish a company for being so innovative. And that’s what the judge is suggesting here. It’s not, again, to repeat, he’s not accusing them of abusing their Windows position. He’s accusing them of not making enough profit and investing too much in research. And I think that’s a terrible signal, and I don’t think it’s going to stand up at the end of the day.

RAY SUAREZ: Well, Peter Coffee, let’s look down the road a little bit. What difference does this make if you’re going to walk to cross that huge parking lot and walk through the automatic doors of a big box retailer somewhere? What are some of the ways that this plays out at ground zero, at the cash register for a consumer?

PETER COFFEE: You have to look at this war, if you want to call it that, between Microsoft and its competitors, like any other war. The worst damage that’s inflicted has been on the bystanders. When you walk into that computer superstore and see that endless sea of essentially identical machines — these beige boxes that all have that same Windows desktop on them. The judge detailed in his findings of fact that that homogeneity of personal computers is a direct result of tactics in which Microsoft engaged in its effort to control the emergence of the Web browser market.

If Microsoft is prevented from imposing that uniform look on the Windows operating system, if PC makers are able to return to a practice in which they had begun to engage of simplifying some of that complexity of PCs, giving people more appliance-like access to the capabilities of their computers and the Internet, then I think you will see a wider range of devices with more of a gap between the lowest priced and the highest priced machines, more of an opportunity to choose the level of complexity in return for the level of capability that you want. It will be more like the home entertainment electronics market, for example, in which all TVs show the same programs, but there’s an enormous range of capability in the way that they present that content.

I believe that the computing market can achieve a similar degree of differentiation and flexibility and variety for consumer choice with a standards-based foundation of Internet-mediated contents, but without any one company being in a position to control the manner in which that content appears.

RAY SUAREZ: And you’re talking about technology. Stanley Liebowitz, briefly, what about price?

STANLEY LIEBOWITZ: I think that what’s likely to happen, if we were to have a structural remedy at least, would be that we’re going to have, it’s true, somewhat greater variety. We’ll have more brands of Windows that will compete with one another. The price is not likely to be lower. It’s really likely to be higher because Microsoft is sort of like the Wal-Mart of software. The fact is that if you go back, you know, ten years ago, software was much more expensive than it is now, and my research indicates that Microsoft’s responsible for most of that decrease in price.

In markets where Microsoft doesn’t compete, prices have remained virtually constant, compared to the markets where Microsoft has competed where they’ve fallen 65%. And so to say that prices are going to be lower in a market without Microsoft just ignores the history of what Microsoft has done and what their behavior has been.

RAY SUAREZ: Well, we’re going to have to leave it there. Gentlemen, thank you very much.