U.S. vs. Microsoft

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• JIM LEHRER:

  Today's decision by the Justice Department is the latest step in a case that began over three years ago. In a statement, the department said it will not seek a breakup of the company into separate operating systems and applications businesses. But does believe it has established a basis for relief that would end Microsoft's unlawful conduct.

  To sort out what this all means, we turn to: 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. Professor Gavil, I finally got your name out right. So, breaking up Microsoft is off the table for all practical purposes now, right?

• ANDREW GAVIL:

  It clearly is. And I think the government intended to take it off the table with some very specific goals in mind. As long as that breakup was on the table, as long as they were litigating and asking for it, the litigation was going to continue and it could have been years before we would actually see some relief in the marketplace. So I think it has made the decision to take that off the table in the hope of either getting Microsoft to talk more seriously about adjusting its conduct and reaching settlement or get the court focused on the most immediate, most necessary remedies, some changes in the operating system habits of Microsoft as Windows XP, its next product, comes to market.

• JIM LEHRER:

  As a practical matter hadn't the appeals court decision pretty much mooted the issue of a breakup anyhow? Wouldn't it have been difficult to get a decision on that?

• ANDREW GAVIL:

  It wasn't moot but it was going to be difficult.

• JIM LEHRER:

  Not moot legally I mean.

• ANDREW GAVIL:

  That's right. The court of appeals left open the possibility of a breakup but it also made very clear that a breakup is an extraordinary remedy. It's an extreme remedy. And on remand the district court, if it was asked to impose that remedy, was going to have to be really certain that it was the remedy of choice, that it was necessary and appropriate given the scope of the liability.

• JIM LEHRER:

  Mr. Coffee, do you agree that it was pretty well already written that that wasn't going to happen, the breakup?

• PETER COFFEE:

  The appeals court very much left the door open to a breakup. They called it the most… I believe they said it was the most excellent of antitrust remedies or words to that effect. But there were also very strong arguments that in the past companies have been broken up along lines that were remaining from the companies having been put together by acquisition and merger in the first place. And Microsoft, for the most part, has grown as an organic company finding the dividing lines would not be easy. And I think a good many companies are probably a little relieved that the government has chosen not to try to get into the business of deciding what the boundaries are between the operating units of companies that have grown up in one piece.

• JIM LEHRER:

  Do you agree with Professor Gavil that by taking that off the table it does at least expedite the possibility of a resolution of this case?

• PETER COFFEE:

  I absolutely think that the prospect of remaining in one piece is important to Microsoft in terms of going forward, and I think even Microsoft's most vituperative enemies are probably a little bit relieved that we will not have that big cloud hanging over the industry perhaps for years because the industry really wants to dispel those clouds and get people excited about buying a new PC this fall or this winter. I think many people in the industry probably see this as a necessary step toward that goal.

• JIM LEHRER:

  All right. Mr. Coffee, there was another part of today's announcement that had to do with the so- called bundling issue. First of all, explain what that is in language we can understand and then tell us about the Justice Department decision.

• PETER COFFEE:

  Well, when you buy a new personal computer, it comes with this large, complex system called Windows that makes sure that applications such as a word processor or a spreadsheet can all have a common look, they all have menus that do about the same things and about the same place that behave about the same way. We call it a shell. Microsoft increasingly has put additional functions into that basic package: For example, a photograph editor, a music player, other things that you used to be able to make a nice little business producing and selling as separate products. Bundling is when you get more and more of these functions….

• JIM LEHRER:

  Excuse me. Other companies could do that, not Microsoft.

• PETER COFFEE:

  Exactly.

• JIM LEHRER:

  You could make a living making just the music things.

• PETER COFFEE:

  Exactly. Yes. And Microsoft has put more and more of these functions into the basic package leaving fewer opportunities for smaller companies to come into the market with innovative solutions because, after all, if someone has gotten something free, what is the likelihood that they'll go out and look for something to buy at an extra cost?

• JIM LEHRER:

  So the Justice Department – we'll go to Professor Gavil on this – the Justice Department came in here and said today they're not going to challenge that anymore, right?

• ANDREW GAVIL:

  Yes and no.

• JIM LEHRER:

  Okay.

• ANDREW GAVIL:

  Part of the claim that was upheld by the court of appeals, the monopolization claim, included allegations about combining products. So the additional separate count, you know how sometimes you can engage in an act and the act actually forms the basis of more than one crime or more than one possible theory. Here there were two theories that in part arose out of the same conduct. All the government is saying is there's no real reason to pursue a finding of liability separate and distinct from the one they already have. The interesting question will be as we go back to remedy, since that same conduct is already part of the court of appeal's decision in what they affirmed, the court… The….

• JIM LEHRER:

  Wait a minute. The appeals court said they shouldn't do that anymore, right?

• ANDREW GAVIL:

  Yes, as part of one part of the case they said they shouldn't do that anymore but to the extent it was a stand- alone basis for a distinct violation of the Sherman Act, the court said, well, on that part you need to go back to the district court on a more strict legal standard. That's the part that the government has decided to drop — essentially concluding that it doesn't add anything to what they already have. They could already get remedy enough.

• JIM LEHRER:

  All right. So let's go to that. What remedy are they suggesting? How do you read this statement today as to what they now want Microsoft to do to get this thing over with because they said in their statement, let's get this thing over with and move on….

• ANDREW GAVIL:

  The biggest clue in the statement is a reference back to part of the district court's original remedy order which was called the interim remedy. Since the court knew that the breakup was going to take some period of time, it imposed or it tried to impose some interim remedies that would take effect immediately. Those eventually got stayed so that there's been no remedy in effect for the three years of the case. But in that interim remedy order there were a variety of conduct changes that were required, changes in how Microsoft interacts with its customers, the manufacturers of computers, people like IBM and Dell and Compaq. Changes in its….

• JIM LEHRER:

  And that means not forcing them to put their particular… What Microsoft wants on their computers, in other words, the software in with the hardware that computer makes, right?

• ANDREW GAVIL:

  Autonomy is a big theme in those remedies.

• JIM LEHRER:

  Right. Okay.

• ANDREW GAVIL:

  Autonomy for original equipment manufacturers and autonomy for you and I. For example, one of the things that has come up already in connection with discussions of XP is the simple….

• JIM LEHRER:

  XP; that's the new system.

• ANDREW GAVIL:

  That's the new system, Windows XP, one of the questions that come up is our right to add and remove; and a manufacturer's right to add and remove.

• JIM LEHRER:

  For instance going back to Mr. Coffee's example, that if you didn't want music, you didn't have to get it. I mean that was your own decision to get it, and you could go out and buy it and put it on there if you wanted to, but you didn't have to buy it as a package from Microsoft, right?

• ANDREW GAVIL:

  It shouldn't be one size fits all. That's the theme. And Microsoft's new operating system combines a lot of features that used to be sold separately. It's not just a question of do I want it or don't I but do I want Microsoft's version of it or do I want somebody else's?

• JIM LEHRER:

  So, Mr. Coffee, Microsoft is certainly not off the hook. In other words, if the Justice Department gets its way based on this statement today, they want some big changes from Microsoft, correct?

• PETER COFFEE:

  Yes, they do. They want Microsoft to disclose internal workings of its software that in the past it has treated as its own information to use as it sees fit. They want Microsoft to offer its products in an a la carte fashion to the people who make and sell PC's, so at this point there may be a real difference between an IBM PC and a Dell PC. They won't all have the same look and feel. One of the most damning pieces of discussion in the district court trial was when Hewlett-Packard talked about how they used to have a piece of software that ran on top of Windows that made some of its functions easier to understand for a new PC owner, Microsoft said, no, you have to take that off. Windows is our product. You have to present it as we give it to you.

  And Hewlett-Packard documented that when they did this, they got more technical support calls from users, they had more systems that were perfectly good functioning systems being returned to retailers and that this had a real cost, that Microsoft's iron grip on the look and feel of the conventional personal computing experience really was making it difficult for the PC makers to find new ways of making these this easier for people to understand.

• JIM LEHRER:

  Okay. So what happens next, Mr. Coffee, in terms of this particular case, based on what the Justice Department said today?

• PETER COFFEE:

  Well, I'm sure what everyone hopes will happen is that Microsoft will say, okay, if the breakup is off the table let's talk concretely about a settlement; let's talk about the remedies to which we could agree in terms of giving more flexibility to the PC makers and more information to the competing developers of application software and get this industry moving forward again. I think that's probably what many people would like to see happen out of this.

• JIM LEHRER:

  And Professor Gavil, quickly, do you think that's possible based on what the Justice Department has decided today?

• ANDREW GAVIL:

  Very possible. And in a sense the Justice Department has called Microsoft's bluff on an important difference in their public positions. Publicly they've been saying repeatedly they are ready to resolve the case, they want to sit down and talk about it, yet they've been litigating it as aggressively as possible. By taking the breakup and tying off the table what the government has in essence said is we're ready to talk.

• JIM LEHRER:

  Okay. Thank you both very much.