Microsoft Accord Reflects Limits of Antitrust Law : Business: U.S. attorneys found themselves playing brinkmanship. Settlement may do little to slow giant.
When government antitrust investigators began their probe of Microsoft Corp. back in 1989, they were almost laughably off target: They were looking into possible collusion between Microsoft and IBM Corp. just as the long relationship between the two firms was dissolving into a bitter feud.
But as the Federal Trade Commission lawyers learned their way around the industry, they quickly found themselves awash in an ocean of discontent over Microsoft’s business practices. Now, 4 1/2 years later, the most important antitrust probe in recent history has ended with a settlement, one that forces Microsoft to change some of its business practices but still leaves it sitting comfortably atop the industry.
Justice Department staffers were celebrating what they viewed as a victory Sunday, sipping champagne at the home of department antitrust chief Anne K. Bingaman. Settlement talks had begun in June with a call from the Justice Department to Microsoft general counsel William Neukom--”I think it was around Father’s Day,” Neukom recalled--and ended Friday when Microsoft Chairman Bill Gates agreed to terms after a long phone discussion with Bingaman.
Yet the rocky start of the government case against Microsoft now looks like a revealing sign of the difficulties involved in modern-day trust-busting. Instead of underscoring the Clinton Administration’s strong commitment to antitrust enforcement, as Bingaman had intended, the case may have revealed the limits of antitrust law in the complex and fast-changing world of high-tech.
Government lawyers working for two different agencies gathered hundreds of thousands of documents from dozens of software companies over the years, and they ultimately painted a picture of Microsoft as a ruthless, sometimes unscrupulous monopolist. But when it came to bringing charges, they found themselves playing a highly politicized game of brinkmanship with Microsoft and its strong-willed chairman.
Twice, the Federal Trade Commission deadlocked over whether to bring charges. The Justice Department then picked up the case, but it was also of two minds. The settlement that was finally reached will do little to slow the Microsoft juggernaut, many in the industry say, and yet it still promises to shape the industry in many subtle ways.
If there was one Microsoft competitor especially determined to see the government “do something” about allegedly monopolistic practices, it was Novell Inc. The company’s product family included a personal computer operating system that competed with Microsoft’s dominant MS-DOS product. But even though the software was getting good reviews, it wasn’t selling.
A big reason seemed to be Microsoft’s “lockout” contracts, which provided heavy discounts to computer manufacturers that agreed to pay royalties for every machine they shipped whether or not they came with Microsoft software. Manufacturers thus had little interest in offering operating systems from companies like Novell.
Novell’s avuncular chairman, Ray Noorda, was bitter about what he saw as Microsoft’s predatory practices. When asked why he didn’t sit down with Gates and resolve the increasingly bitter dispute between the two companies, he replied: “To have a heart-to-heart with someone, you need two hearts.”
With the FTC’s interest, industry complaints against Microsoft crystallized into a strong alliance. In September, 1992, Novell met with 10 other angry Microsoft competitors to coordinate lobbying efforts and assure that the FTC had enough evidence to expand its investigation.
Among the group was Carlsbad-based Stac Electronics, which had just sued Microsoft for selling so-called file compression software that was similar to software that Stac had proposed licensing to Microsoft. Stac recently won a lawsuit over the incident, and Microsoft agreed to pay $20 million in damages and invest in Stac shares.
In late 1992, the FTC investigation was bolstered with a controversial bit of research. Andrew Schulman, a Cambridge-based programmer, contended in a book that Microsoft had secretly embedded special error messages in its Windows software to make it appear incompatible with Novell’s competing system.
Microsoft denied the charges, claiming that the error messages were only put in to warn users that Windows hadn’t been tested for compatibility with operating systems other than MS-DOS. And Gates continued to insist publicly that he was unconcerned about the FTC.
“Am I worried?,” he told Business Week. “Do I worry about someone walking up and shooting me in the head? It’s a possibility.”
Privately, though, Microsoft was far less sanguine. The company hired a battery of powerful lawyers, including former FTC commissioner Patricia Baily, a close friend of FTC chairwoman Janet Steiger.
Novell and its allies wheeled out some big legal guns of their own. The lead attorney for Novell’s law firm, Michael Sohn, was the FTC’s general counsel during the Jimmy Carter Administration.
Meanwhile, even as the investigation continued, Microsoft grew. It was rapidly gaining market share with products that ran better on its Windows operating system than that of competitors. Competitors again cried foul, arguing Microsoft unfairly uses its position in operating software, which controls basic PC functions, to compete in building applications like word processing and spreadsheets.
By the beginning of 1993, the FTC staff believed it had enough evidence to file charges. There was little political support for broad charges that might be hard to prove--this was, after all, one of America’s most successful and admired companies, not to mention one of its biggest exporters.
But the staff felt confident in pursuing narrower measures, including a preliminary injunction barring Microsoft from offering the hated “lockout” contracts and preventing Microsoft from purposely creating incompatibilities between its software and other operating systems.
Finally, in February, 1993, the issue came to a vote at the FTC. But with one commissioner recusing himself over a possible conflict of interest, the FTC deadlocked, 2 to 2, on whether to bring charges. Gates had won the first round.
Microsoft’s competitors weren’t giving up. All spring and summer, lawyers for Novell, Lotus Development, Borland International, Sun Microsystems and even IBM trekked through the halls of the FTC, explaining why Microsoft should be contained.
Bill Gates and his team of lawyers made their own visits to Washington to talk to the FTC commissioners, with mixed results. He impressed at least one of the commissioners, who found him “passionate” about his company. But he also managed to offend, calling another commissioner’s ideas “communistic.”
Gates’ strongest argument? That Microsoft was a key source of growth in the American software industry and generated $2 billion a year in exports. Any shackles on the company would only open the gate for foreign competition. At a time when the Clinton Administration was experimenting with expensive industrial policies to get American industry up to speed, the argument was a potent one.
On July 21, the FTC split once again on the Microsoft case, and it seemed Gates had won for good. But a week later, urged on by Sen. Howard M. Metzenbaum (D-Ohio), chairman of the Senate Judiciary Committee, the Department of Justice took an unusual step and asked the FTC for copies of its file on Microsoft.
Assistant Atty. Gen. Bingaman had been promising to strengthen the department’s antitrust efforts, and Microsoft was a promising and high-profile case, albeit a risky one. Justice Department lawyers then spent months poring over more than 200 boxes of documents and 50 to 60 boxes of depositions received from the FTC. Bingaman also hired a prominent San Francisco antitrust lawyer named Sam Miller as outside counsel.
The antitrust division of the European Union joined in the negotiations, and half a dozen lawyers met in Brussels last fall.
Finally, the Justice Department was ready to deal.
“I got a call in early June, I think it was around Father’s Day, from a Justice Department staffer who proposed settlement talks and a few days later Anne Bingaman called; I was surprised,” said Microsoft general counsel William Neukom.
Microsoft, which had repeatedly insisted it wouldn’t settle, abruptly changed tack when it discovered that the department had dropped many of the broader charges.
“The Justice Department didn’t think there was a case to be made on those other claims . . . they seemed to be interested in getting this case out of the way and breaking the deadlock,” said a source close to Microsoft.
* EFFECT ON STOCKS: The Microsoft settlement could lift depressed shares of many software companies. D1
