Article - Microsoft suit may shape the future of the Internet (May 1998)
The US Department of Justice and twenty States have launched formal proceedings against Microsoft for monopolistic practices relating to its promotion of the Internet Explorer browser. The decision to proceed with such a dramatic step came after settlement negotiations broke down, and the Department decided to act quickly before the roll out of Microsoft’s new Windows 98 operating system.
The charges allege that Microsoft illegally stifled competition, harmed consumers, and undercut innovation in the computer software industry. The suit requires Microsoft to ‘untie’ Windows 98 and Internet Explorer.
‘All we are asking is that personal computer suppliers be relieved of contract restrictions,’ argued David Boies on behalf of the Justice Department. He said computer makers should be free to remove the Internet Explorer Web browser that now comes bundled with Windows.
Boies acknowledged that many sections of the Microsoft browser cannot be removed. But he said that some computer code could be removed to make the Web browser inaccessible to users.
The action is being taken under Sections 1 and 2 of the US ‘Sherman Act’ to:
- Restrain anti-competitive conduct by Microsoft; and
- Remedy the effects of its past unlawful conduct.
Microsoft immediately denied the charges, claiming that the law suit was ‘without merit’ and CEO Bill Gates vowed to fight the case in court. One spokesperson even described it as ‘a sad day for consumers and a sad day for the American software industry’. Netscape, on the other hand, applauded the antitrust lawsuits.
The sweeping antitrust lawsuit filed on May 18 by the Department of Justice against Microsoft is built partly on internal memos sent by its executives, including CEO Bill Gates. The 53-page complaint, as well as a 71-page supporting document containing depositions, emails, and interviews is available at: http://www.usdoj.gov/atr/cases/ms_index.htm.
The department contends that Microsoft’s own documents, ‘make clear that Microsoft executives did not believe that Microsoft could win the browser war’ through competition and that it instead had to use its Windows monopoly advantage to tilt the playing field in its favour. The documents were obtained during the agency’s lengthy investigation of the company.
Microsoft’s Windows operating systems are used on over 80% of Intel-based PCs, and more than 90% of new PCs are shipped with a version of Windows pre-installed, and the department, not surprisingly, argues that Microsoft possesses monopoly power in the market for personal computer operating systems:
‘Because end users want a large number of applications available, because most applications today are written to run on Windows, and because it would be prohibitively difficult, time-consuming, and expensive to create an alternative operating system that would run the programs that run on Windows, a potential new operating system entrant faces a high barrier to successful entry.’
The Browser War
The suit argues that the most significant potential threat to Microsoft’s operating system monopoly is not from a direct, frontal assault by existing or new operating systems, but from new software products that may become, alternative platforms for software applications, not limited to the Windows operating system.
To protect its valuable Windows monopoly against such potential competitive threats, and to extend its operating system monopoly into other software markets, the Department argues that Microsoft has engaged in a series of anti-competitive activities, including:
- agreements tying other Microsoft software products to Microsoft’s Windows operating system;
- exclusionary agreements precluding companies from distributing, promoting, buying, or using products of Microsoft’s software competitors or potential competitors; and
- exclusionary agreements restricting the right of companies to provide services or resources to Microsoft’s software competitors or potential competitors.
One important current source of potential competition for Microsoft’s Windows operating system monopoly comes from Internet browsers. The suit quotes Bill Gates telling his senior staff that:
‘A new competitor ‘born’ on the Internet is Netscape. Their browser is dominant, with a 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key applications programming interface into the client to commoditise the underlying operating system.’
The big picture for the department of Justice in this case is that if application programs could be written to run on multiple operating systems, competition in the market for operating systems could be revitalized. The combination of browser technology and a new programming languages like Java hold out this promise. Java, for example is designed in part to permit applications written in it to be run on different operating systems. As such, it threatens to reduce or eliminate one of the key barriers to entry protecting Microsoft’s operating system monopoly.
Non-Microsoft browsers are perhaps the most significant vehicle for distribution of Java technology to end users. Microsoft has recognized that the widespread use of browsers other than its own threatens to increase the distribution and use of Java, and in so doing threatens Microsoft’s operating system monopoly. The suit alleges that for this reason, a presentation to Bill Gates on January 5, 1997, on how to respond to the Java threat emphasized increasing Internet Explorer share as a key strategy.
Netscape’s browser also has the potential to become a platform itself, to which more and more applications would be written. Since Netscape’s browser can be run on any PC operating system, the success of this alternative platform also threatens to reduce or eliminate a key barrier protecting Microsoft’s operating system monopoly.
To respond to the competitive threat posed by Netscape’s browser, Microsoft embarked on an extensive campaign to market and distribute Microsoft’s own Internet browser. Microsoft was well positioned to develop and market a browser in competition with Netscape.
Of course, continued competition on the merits between Netscape’s Navigator and Microsoft’s Internet Explorer would have resulted in greater innovation and the development of better products at lower prices, and everyone in the Internet community would have been happy. The department argues that:
‘in the absence of Microsoft’s anti-competitive conduct, the offsetting advantages of Microsoft’s size and dominant position in desktop software and Netscape’s position as the browser innovator and the leading browser supplier, and the benefit to consumers of product differentiation, could have been expected to sustain competition on the merits between these companies, and perhaps others that have entered and might enter the browser market.’
The Windows leverage
The depth of feeling in the Department of Justice is best summed up in one line of their lengthy case: ‘Microsoft has not been willing simply to compete on the merits.’
The department uses damning internal memorandums to back up this claim. For example, they quote from Microsoft’s Christian Wildfeuer, writing in February 1997:
‘(it would) be very hard to increase browser share on the merits of Internet Explorer alone. It will be more important to leverage the Operating System asset to make people use Internet Explorer instead of Netscape Navigator.’
Of the memos cited, Microsoft senior Vice President for law and corporate affairs William Neukom has said, ‘In the course of the litigation, the facts will come out.’ He has refused to confirm or deny the contents of the memos at this stage.
It will be interesting to see what explanation they offer for the lengthy series of memos that appear to recognise the significant advantage that Microsoft receives by tying its Internet browser to its operating system.
One of the more damaging quotes comes from Microsoft Senior Vice President James Allchin, who in a letter to Microsoft Group Vice-President Paul Maritz on January 2, 1997 wrote:
‘You see browser share as job one... I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective. We do not use our strength - which is that we have an installed base of Windows and we have a strong OEM shipment channel for Windows. Pitting browser against browser is hard since Netscape has 80% market share and we have less than 20%. I am convinced we have to use Windows - this is the one thing they don’t have.’
The department will also argue before the court that Microsoft has misused its Windows operating system monopoly by requiring PC suppliers to agree, as a condition of acquiring a license to the Windows operating system, to adopt the uniform ‘boot-up’ sequence and ‘desktop’ screen specified by Microsoft.
This boot up sequence determines the screens that consumers see upon turning on their Windows PC. Microsoft’s exclusionary restrictions forbid any changes by a licenced supplier that would remove from any part of the Internet Explorer software or that would add any competing browser software in any more prominent or visible way.
Untying the knot
The suit contains charges from PC suppliers like Gateway that they had no choice but to buy the Windows operating system. A Hewlett-Packard executive also testified that ‘absolutely there’s no choice’ except to install Windows on its PCs. As virtually every new PC comes with Windows, no matter which supplier has built it, the consumer will still see the same screens and software dictated by Microsoft. Suppliers are deprived of the freedom to make competitive choices about which browser or other software product should be offered to their customers.
These restrictive agreements also maintain, and enhance the importance of, Microsoft’s ability to provide preferential placement on the desktop or in the boot-up sequence to various Internet Service Providers (ISPs) and Internet Content Providers (ICPs), in return for those firms’ commitments to give preferential distribution and promotion to Internet Explorer and to restrict their distribution and promotion of competing browsers.
As a result, these restrictions further exclude competing Internet browsers from the most important channels of distribution, substantially reduce suppliers’ incentives and abilities to innovate and differentiate their products in ways that could facilitate competition between Microsoft products and competing software products, and enhance Microsoft’s ability to use the near-ubiquity of its Windows operating system monopoly to gain dominance in both the Internet browser market and other software markets.
The court has set September 8 as the date for trial. Microsoft had argued for a delay of seven months, but by that time Microsoft may have sold a large number of its new Windows 98 computer operating system software. U.S. District Judge Thomas Penfield Jackson ruled that ‘By the time that Microsoft propose (to have the case heard), there will be 16 to 18 million horses out of the barn, and that’s too late,’
The state and federal actions have now been combined into one lawsuit.
It is unclear what knock on effect will be felt in other jurisdictions. In Europe, the European Commission said it was not investigating Microsoft’s bundling of its Windows software and its Internet Explorer browser. They have chosen to leave the issue to the United States. However, the European Union’s executive was ‘cooperating very closely’ with the US Justice Department on the issue.
In the meantime the Internet Community awaits its own ‘trial of the century’. The Department of Justice appears to have the upper hand at the moment, but as we have seen throughout the lead up to the formal charges, Microsoft will not give up easily.