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United States v. Microsoft

In 1999, a federal judge found that Microsoft, the world's biggest software company, is a monopoly that has stifled competition. Microsoft now faces legal consequences as well as rapidly evolving technologies. Both may challenge its domination of the computer software industry.

The Microsoft Corporation is the largest computer software company in the world. The chairman of this company is multi-billionaire Bill Gates, the wealthiest man in the world. Like Standard Oil at the turn of the 20th century and AT&T in the 1970s and '80s, Microsoft has currently become the target of antitrust lawsuits. The suits charge Microsoft with illegally monopolizing 90 percent of the computer software market with its Windows operating system. The courts still have to decide Microsoft's legal fate.

The Battle of the Browsers

In 1975, Bill Gates dropped out of Harvard and joined with his friend, Paul Allen, to form a software company named Microsoft. The company took off when Gates and Allen improved some operating system software and licensed it to IBM.

After Apple developed the first point-and-click operating system for the Macintosh in 1984, Microsoft produced its own version, called Windows. Today, with Windows installed in about 90 percent of the world's computers, Microsoft stock is valued at more than $550 billion. Gates, 44, owns about 15 percent of Microsoft stock, making him the richest man in the world.

In the early 1990s, the U.S. government began to investigate Microsoft for using unfair practices in competing against other companies. One of these practices required computer makers who wanted to license Windows to pay a fee for every machine they manufactured, even those with other operating systems.

To avoid a costly lawsuit, Microsoft agreed to stop practices like this. A court order known as a consent decree formalized the agreement in 1995.

By the mid-1990s, the Internet had opened a new way to use computers for millions of people. To reach the Internet's graphical World Wide Web, users need a software application known as a "browser." The Netscape Company was the first to flood the browser market with its Navigator (later renamed Communicator). Belatedly, Gates recognized the Internet's potential and introduced Microsoft's own browser, called Explorer.

In 1995, Microsoft started to require computer manufacturers licensed to install Windows to include, or "bundle," Explorer at no extra charge to the consumer. If these companies refused to add Explorer to the Windows desktop, they would lose their license to install the popular operating system on their computers. Netscape complained that Microsoft was competing unfairly, first by giving Explorer away free and second by forcing the manufacturers to make it the default browser on their computers. Since more than 85 percent of the computers sold at this time included Windows bundled with Explorer, sales of Netscape's Navigator plummeted.

Claiming that Microsoft had violated the 1995 consent decree, U.S. Attorney General Janet Reno obtained another court order late in 1997. It directed Microsoft to offer computer makers the choice of installing Windows with or without the Explorer web browser. This time, however, Gates balked and appealed the court order.

Meanwhile, the U.S. Justice Department considered additional legal action against the giant software company for antitrust law violations. By spring 1998, Microsoft dominated 90 percent of the operating system software market, while its Explorer browser was rapidly replacing Netscape's Navigator.

In May 1998, after fruitless attempts to settle with Microsoft out of court, the federal government, 20 states, and the District of Columbia sued the company under the Sherman Antitrust Act of 1890. The Sherman Act prohibits attempts by businesses to monopolize a market by unfairly eliminating competition. This was the same law the government used to go after AT&T 20 years ago and Rockefeller's Standard Oil almost a hundred years ago.

Joel Klein, head of the Justice Department's Antitrust Division, declared, "What cannot be tolerated--and what the antitrust laws forbid--is the barrage of illegal, anti-competitive practices that Microsoft uses to destroy its rivals and to avoid competition." Gates rejected this view and explained that Microsoft's success came from its innovative, superior, and low-cost software that benefited the consumer.

United States v. Microsoft

In June 1998, Microsoft gained a partial victory when a federal judge overruled the earlier court order banning the company from bundling Explorer with Windows. Even so, the federal and state governments decided to go on with their antitrust lawsuits, alleging that Microsoft was illegally attempting to preserve its Windows monopoly. The trial began in October 1998 before a federal judge, Thomas Penfield Jackson.

The federal and state governments presented testimony and other evidence (including hundreds of Microsoft e-mail messages). They tried to prove that Microsoft had acted unfairly to suppress the development of competing browser technology that threatened its Windows monopoly. The government plaintiffs accused Microsoft of:

• giving Explorer away to drive Netscape out of the browser market.
• threatening to cancel the licensing of Windows to computer makers unless they agreed to install Explorer.
• pressuring computer chip-maker Intel not to develop its own competing browser.
• threatening to cancel new Macintosh versions of Microsoft Office software unless Apple installed Explorer in the Mac as its default browser.
• making it technically difficult for consumers with Windows computers to completely delete Explorer or change to another browser.
• attempting to make the Sun Microsystems Java programing language, which facilitates browser technology, dependent on Windows.

Throughout the trial, Microsoft maintained that its sole purpose in bundling Explorer with Windows was to make it easier, more convenient, and less costly for consumers to use a computer. After all, Microsoft attorneys reminded the court, the overriding intent of the Sherman Act is to protect consumers, not competing companies. When America Online, the nation's largest Internet service provider, bought Netscape during the trial, Microsoft offered this as proof that competition was still strong in the computer software industry.

On November 5, 1999, Judge Jackson issued "Findings of Fact" in the case. To the surprise of many, his 207-page list of findings sided almost totally with the government. He found that Microsoft was a "predatory monopoly," using unfair tactics against rival companies to crush competition. This ultimately denied consumers both choice and software that was never developed because of Microsoft's actions to preserve its monopoly.

At the beginning of the year 2000, the lawsuit against Microsoft was far from over. Judge Jackson still had to decide if the facts supported the government's contention that Microsoft violated the Sherman Antitrust Act. If so, as appears likely, the judge must then decide what "remedies" to impose on the world's biggest software maker to correct its illegal behavior. Barring a negotiated settlement out of court, Microsoft will probably appeal Judge Jackson's ruling all the way to the U.S. Supreme Court.

Evolving technology, which Microsoft does not monopolize, is rapidly transforming desktop computers into wireless, online, hand-held devices. Microsoft may have to pay a price for its past actions, while it tries to keep up with fast-moving changes in technology.

For Discussion and Writing

1. According to the government, why did Microsoft attempt to control the Internet browser market? What was Microsoft's position on this issue?
2. Judge Jackson found that Microsoft was a "predatory monopoly." What does this mean? What evidence did the judge accept to reach this finding?
3. Following the release of Judge Jackson's "Findings of Fact," Bill Gates asserted that "Microsoft's innovations and behavior were completely fair and brought tremendous benefit to millions of consumers." Do you agree or disagree with him? Why?

For Further Reading

The Microsoft Anti-Trust Case: An Online NewsHour Focus

A C T I V I T Y

United States v. Microsoft: The Remedies

In antitrust cases, courts impose what are called "remedies" to correct illegal corporate behavior and to restore competition. This activity asks small groups to consider the following possible remedies if the courts decide that Microsoft violated the Sherman Antitrust Act. Each group may adopt one remedy, a combination of them, or one of its own. The groups should then each prepare reasons and arguments for its remedy to present to the rest of the class.

Possible Remedies

1. Warn Microsoft not to engage in certain unfair competitive practices. Under this remedy, the company would be able to continue business as usual. Microsoft would most likely interpret this remedy as an admission by the government that the company is really not a "predatory monopoly." Others who view Microsoft more negatively would probably view this remedy as a mere "slap on the wrist."

2. Impose a huge fine. Fines are often used to punish corporate misbehavior and to deter anti-competitive practices. But would such a remedy matter that much to this wealthy corporation?

3. Require a long probation period with a detailed code of conduct supervised by a team of government attorneys and computer experts. This would be a massive intrusion by the government into the realm of private free enterprise. Given the facts in this case, however, such an intrusion may be necessary to make sure Microsoft does not continue to use its monopoly power to eliminate competition.

4. Force Microsoft to make its secret Windows software code available to other companies. This would enable Microsoft's competitors to produce new and perhaps better Web browsers, word processors, and other programs that run with Windows. Microsoft would undoubtedly view this remedy as theft of its corporate property.

5. Split Microsoft into two or more competing companies. Each could develop its own version of Windows or each new company could focus on one element of the old company such as Windows, Explorer, or office software. Considered the "death penalty" of antitrust remedies, this option would destroy the Microsoft monopoly to restore competition in the software industry. But Gates continually points out that rapid changes in technology already make it impossible for any one company to control the software industry.