Article 11 of 54
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Courting Defeat: Did the Giant Slay Itself?
David Streitfeld
The Washington Post
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Copyright 2000, The Washington Post Co. All Rights Reserved


"This antitrust thing will blow over."

So said Microsoft Corp. Chairman Bill Gates in a 1995 meeting. All the friends and foes of the software giant probably agreed, not only then but as recently as a few months ago. There would be a settlement, the company would be rapped on the knuckles, and it would be business as usual.

With U.S. District Judge Thomas Penfield Jackson's order yesterday splitting the company in two, "this antitrust thing" took the ultimate toll. To be sure, Microsoft will appeal the breakup vigorously if not desperately. But until and unless it wins, the prospect of dismemberment will shadow everything the company says and does.

How such a wildly successful and fabulously valuable firm suffered this great humiliation will be studied in law schools, management classes and the high-tech world for decades to come. With all due respect to the government's winning strategy, the attention will undoubtedly focus on the mistakes Microsoft made.

As Rob Enderle, an analyst with Giga Information Group, puts it: "It wasn't so much that the Department of Justice won this trial. Microsoft lost it. It's like going in for a speeding ticket and coming out with a death sentence."

There will be many rich areas for scholarly exploration. Can the roots of the breakup be ultimately traced to Gates's longtime attitude that competitors should not be merely beaten but put out of business? Could the company have been saved with any courtroom approach other than one that even its sympathizers say was sometimes bumbling and always fatally arrogant?

If a sampling of pro-, anti- and neutral Microsoft experts this week is any indication, the consent decree between the company and the government will draw special attention.

In the July 1994 deal with the government, Microsoft agreed to stop certain practices, such as charging a computer company a license fee for using the Windows operating system on all its machines, even if some were sold without Windows installed. In effect, this was a Microsoft-imposed tax on any computer maker who wanted to install a non-Windows system.

After some courtroom wrangling, Judge Jackson approved the consent decree on Aug. 21, 1995. That night, Gates appeared on "Larry King Live." Noting the day's events, King threw a softball at the richest man in the world. "Any comments?" he asked.

"That whole thing really has no effect on Microsoft or how we work . . .," Gates answered. "It's great to see it finally come to a close. Because there were a lot of years there where, you know, we were producing a lot of documents and what it comes down to is that there is nothing significant that we needed to change, and that just confirms the way we've viewed it all along."

By making that statement, Gates helped ensure there would be a lot more years, a lot more documents, and that Microsoft would be changed after all.

"Instead of letting Justice have their day in the sun, Gates openly ridiculed the consent decree," said Luke Froeb, a former government antitrust economist who now teaches at Vanderbilt University. "He just made Justice look bad--'Hey, we got everything! You got nothing!' They weren't going to bargain like that with him again."

If Gates's statement sent one signal to regulators, it sent another to Microsoft employees. Said Froeb: "Everyone in the company is listening and saying, 'That's how we have to behave.' Consequently, they didn't have much appreciation for how their behavior could run afoul of antitrust laws."

Gates may have been too eager to rub everyone's nose in his victory, but he wasn't wrong. The consent decree had no practical effect on Microsoft's business practices.

Yet it ultimately might have been a huge mistake for the company, because it never fully resolved the issue of its behavior. That's the view of Steve Wood, who as the sixth employee at Microsoft knows the company very well.

"The Justice Department had a weaker case in 1994," explains Wood, now the chief executive of Wireless Services Corp. "In the end Microsoft would have won. There's no way the Justice Department would have been in a position to come back after them."

Even if Microsoft had lost, the issue would still have been resolved, and presumably without a breakup order either. But the consent decree "left a window open," Wood said. "The Justice Department case started this time with a very narrow allegation that Microsoft breached the consent decree. But as the case went on, they brought up all these other issues."

The most extreme Microsoft partisans, in a view that the company itself shares, say Microsoft isn't to blame at all for its fate. Those responsible for the breakup don't work on the company campus in Redmond, Wash. Paul Grayson, a high-tech executive who has scrapped with Microsoft legally but now says that "we're damned lucky that Microsoft has been around," blames society.

"Part of the character of America is to push people to excel and then tear them down later," said Grayson, the chief executive of Alibre Inc. "You raise up a hero, and then see how they fall."

After some searching, Grayson comes up with something the company should have done differently. "They should have erased all their e-mails"--many of which were used to devastating effect by the government in the trial.

In general, though, he wonders if you can blame Microsoft for being Microsoft.

"A prizefighter never goes into the ring without the desire to knock his opponent out in the first 30 seconds," said Grayson. "That's what Microsoft has done with its competitors. And when Netscape came along, it wanted to do the same thing. If you're a prizefighter, are you supposed to be nice to your opponent before knocking them out?"

Microsoft's behavior toward Netscape Communications, the company that first popularized the Internet browser, formed the heart of the government's case.

Whether Microsoft could have beaten Netscape legally is a matter of debate. Benjamin Klein, a UCLA economics professor who has been a consultant to Microsoft on matters unrelated to this case, thinks the company's much-vaunted paranoia betrayed it.

"One of the reasons Microsoft is a successful company is that they operate in a paranoid way, but in this particular case it didn't matter," said Klein. "The scenario they were worried about"--that Netscape's Internet browser would become a platform that rendered Microsoft's Windows operating system superfluous--"was such a small probability. It turned out not really to matter."

But Dan Rubinfeld, a former deputy assistant U.S. attorney general who was a consultant to the government on the case, argues that "there was a hard battle going on over browsers. Microsoft engaged in practices that harmed Netscape and harmed competition. It's very likely that did make a difference."

In this sense, then, Microsoft played blood sport once too often. "They could have avoided this if they stepped back half a step, and realized companies with large market shares have to be very cognizant of their effect on competitors," said Vanderbilt's Froeb. "And it wouldn't have affected their position [in the marketplace] at all."

Some observers of the Microsoft case say that the outcome might have been different if the company had learned the lessons of embattled companies in another industry: tobacco.

"The differences couldn't be more stark," said former Maine attorney general James E. Tierney Jr. "The tobacco companies, wary of the liability nightmare inherent in selling a product that kills, granted their attorneys broad influence. Everything about these companies ran through their lawyers."

As result, he said, the companies enjoyed freedom from regulation by the Food and Drug Administration--and didn't pay a dime in legal judgments--for decades.

At Microsoft, on the other hand, "they were the opposite of very heavily lawyered," Tierney said. "I'm not sure that Microsoft, even today, understands the law. Bill Gates just doesn't get it."

There was certainly ample evidence of that during the trial, everyone agrees.

"They were too uncompromising and too incredible," said UCLA's Klein. "They said they didn't have market power in operating systems! They lost all credibility with the judge."

Even as government lawyer David Boies ran rings around them, Microsoft stonewalled.

"They had a very detailed presentation in which essentially they denied everything, and said everything they did was right," said Nicholas Economides , a professor at the Stern School of Business at New York University.

Microsoft never shifted its courtroom tactics because even at that late date, the company believed it was right. "If you really believe that you're absolutely innocent, it might be hard to defend yourself in the most effective way," said Economides . "You think that eventually your opponent will see the light."

It didn't help that Microsoft never seemed to realize the federal government isn't the same sort of competitor as Netscape, Novell, Borland and a host of others that it had bested.

"They didn't understand that the government isn't a company but a special entity," said Gartner analyst David Smith. Referring to such moments as Microsoft chief executive Steve Ballmer saying in public "the heck with" Attorney General Janet Reno, Smith said: "The attitude they showed for so long was that they didn't have to answer to the government."

But perhaps all these analyses start from the wrong assumption. Maybe a breakup, far from a fate the company has strenuously sought to avoid, is actually something Microsoft secretly desires.

"They made too many enemies, pushed too many people around, stretched the truth too much too many times--even in the courtroom, as evidenced by their doctored videotape," said Leon Kappelman, an associate professor at the University of North Texas and, he noted, a Microsoft shareholder.

"I have no idea what is on the minds of Gates and Ballmer, but they have conducted themselves, the company, and this case as if they wanted the company broken up," said Kappelman. "Perhaps they doth protest too loudly?"

Staff writers John Schwartz and Ariana Eunjung Cha contributed to this report.

What's Next

Microsoft must . . .

* Submit plan to break itself in two.

* Implement new restrictions on business conduct within nine months and allow Justice Department monitoring.

Appeal Process

In the next 30 days, Microsoft will appeal the final order and is likely to receive an emergency stay on the breakup. Judge Jackson could forward the appeal, at the Justice Department's request, to the U.S. Supreme Court.


The Supreme Court could make a final ruling or remand the case back to Jackson.


If the Supreme Court doesn't accept the appeal, the case goes to the U.S. Court of Appeals.

Either the Justice Department or Microsoft could appeal the U.S. Court of Appeals' ruling to the Supreme Court, whose rulings are final. If the Supreme Court decides not to hear the appeal, the Court of Appeals' ruling is final.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.