Appeals court's action not surprising,
and neither is Microsoft's behavior

Thursday, June 28, 2001
Mercury News
[ source ]

Microsoft and its acolytes were purring with delight Thursday, at least publicly. But while the U.S. Court of Appeals gave the company what everyone expected -- overturning the breakup order -- it didn't hand Microsoft the overwhelming victory that some were claiming.

Not even close.

This was the friendliest collection of judges Microsoft is likely to encounter -- an appeals court largely appointed by presidents who bowed to business interests and disdained antitrust enforcement. Yet even these judges couldn't stomach what they found in the record.

``The company behaved anticompetitively,'' they wrote unanimously. This misbehavior ``contributed to the maintenance of its monopoly power.'' And the legal system will find remedies to curb the abuses.

The appeals court judges did their homework, as was abundantly clear in their 125-page ruling. That they would do so wasn't a given during the two-day hearing back in February. During the portion I attended, they absolutely hammered the government lawyers while giving -- it seemed at the time -- absurd deference to Microsoft.

But the judges came around to the obvious. They dismissed Microsoft's preposterous claims that it acted solely in the interests of customers. Rather, they found, the only plausible explanation for some company behavior was a campaign to maintain the mega-profitable Windows monopoly.

The section of the ruling that deals with Java -- the Sun Microsystems programming language and computing platform -- is remarkable. The appeals court notes, bluntly, how Microsoft deliberately deceived software developers, first pretending it would support Java while it was working to pollute it:

``Microsoft's conduct related to its Java developer tools served to protect its monopoly of the operating system in a manner not attributable either to the superiority of the operating system or to the acumen of its makers, and therefore was anticompetitive,'' the judges wrote. ``Unsurprisingly, Microsoft offers no pro-competitive explanation for its campaign to deceive developers.''

Microsoft did win on several points apart from the breakup order. It's important to realize, however, that in several of the areas in which the judges overturned U.S. District Judge Thomas Penfield Jackson's trial rulings, they weren't giving the company total vindication. Rather, they sent the matter back to the lower court for a rehearing.

That was the case with the appeals court's treatment of ``tying'' Internet Explorer to the operating system. The judges didn't utterly absolve Microsoft, as many legal experts had predicted. When the trial court rehears this part of the case, the government's hurdle will be higher, but not necessarily insurmountable.

The appeals court waffled on the question of whether Microsoft can put anything it wishes into the operating system. The answer seemed to be a big ``maybe.'' The judges stuck with traditional antitrust doctrine, in the sense of not permitting so-called ``integration'' if the sole reason is to kill competitors.

Bill Gates, in his public reaction, was true to form. He misrepresented the ruling. He offered a non sequitur or two. And he vowed that Microsoft wouldn't change its behavior or future plans in any way.

Gates was particularly offensive when he brushed off Microsoft's brutal treatment of a major set of customers, the PC makers. The court saw blatant antitrust law-breaking in the company's restrictive, anticompetitive licenses, which forced onerous terms on manufacturers who had no alternatives.

Microsoft, Gates said blandly, ``isn't doing this anymore.''

Right. And a thief who retires, having stolen millions, isn't doing it anymore, either. Apparently we should let him keep his loot and ask him not to do it again.

That attitude means that the next trial judge needs to move quickly to put conduct restrictions into place. Not only has Microsoft not acted with restraint, it's been more brazen than ever in recent months, imposing its will on customers and competitors alike. Every day that Microsoft is allowed to continue in its ways is another day that monopoly abuses generate more cash for Microsoft to use to conquer more territory.

The remedies will be crucial if we're going to have genuine competition on the next frontier. We're moving away from packaged desktop-computer software toward so-called ``Web services,'' in which software lives both on PCs (and other devices) and on the Net.

Every move Microsoft is making these days is plainly designed to leverage its Windows monopoly toward control of Web services -- toward control of the Internet itself. How will the legal system keep up, if it doesn't act now?

The only useful comment I heard Thursday from Gates, Steve Ballmer or anyone else at Microsoft was an apparent willingness to negotiate a settlement. Of course, we've heard this before. But the possibility that Microsoft will negotiate in good faith now seems somewhat higher, given the fact that the court ruled against the company on central issues.

The biggest winners Thursday were probably the trial lawyers who will now redouble their locust-like swarming around a company that may now be more vulnerable to civil antitrust suits. Here's betting that America Online, which bought Netscape -- the company Microsoft all but destroyed with its tactics -- will launch a multibillion-dollar lawsuit at some point.

The appeals ruling also highlights the damage caused by Jackson's misconduct. He refused to hold an evidentiary hearing on the remedies. He also shot off his mouth about the case in an astonishingly injudicious way. Yes, Microsoft provoked him with its constant arrogance and courtroom misrepresentations. But when he rose to the bait, Jackson ensured that the case would stay unresolved much longer than necessary.

In other words, Microsoft has won something invaluable for its purposes -- time. It can, and apparently plans to, persist in whatever practices it deems necessary to maintain and extend its monopoly. It will keep building into Windows and Internet Explorer and Office any and all technologies that will further solidify its monopoly. It can extend its reach into new markets, using its $30 billion in cash (which grows by a billion dollars each month).

I keep hoping, against all evidence, that Microsoft will behave with honor one of these days. But I'd settle for the company's grasp of something it has never accepted.

Simply put, it is a monopoly. Monopolies operate under different rules. That's what a set of judges, known to be skeptical of antitrust activism, said Thursday. Is Microsoft paying any attention?

# # #

National Association of Attorneys General: Conclusions Of Law: Monopoly Power

April 14, 2000 [ source | index ]

The plaintiffs proved at trial that Microsoft possesses a dominant, persistent, and increasing share of the relevant market. Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent, and the firm's share would stand well above eighty percent even if the Mac OS were included in the market. Id. 35. The plaintiffs also proved that the applications barrier to entry protects Microsoft's dominant market share. Id. 36-52. This barrier ensures that no Intel-compatible PC operating system other than Windows can attract significant consumer demand, and the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level for a protracted period of time. Id. Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power. See United States v. AT&T Co., 524 F. Supp. 1336, 1347-48 (D.D.C. 1981) ("a persuasive showing . . . that defendants have monopoly power . . . through various barriers to entry, . . . in combination with the evidence of market shares, suffice[s] at least to meet the government's initial burden, and the burden is then appropriately placed upon defendants to rebut the existence and significance of barriers to entry"), quoted with approval inSouthern Pac. Communications Co. v. AT&T Co., 740 F.2d 980, 1001-02 (D.C. Cir. 1984).

At trial, Microsoft attempted to rebut the presumption of monopoly power with evidence of both putative constraints on its ability to exercise such power and behavior of its own that is supposedly inconsistent with the possession of monopoly power. None of the purported constraints, however, actually deprive Microsoft of "the ability (1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion." IIA Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law 501, at 86 (1995) (emphasis in original); see Findings 57-60. Furthermore, neither Microsoft's efforts at technical innovation nor its pricing behavior is inconsistent with the possession of monopoly power. Id. 61-66.

Even if Microsoft's rebuttal had attenuated the presumption created by the prima facie showing of monopoly power, corroborative evidence of monopoly power abounds in this record: Neither Microsoft nor its OEM customers believe that the latter have - or will have anytime soon - even a single, commercially viable alternative to licensing Windows for pre-installation on their PCs. Id. 53-55; cf. Rothery, 792 F.2d at 219 n.4 ("we assume that economic actors usually have accurate perceptions of economic realities"). Moreover, over the past several years, Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power. Findings 67, 99, 136, 141, 215-16, 241, 261-62, 286, 291, 330, 355, 393, 407.

In this case, the plaintiffs postulated the relevant market as being the worldwide licensing of Intel-compatible PC operating systems. Whether this zone of commercial activity actually qualifies as a market, "monopolization of which may be illegal," depends on whether it includes all products "reasonably interchangeable by consumers for the same purposes." du Pont, 351 U.S. at 395. SeeRothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986) ("Because the ability of consumers to turn to other suppliers restrains a firm from raising prices above the competitive level, the definition of the 'relevant market' rests on a determination of available substitutes."). The Court has already found, based on the evidence in this record, that there are currently no products - and that there are not likely to be any in the near future - that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Findings 18-29.

The Court has further found that no firm not currently marketing Intel-compatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of such consumers with a viable alternative to existing Intel-compatible PC operating systems. Id. 18, 30-32.
From these facts, the Court has inferred that if a single firm or cartel controlled the licensing of all Intel-compatible PC operating systems worldwide, it could set the price of a license substantially above that which would be charged in a competitive market - and leave the price there for a significant period of time - without losing so many customers as to make the action unprofitable. Id. 18.
This inference, in turn, has led the Court to find that the licensing of all Intel-compatible PC operating systems worldwide does in fact constitute the relevant market in the context of the plaintiffs' monopoly maintenance claim.

In short, the proof of Microsoft's dominant, persistent market share protected by a substantial barrier to entry, together with Microsoft's failure to rebut that prima facie showing effectively and the additional indicia of monopoly power, have compelled the Court to find as fact that Microsoft enjoys monopoly power in the relevant market. Id. 33.

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