The Microsoft Decision: Fallout Might Be a Less Cocky Microsoft, and Less Fearful Competitors

SAN FRANCISCO -- While far from over, the historic antitrust case of U.S. vs. Microsoft is tilting in favor of the U.S. Justice Department. A judge's findings late Friday clearly strengthen the government's hand as it weakens Microsoft's (MSFT).

"Now it's damage-control time for Microsoft," says Dana Hayter, an attorney with Fenwick & West and a former Department of Justice employee. "The judge is telegraphing his punch on the remedy side. Given that tone, he's considering a more extensive remedy."

Some of the rippling effects of the antitrust trial could include more lawsuits against Microsoft and an increase in investments into areas now dominated by the Redmond, Wash., software company. More broadly, the findings add new grist to the debate about the rules of innovation, competition and monopoly in the age of the Internet.

Microsoft Decision: Join the discussion on TSC Message Boards.

U.S. District Judge Thomas Penfield Jackson issued his findings of fact late Friday, which said decisively that Microsoft holds a monopoly in operating systems for personal computers. Jackson isn't expected to rule for several months on whether Microsoft violated antitrust laws, but his strongly worded findings represent a major setback to Microsoft in its defense and suggest that he will favor the government's case in his final decision.

Microsoft said in a statement it will continue to "vigorously contest" the issues in court. Assistant Attorney General Joel Klein cautioned that it's too early to talk about any remedies against Microsoft, but he said he was "enormously pleased" by the finding.

Jackson wrote that "Microsoft enjoys monopoly power" in operating systems for Intel (INTC)-based PCs and that its customers "lack a commercially viable alternative to Windows." The decision also said by tying its Windows 98 operating system to its Internet Explorer Web browser, Microsoft purposely squashed innovation.

"Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products," wrote Jackson in a 207-page document. "The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."

Both Microsoft and the Justice Department have 30 days to respond, after which Jackson will issue a ruling on whether Microsoft's monopoly violated antitrust laws. A monopoly doesn't violate antitrust laws unless a company uses its monopoly to prevent competition or to extend its control into new industries.

An appeal from Microsoft, the Justice Department or both would tie up the case for months, if not years. But antitrust experts interviewed predict that the findings will trigger another round of settlement talks between Microsoft and the government. "It certainly gives the government more leverage," says Hayter. "It increases the likelihood that there will be a meaningful settlement."

Rick Horning, a partner with law firm Tomlinson Zisko Morosoli & Maser, agrees with Hayter, but says "it also stiffens the backbone of the government."

Even if Microsoft settles, its legal headaches could be far from over. "A findings of fact that Microsoft has monopoly power creates a shortcut for follow-on litigants," says Hayter. "It makes it easier for people to sue them."

Indeed, what's bad for Microsoft is good for many others.

The findings could encourage increased investment in Internet ventures as companies feel less afraid that Microsoft will steamroll them into oblivion. "The less control that Microsoft has on the Net the more funding comes into e-business ventures," says Hayter. "Three years ago Microsoft was coming to the Valley and saying, 'Don't fund companies that are competing against us.' Now they can't do that."

Other observers say the bigger issue is that the trial has highlighted the difficulties of applying current antitrust law to monopolistic behavior in the fast-moving technology industry. "In every major cycle of the computer industry, customers have appointed a vendor to be in charge," says Roger McNamee, whose Integral Capital Partners is long Microsoft. "And that vendor has wound up the monopolist. In the old days it was IBM (IBM) -- today it's Microsoft."

"Can antitrust law really keep up?" asks Andrew Shapiro, a lecturer at Columbia University Law School. "By the time this is all resolved, the browser is embedded in the operating system." Instead of using the law to influence business, Shapiro says, the public might be better served by putting more pressure on the private-sector consumer choice.

Among other possible remedies: Change government procurement policies so that a certain percentage of computer systems use open source technology, or force Internet media corporations -- through consumer pressure -- to preserve a public space on their Web pages for content or services that isn't supported by Microsoft.

While the U.S. vs. Microsoft case has been one of the biggest business stories of the past year, its immediate impact on stocks is likely to be muted. And Wall Street, which has had a year to ponder the impact of an unfavorable ruling, increasingly sees Microsoft as less central to the tech industry during the rise of the Internet. Despite a number of endeavors in e-commerce and Internet content, Microsoft remains just one of a number of important players in the Internet industry.

Even though the outcome of the trial is still unclear, Shapiro says the government investigation, trial and harsh public scrutiny of Microsoft has forced Microsoft to be more friendly. In recent months, Microsoft has backed away from pressuring ISPs and Web sites into promoting its browser and Internet software to the exclusion of competitors.

"This was always a trial of public opinion," says Shapiro. "Already the Justice Department has won in the sense that they've put Microsoft on the defensive."

>To order reprints of this article, click here: Reprints