The Microsoft Decision: Judge Finds for Government

The findings on the facts in the case set the stage for a final ruling in the coming months on whether the software giant violated federal antitrust laws.
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(Updated at 8:44 p.m. EST)

In a sharp blow to

Microsoft

(MSFT) - Get Report

, a federal judge issued findings Friday evening favoring the government in its wide-ranging, yearlong antitrust lawsuit against the company, holding that the giant software maker enjoys monopoly power in the personal computer market.

U.S. District Court Judge Thomas Penfield Jackson's findings on the facts in the case set the stage for a final ruling in the coming months on whether Microsoft used its monopoly power to violate federal antitrust laws.

In his findings, the judge said Microsoft's actions stifled innovations in the industry and deterred investments in rival technologies. He also found that the actions of Microsoft had the potential to harm consumers.

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"Microsoft enjoys so much power in the market for

Intel

(INTC) - Get Report

-compatible PC operating systems that if it wished to exercise this power solely in terms of price, it could charge a price for

Windows

substantially above that which could be charged in a competitive market," the judge wrote. "In other words, Microsoft enjoys monopoly power in the relevant market."

In his findings, the judge said

Apple Computer

(AAPL) - Get Report

was too small to compete effectively against personal computers that used Microsoft Windows, and that

Linux

software does not pose a threat to Windows. He said computer makers believed they had no choice but to use Windows.

Later this year or early next year, Judge Jackson will make a second ruling in the case, the conclusions of law, determining how antitrust statutes should be applied to the facts. The judgment, or final ruling, will follow after that, perhaps one or two months later. Though it is possible that appeals could be filed after each ruling, analysts expect that neither side will appeal until after the final judgment.

Judge Jackson's findings, which were made public at 6:30 p.m. EST, sent Microsoft's stock tumbling in late after-hours trading. The shares fell to 3 3/8 to 88 3/16 on

Island ECN

. Instinet quoted the shares at 89. Earlier, the stock ended regular trading at 4 p.m. Friday down 1/8 at 91 9/16 on heavy volume of 35 million shares.

The Microsoft decision could have a material impact on

mutual fund investors, as the stock is held by one-third of domestic equity funds, according to

Morningstar

.

Assistant attorney general Joel Klein, who heads the

U.S. Justice Department's Antitrust Division

, said the

Justice Department

was "enormously pleased by the Microsoft findings." But he said it was premature to discuss what remedies might be taken against Microsoft.

"This is a great day for America's consumers," Attorney General Janet Reno said.

The opinion did not specifically identify which antitrust laws Microsoft might have violated, if any, or say anything about penalties. But Judge Jackson sided with virtually every part of the government's case.

Microsoft said it disagreed with many of the court's findings, and said it was confident that its position will ultimately be upheld. It said it will "vigorously" contest the case in court.

At a news conference after the decision was released, Microsoft founder Bill Gates said the fight is far from done, emphasizing that the findings of fact are only the first of three steps in the lawsuit.

"Microsoft competes vigorous and fairly," Gates said. "From the very beginning, Microsoft has wanted nothing more than to resolve this case. The only thing that is really important to us is that we can continue to innovate that software."

Under the law, he said, "The kind of innovation we do is absolutely encouraged." He noted that the findings recognized Microsoft's contribution to the development of the Internet and creating innovative, low-priced software.

Gates declined to speculate on any potential impact on the company's stock.

One analyst cautioned against jumping to immediate conclusions, noting that Judge Jackson now has the challenge of writing an ironclad decision that will hold up under appeal. Two of his findings have already been overruled by appellate courts, this analyst said.

"It's a first decision -- this is a decision that will be spinning wildly by the two sides," said James Lucier, an analyst with

Prudential Securities

, who still has an accumulate rating for Microsoft. His firm hasn't done underwriting for the company. "The question is: How is Judge Jackson, a man worried about going down as the

Rodney Dangerfield

of his profession, write a decision that will hold up under appeal?"

Lucier said he was surprised that the decision "blurs the lines" between findings of fact and conclusions of law. Jackson may have done that intentionally in an attempt to send the decision, if appealed, directly to the

U.S. Supreme Court

, he said.

Some observers following the case believe the disclosure could lead to settlement talks. "Judge Jackson has encouraged settlement talk all along," said Lucier. "Microsoft and the Department of Justice have indicated they might entertain a settlement." However, he also said that the state attorneys general, the other plaintiff in the case, are not as amenable to a deal.

In May 1998, the Justice Department, 20 states and the District of Columbia sued Microsoft under sections 1 and 2 of the

Sherman Antitrust Act

. The judge heard opening arguments five months later, on Oct. 19, 1998. Testimony in the case lasted almost a year, ending with final arguments on Sept. 21, 1999.

The government contended that Microsoft violated U.S. antitrust laws by engaging "in a broad pattern of unlawful conduct with the purpose and effect of thwarting emerging threats to its powerful and well-entrenched operating system monopoly," according to Justice Department documents. Justice concludes that such behavior harms consumers by depriving them of choice and advances in the software industry.

The government said Microsoft tried to eliminate competition by offering to divide the browser market with

Netscape

in a meeting on June 21, 1995. Then, when Netscape refused, the government asserted, Microsoft took a number of steps to eliminate the competition. These included unlawfully requiring computer manufacturers to include its

Internet Explorer

Web browser as a condition of using its Windows 95 and Windows 98 operating systems. It also included alleged anticompetitive and exclusionary arrangements with Internet service providers and online services to install the Microsoft browser only and preclude the use of the Netscape browser, as well as setting a "predator price" for Internet Explorer, offering the browser for free.

Additionally, the government alleges that Microsoft tried to sabotage

Sun Microsystems'

(SUNW) - Get Report

Java

cross-platform capabilities, which it saw as a threat to the popularity of its Windows operating system.

Microsoft denied all the charges, characterizing the government's case as "specious," "fiction," "fantasy," "silly" and "pure baloney."

Among other rebuttals, it contended that Netscape has been more than able to distribute millions of copies of its software. It argued that it does not have a monopoly because it does indeed face significant competition, namely from Netscape, which was acquired earlier this year by

America Online

(AOL)

for $10 billion. Microsoft said its competition also includes

Red Hat

(RHAT)

, a company with a market value exceeding $8 billion that develops open-source software, including the Red Hat Linux operating system. Microsoft also pointed out that even the government's chief economic witness said Microsoft's conduct had not harmed consumers "up to this point."

Stick with

TheStreet.com

this evening and over the weekend, as we provide up-to-the-minute stories, commentary and reaction on the Microsoft case.