No Split But Microsoft's A Monopolist

By Adam Cohen/Redmond

The ruling lifts the cloud of breakup over the company," Bill Gates exulted at a press conference last week. Moments later from the same podium, Microsoft spokesman Jeff Raikes echoed: "I'm sure you'll understand, especially if you live in Seattle, the feeling of the sun breaking through the clouds." CEO Steve Ballmer chimed in a short time later, "The sun was definitely shining a little bit in Seattle."

Microsoft's highly repetitive and relentlessly on-message weather report was its way of saying it was delighted, delighted, delighted with last week's appeals-court ruling partly reversing the antitrust verdict against it. The decision clearly sent a burst of sunshine Microsoft's way. Gates & Co. won on the most critical issue: the court unanimously reversed the trial court's order splitting Microsoft in two. And it upbraided Judge Thomas Penfield Jackson, a Microsoft nemesis, for his comments to the media and booted him off the case.

But the ruling left plenty of dark clouds hovering over Microsoft just as the company is releasing a phalanx of products designed to strengthen its Internet strategy, including Windows XP, its updated operating system. The court affirmed Judge Jackson's two most damning holdings--that Microsoft is a monopoly and that it engaged in illegal anticompetitive acts. The court sent the case back to the trial court for new hearings that could result in substantial remedies against Microsoft--even, although it's now unlikely, another breakup order. Perhaps most troubling: the ruling could pave the way for a flood of private antitrust lawsuits.

Which is why the other side was hailing the decision just as gleefully. Attorney General John Ashcroft called it a "significant victory" for the Justice Department. Ed Black, president of the Computer & Communications Industry Association, predicted that when the case resumes, last week's ruling will spell "serious trouble" for Microsoft. "We've been high-fiving since it came down," he says.

Last week's decision is the latest turn in a lawsuit that has been 3 1/2 years of bad road for Microsoft. The ruling was the best Microsoft has seen in the case, but it fell far short of a full-throttle victory. The appeals court unanimously upheld Judge Jackson's finding that Microsoft is a monopoly "in its entirety." And it set out a laundry list of actions--from bullying computer makers into bundling its Internet browser to deceiving developers of the rival Java programming language--that broke federal antitrust law.

So what went wrong? Nothing, the company says. As Microsoft sees it, the vast majority of the anticompetitive activities the appeals court pointed to occurred far in the past. Microsoft says it is double-checking current licenses and does not believe the ruling will have much impact on the company going forward.

Microsoft's critics, however, say it is significant that even the court's most conservative jurists signed on to the unanimous ruling that Microsoft violated the antitrust laws. "These guys came a long way from oral argument to the time they wrote the decision," says Michael Pettit, president of ProComp, an anti-Microsoft tech-industry alliance. Pettit says it's clear that even the judges who were most skeptical about antitrust law turned against Microsoft when they read the record and saw how the company had done business.

In a case with no clear winner, there was one undeniable loser--Judge Jackson. The court blasted him for "egregious" violations of the judicial-conduct canons, when he rattled on to the press while the case was pending, offering his opinion that Bill Gates had a "Napoleonic concept of himself and his company" and comparing Microsoft to a drug gang.

When the case lands back in district court, it will get a new judge. That's good news for Microsoft, since Jackson's pursuit of Gates was beginning to resemble Ahab's pursuit of a certain whale. But the bad news is that the appeals court asked for potentially prolonged new hearings on issues, especially the question of whether it was legal for Microsoft to tie its browser to its operating system. The last thing Microsoft wants is to have this case to drag on for years.

The Microsoft camp once hoped that after this ruling, President Bush, who expressed skepticism about the case during the presidential campaign, might back away from this Clinton-era holdover. But that will be harder to do now that a Republican-majority court has attested that Microsoft broke the law. And even if the Bush Administration does cave, that won't end the case. Nineteen state attorneys general are part of the lawsuit, which would proceed as long as they continued to press their claims.

That still leaves another possibility--a negotiated settlement. The appeals court seemed to be pushing both sides back to the bargaining table. It's likely that Microsoft and the government will start talking sooner rather than later. But that doesn't mean they will get to yes. The parties tried to make a deal last year, with federal Judge Richard Posner as mediator. But the states and Microsoft reportedly could not agree on the remedy. In any new negotiations, that same stalemate may occur again.

Microsoft wants no more than a "conduct" remedy--restrictions on how it behaves in the future. But at least some states will probably push for a "structural" remedy--like splitting Microsoft. "The court gave some cautionary language about breakup, but I don't think they fully took it off the table," Iowa attorney general Tom Miller, who has been a leader among the AGs, told TIME. "One of the ways you get to a structural remedy is by process of elimination. You see that other remedies won't work."

So what does all this mean for consumers? The decision could lead Microsoft to make last-minute changes in the XP operating system, the latest version of the Windows software that runs nearly 95% of all PCs. Just before the ruling came down, Gates & Co. said they were removing Smart Tags, a controversial feature of the new software. Smart Tags turn words on websites into links to Microsoft-approved sites. Critics charge they are Microsoft's attempt to use its browser market dominance to drive traffic to its own sites. If Microsoft is worried about the ruling, it might modify other XP features that could be seen as anticompetitive. More broadly, by reining in Microsoft, the ruling could introduce competition into an array of software markets in which Microsoft is now dominant, from browsers to word processing.

The Microsoft camp insists consumers will benefit for the opposite reason--because the ruling frees Microsoft, and hence the rest of the technology industry, to innovate and improve products without government meddling. The company has several new initiatives teed up, including Passport, a kind of Web-shopping manager, and Hailstorm, a subscription-based e-mail-alert Web service. One of Microsoft's main offenses in the antitrust case, the company points out, was giving away the Internet Explorer with Windows. "There weren't a lot of complaints from customers that they were getting a browser for free," says Jonathan Zuck, executive director of the pro-Microsoft Association for Competitive Technology.

Aside from what happens in the government's case, last week's decision delivered a separate blow to Microsoft. The ruling that Microsoft is a monopoly could open the floodgates to civil suits by companies, and even consumers, who have been harmed by Microsoft's anticompetitive activities. Proving that a company is a monopoly is an onerous legal task, and private litigants may now be able to bootstrap their cases onto last week's findings.

One company that could be first in line: AOL Time Warner, the parent company of TIME. In recent talks about renewing AOL's spot on Windows XP, Microsoft sought indemnity from future antitrust claims. AOL refused, and the deal died. AOL might sue, claiming that Netscape, the Internet browser it now owns, was harmed by Microsoft's monopolistic behavior. Estimates of potential damage are in the billions of dollars. Other companies that could sue: Microsoft-loathing Sun Microsystems, RealNetworks and Oracle.

For now, though, Microsoft is basking in the sunlight of what it regards as a clear-cut victory. Microsoft, whose Redmond, Wash., campus is just outside Seattle, may be right in saying Seattleites have a special ability to appreciate the sun breaking through the clouds. But residents of that rainy burg know that sunshine is sometimes just a break between cloudy days.