Microsoft and the Judge: Round IIPublished: April 25, 2000 in Knowledge@Wharton
After his findings of fact last fall that Microsoft was a predatory monopoly, it came as no surprise to most when U.S. District Judge Thomas Penfield Jackson ruled last week that the company had indeed violated antitrust laws.
Now, though, comes the hard part: What should be done about it?
As the case wends its way through the judicial system, the implications for the company, its competitors and its customers could be far-reaching. Or the impact on Microsoft might turn out to be minimal. Nothing will be clear until the company reaches a settlement with the government or the judge imposes remedies, according to four Wharton faculty members.
And contrary to what some investors may think, a resolution of the case, whether for or against Microsoft, will have little effect on volatile technology stocks, says one faculty member who has written extensively on equities.
On April 3, Jackson ruled that the Redmond, Wash.-based software giant repeatedly violated antitrust laws. Jackson held that Microsoft used anti-competitive methods to maintain a monopoly for its Windows operating system, tried to monopolize the Internet browser market by stifling competition and illegally tied its Internet Explorer browser to Windows.
Microsoft Chairman Bill Gates said the company believes it would have "a strong case on appeal," but he also expressed hope that a settlement could still be reached in the suit, which was filed by the U.S. Justice Department and 19 state attorneys-general.
In a separate proceeding that would determine what sanctions to impose on the company, the judge's options fall into two broad categories. He could impose a structural remedy -- that is, break up the company. Or he could decide on conduct remedies that would force Microsoft to change its business practices.
"The biggest question is how to get competition in the future done on a level-playing field without interfering with technological progress," says Dennis Yao, professor of public policy and management and a former official at the U.S. Federal Trade Commission. "That's a delicate balance."
Yao says one reason why a break-up of the company may be considered is that it would offer a clean, quick, one-time solution to Microsoft's wrongdoing. By contrast, conduct remedies would require continual policing by regulators - a time-consuming, costly and difficult job.
"Finding that Microsoft violated antitrust laws is not nearly as difficult as figuring out how to remedy the violation," Yao says. Deciding on an "appropriate aggressiveness in pursuing remedies is very hard because the issues involve law, public policy and technology."
Marketing professor and deputy dean David Schmittlein says the judge has any number of options. He could require Microsoft to sell its products individually, such as separating Internet Explorer from the Windows desktop. Or he could compel the company to adhere to certain pricing strategies for its products. "If Windows is the monopoly product at issue, Windows would have to accommodate other software," Schmittlein says. "That could be quite onerous to the company."
Schmittlein notes that a structural remedy would probably not come quickly because an appeal by Microsoft could take a long time to settle. Conduct remedies would be different in that some of them would be enforced during an appeals process, which would be a negative for Microsoft.
"There might be a multi-page manual of conduct that becomes a kind of template for decision-making, which doesn't help people at Microsoft take the initiatives they need to take" in order to keep the business competitive, he says. "These kinds of things that effect organizational norms for decision making can have rather significant consequences."
But Schmittlein says Microsoft likely has already been damaged to some extent by the case because it has been a major distraction for management.
"Time and talent are two of the scarcest resources an organization has. Looking back over the last couple of years, one might wonder about the time and talent spent on this litigation. There may be greater ability to focus going forward than was the case over the last few years, but it's not a sure thing. I'd be more concerned about the ability to focus on the changing nature of Microsoft's business, doing the things it can do really well. Managing public opinion and managing a succession of legal arguments may come at the expense of developing the kind of software that built the company."
Hence, Microsoft's monopoly power may already have been slowed. Says Schmittlein: "Regardless of the litigation's eventual outcome, the government has accomplished part of the purpose it had in mind."
Yao and Schmittlein agree that Microsoft's dominance in the software field is already being put to the test by technological developments that have nothing to do with the antitrust case. Increasingly, PC users will be able to go to the Web to download software applications for appointment calendars, spreadsheets and the like, bypassing the kind of applications offered by Microsoft Office.
"Here, the operating system of the computer becomes less important because the important foundational elements - the nuts and bolts of a PC - don't reside on the computer; they reside somewhere else," Schmittlein says. "Other companies can provide calendar and worksheet applications from Web-based servers without a great deal of interface with windows. You're seeing more and more Web-based applications and use of Linux as an operating system. Microsoft loses in two ways. One, the operating system becomes less important to the computer's functionality. Secondly, Microsoft's ability to sell other software products that work with Windows is compromised, at least inasmuch as the distinctive benefits of working with Windows become less important."
Yao points out that the emergence of Linux may actually help Microsoft's position in the antitrust case. "If Linux exceeds current expectations, Microsoft might be able to persuade the relevant decision makers [the court or the plaintiffs] that a lesser remedy might be sufficient to solve the antitrust problem."
David Croson, assistant professor of operations and information management, says that despite the attention generated by the case, the effects on Microsoft's share of the software market may turn out to be minimal.
"I don't see that Microsoft's dominance is going to be eroded in any substantial way by this legal decision," Croson says. "The reason people use Microsoft products is they have the right combination of functionality and price that the market wants."
Croson adds: "I think the remedies have to be incredibly onerous, structural, in order to really change anything about Microsoft's market share. It's not like the Department of Justice can legislate what software people will buy or use. Some remedies could cost Microsoft money and serve effectively as a fine, but it wouldn't cause an upstart software company to come in and take market share."
Croson says the judge's decision was correct, but he notes that "the things Microsoft has been accused of are not things which are the core pillars of its profitability … Microsoft doesn't make a lot of money from Internet Explorer."
Schmittlein notes that the prospects for a settlement "need to wait a bit until we see if a remedy is proposed. If it's a conduct remedy there are probably outcomes that would benefit everyone. It's hard to see anything positive with a structural remedy. With respect to conduct remedies, if there is a sweet spot for negotiating a settlement it will be in the months, not years, ahead because the company is facing this continued distraction. The government may feel that it has succeeded in drawing a line in the sand and in particular may want to get some change imposed rather than go through the uncertainty of the appeals process. The nature of the remedy has less relevance as years go by. Nobody really wins in that setting."
For his part, Yao says he has "concerns that the states and the Justice Department don't have the same objectives…Just having lots of other players involved makes negotiating that much harder."
Croson expressed surprise that Microsoft did not settle the case when it had a chance, noting that the company makes things worse for itself when it acts "really pugnacious." Still, he says, "We should not assume that the judge will rule unilaterally. There are still lots of opportunities to negotiate what the final remedy will be."
Regardless of how the case plays out, finance professor Jeremy Siegel says Microsoft's fortunes will have little effect on the stock market. Indeed, Siegel, author of the bestseller Stocks for the Long Run, says Jackson's decision had "very little" impact on the huge decline in NASDAQ stocks on April 4.
"NASDAQ was sinking anyway," says Siegel. "Whenever you have a market dominated by momentum players, when the market doesn't make a new high, speculators just get out. A lot of people feel there was a flurry of margin calls and that made the situation even worse and that fed the decline dramatically.
"In my book, I examine the biggest changes [in stock prices] over the last 100 years and I find only one of four large changes can in fact be attributed to an identifiable news event.
"Microsoft is not a significant factor in this market," says Siegel. "The news had come so slowly over the preceding years about the court case that the market had already digested the news. There was disappointment at no settlement, but the market had resigned itself to it many times before."