How Significant is Microsoft’s Anti-Trust Victory?

Now that the U.S. District of Columbia Circuit Court of Appeals has sent the Microsoft anti-trust case back to the lower courts, an array of issues has come bubbling to the fore. Although the company’s supporters view the court’s decision to reverse the break-up of the software firm as a triumph, how significant is the victory? Will the company become emboldened by it? Will the Bush Administration continue to prosecute the case? What will the final remedy be? And do consumers ever win these court battles?

Wharton professors who have been following the case have some insights to offer into these questions. They point out that the appeals court decision is not as great a victory for Microsoft as the company’s fans may be tempted to believe.

“I think the latest flip-flop removes all doubt that this a political issue, not an economic one,” says David C. Croson, professor of Operations and Information Management at Wharton. “Microsoft learned during the Clinton Administration that it pays to cozy up to politicians – or perhaps more accurately, that it doesn’t pay to antagonize them. Croson adds that the recent ruling was based entirely on the judge’s conduct, not Microsoft’s. “The appeals court reiterated that Microsoft was still a monopoly, but simply opening up the remedies stage again will allow us to see the effects of recent cozying,” he says.

Gerald Faulhaber, professor of Public Policy and Business, points out that the Bush Administration is unlikely to pursue the case with any great vigor. But, on the other hand, agreeing with Croson, he notes that it would be politically disastrous for the new administration to drop the case completely, as some have suggested might happen. “They don’t exactly have the most aggressive anti-trust team in place,” says Faulhaber of U.S. Attorney General John Ashcroft and his new anti-trust chief, Charles James. “They certainly wouldn’t have brought this kind of suit initially. Maybe their druthers would be not to continue it, but it would be political disaster.

Faulhaber believes that the Microsoft case represents “a litmus test for the Bush Administration. If the administration lets Microsoft off the hook completely, it will create a political firestorm,” he says. “There are 19 state attorneys general involved, too, and they are looking for something out of this suit. The Bush Administration will have to at least get Microsoft to concede something.”

But what will that concession be? Generally, it is thought that the world of technology moves so quickly, a remedy proposed today may well be irrelevant by the time it is implemented since the next new thing will be in the process of becoming commonplace. In fact, what seemed to be the central part of the original anti-trust case, the Internet browser, as Faulhaber notes, is something that Microsoft has now won the right to distribute for free.

“The issue is more than that, though,” says David Farber, of the University of Pennsylvania Computer and Information Science Department who testified against Microsoft in the anti-trust case. “I think Microsoft will be a lot more careful in the future with the issue of monopoly practices reconfirmed by the Appeals Court. I think you will find them to be less aggressive than they were, though they will certainly be aggressive. And I think it will braven the hearts of a lot of people, since competitors thought that the whole case would be thrown out.

“Still, until a remedy is reached, there will be a lot of aggressive moves,” says Farber. “It’s like when you have a war and you know an armistice is coming, you fight harder. You want to get as much land as you can before they stop you.”

Dennis Yao, a former commissioner of the Federal Trade Commission and now a professor of Public Policy, believes that “the major stumbling block for both the court and for a settlement is finding an implementable remedy that does not require considerable ongoing oversight and regulation. I believe that the U.S Department of Justice (DoJ) liked the divestiture remedy in part because it did not have the ongoing regulation problem. What will happen depends in part on the existence of feasible remedies. Another stumbling block to settlement is likely to be the states, which have in the past assumed a more aggressive posture vis-a-vis Microsoft than the DoJ

Wharton deputy dean and marketing professor David Schmittlein maintains that part of the benign penalty Microsoft has paid, and may continue to pay, is less a technical one than one of distraction from what should have been its business. “The big issue in this case in my mind, from the outset, was the potential it had to distract Microsoft leadership from its core business,” he says. “Top management time and attention is a very precious commodity, and the litigation has been draining for Microsoft in this respect. After the initial ruling, that distraction seemed to diminish, and I doubt that the current ruling will greatly affect the company’s actions.

“The ‘lessons’ to which the company has been exposed to by the prosecution of this case – that is, the importance of public relations, government contacts, corporate visibility and philanthropy and business dealings that, at least on the surface do not appear anti-competitive – seem already reflected in the company’s behavior. It was probably expecting too much to envision much more of an impact on the company than that.”

Legal studies professor Edward T. Swaine, whose research focuses on anti-trust issues, suspects that Microsoft will be “somewhat chastened” by the court of appeals decision. “Recall that prior to this trial, it had generally been successful in warding off antitrust investigations and private suits, and had received from the D.C. Circuit an extremely supportive decision regarding its basic ability to integrate products,” he says. “Even after the trial, the sweeping remedy ordered by the district court was a virtually unprecedented windfall (save in unwinding behemoths formed by mergers); the oral argument before the D.C. Circuit made it clear that the district court decision would not be sustained in full; and Judge Jackson had already signaled that he would (begrudgingly) recuse himself from further proceedings.” Swaine argues that for people whose expectations were reasonably moderated, “this decision is part of a larger setback for Microsoft, and it is difficult to see how the company could be emboldened by it. Indeed, if one listened to their chief executives, Microsoft was making no plans for a breakup, so even that aspect of the reversal should afford it little satisfaction.”

Both Farber and Schmittlein says it is important to remember that there are still class action suits pending and possible suits from competitors in the future that could keep Microsoft in litigation for years, no matter what the outcome of this current anti-trust case.

“The specific lawsuits against Microsoft by competitors have received a much-needed shot in the arm by this ruling, both because the findings of anti-competitive practice were upheld and because there is no clear remedy in sight any time soon arising from the government’s case,” says Schmittlein. Adds Farber: “With the appeal as it sits now, Microsoft faces a long and tedious set of trials. In some of the class-action suits, there could be triple damages. And just the grind of a couple of such lawsuits is going to be a drain on the corporation.”

If the stock market indicates anything, the reaction to the case has been muted. Microsoft stock climbed from about $70 to $75 a share in the minutes after the appeals court decision was made known, but in the next several days it settled down back about where it was before the announcement. Still, speculation about the more positive nature of the appeals ruling as opposed to the original ruling has driven Microsoft stock up.

“I think it is a great victory for Microsoft,” says Fred Sherman, a Sovereign Bank vice president whose stock market reports are heard daily on KYW-AM, the all-news radio station in Philadelphia. “The stock has gone almost straight up since early April from 52 to 72, so it was like buying on the rumor and selling on the news. Pretty basic stuff.”

Wharton’s Croson sees the share price story differently. “I feel sorry for investors who bought Microsoft based on the assumption that this ruling will make a big difference in the near future,” he says. “They’re right to be optimistic, but they’re focusing on the wrong reason.

“I think that the court issue is obscuring people’s observation of an important change in Microsoft’s pricing strategy, starting with Office XP,” he says. “Microsoft is starting to price software like a continuing service rather than a one-time purchase, and it is charging different types of customers vastly different amounts of money for the same basic software. This tactic isn’t necessarily bad for consumers – especially if one can get the academic discount price – but it’s definitely good for Microsoft’s future earnings.”

As for remedies, the Wharton professors all see something well short of the break-up that was originally proposed, but in any case, it may not be as exciting as it once seemed. “In the end, it may well be a moot point about who won and what the remedy is,” says Faulhaber. “It will take a long time for the state attorneys general and the federal government to agree on anything. I fear it will be irrelevant to the world, and there will be lots of other things going on. By the time we actually come to a settlement, it won’t be front page news.”