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Gates on the Ropes Microsoft will be Forced Back to the Negotiating Table after US Judge Rules that Software Giant 'Harmed Consumers'

By Ed Vulliamy in Seattle, Emily Bell and Jamie Doward for The Observer/Guardian UK
It’s official. Microsoft is a monopoly. But those hoping to see the break-up of Bill Gates’s empire are likely to be disappointed. The 207-page judgment delivered by US district court judge Thomas Penfield Jackson on Friday found in favor of the US Justice Department’s anti-trust team, lead by Joel Klein.
The government’s case against Microsoft focused on the software giant’s dominant position in the industry. The justice department (and 19 state attorneys who also accused the company of anti-trust behavior) argued that Microsoft used its power in operating system software to strong arm its rivals, notably Netscape, out of the market.
During the course of the trial, which started in October 1998, Netscape, an entrepreneurial Internet software company, was bought by Internet service provider AOL – a move Microsoft unsuccessfully argued made the case redundant.
As employees on Microsoft’s Redmond campus digested the judgment on their screens, many winced at the strong words, but experts pointed out that this judgment represents only the first part of the anti-trust proceedings. A decision about how Microsoft should be punished – or the situation remedied – may not be reached until well into next year.
The world’s richest man reacted to the findings in a far more conciliatory way than his arrogant and sometimes petulant behavior during the 77-day trial would have suggested. ‘There’s got to be a way to resolve it which is fair to the government, fair to the consumer and fair to Microsoft,’ said Gates, speaking on CNN directly after the findings were published – on the Internet of course.
The principal points of the judgment that gave Klein and his team complete victory over Gates were that Microsoft operated a monopoly, abused that monopoly and harmed the consumer by restricting competition and innovation.
But anti-trust experts and followers of the case were quick to reach the conclusion that there was nothing in the findings that would force the company to break up. In particular the judge could find no conclusive evidence that Microsoft overcharged for Windows. What the judge seemed to take greatest exception to was Microsoft’s behavior, rather than its structure.
The main findings of Judge Jackson were that:
— Microsoft enjoys monopoly power in the market for Intel-based PC operating systems. It has a large and stable share of the market, which would be expensive for any competitor to crack. Customers do not have an affordable alternative to Windows.
— In this sector of the market – the kind of PCs most users have at home or work – Windows has had more than 90 per cent of the market in every year of the past decade. For the past couple of years this has risen to 95 per cent, and predictions are that it will climb higher.
— 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.
— On its battle with Netscape, the judge said: ‘Microsoft largely succeeded in exiling [Netscape’s] Navigator from the crucial OEM [original equipment manufacturer] distribution channel.’ In other words it bounced Netscape out of the market by bundling its own Internet browser, Internet Explorer, with its software.
A triumphant Klein said: ‘This shows that no company is above the law.’ US attorney general Janet Reno claimed: ‘It’s a great day for American consumers.’
But what does this actually mean? As the dust settles around the initial pronouncement, it is clear that Microsoft’s main worry now is not necessarily the next phase of the trial – which allows the company to argue a case in law, whereas the first phase was argued in fact – but that the strength of the findings will open the way for more damaging civil actions.
AOL, a company in which international financier George Soros has a stake, and Netscape are likely to launch a multibillion-dollar lawsuit against Microsoft on the back of the judgment.
UK-based technology analyst Simon Moores says Gates will have to move quickly to limit the damage: ‘Microsoft had been hoping to find some ambiguity in the judgment, but that doesn’t seem to be there. Gates needs to achieve a compromise quickly – it looks very bad for Microsoft at the moment.
‘The US government would in reality like to see this action settled out of court.
‘They need to make an example of Microsoft but they have a feeling that if they do something damaging to it, it will have an effect on the market. Microsoft is the goose that laid the golden egg’.
Golden eggs maybe. But this weekend Gates and his team will be reviewing a trial process which was handled shambolically by one of the world’s smartest companies.
Gates will no doubt relive the horror of the moment when crack anti-trust lawyer David Boies used two college graduate expert witnesses to prove that videotaped evidence from Microsoft was faked. Boies was exactly the kind of lawyer many felt that Gates should have retained himself instead of, what appeared at times to be, almost bumbling counsel. But as Boies said: ‘He never called.’
Microsoft, say many, will have to mend its ways, and not just in the market place.
The trial process and the often stunningly personal judgement have been a PR disaster for the company. There seems to be no way back from this for Gates, who even in his hour of defeat can hardly manage the right degree of contrition.
Gates, during his post-judgement press conference, could not help lapsing into his role as Microsoft’s most ardent cheerleader.
‘We have the most incredible track record of not just being a company which behaves in a lawful fashion but being a company which brings incredible benefits to millions of consumers’ says Gates.
‘Microsoft has succeeded because we have been guided by the most basic American values: innovation, integrity, serving customers, partnership, quality and giving to the community.’
As the judge would say, add bullying competitors to that list, and that’s the whole picture. Microsoft has lost the battle , but now it has to be careful that it does not lose the war as well.
The key players
David Boies
David Boies volunteered to take a huge deduction from his normal outsized fees to serve as prosecutor for the public in United States v Microsoft. But he said he would have just as readily defended the Gates monopoly, if only Bill had called.
That Bill didn’t was a surprise, as it was Boies who demolished the US government’s trust-busting case against IBM in the 1980s. Boies defends more Goliaths than Davids. Recently, he defeated attempts by the Philippines to end that poor nation’s disastrously costly contract to buy a nuclear plant from Westinghouse. Public interest lawyers claimed the deal resulted from bribes paid to the Marcos dictatorship. Besides his blue-chip corporate clientele, Boies has attracted celebrity clients including Gary Shandling, Mike Wallace and Ross Perot.
Bill Gates
Bill Gates was born in 1955. His father, William Gates Senior, was a corporate lawyer in Seattle who sent his son to Lakeside private school. It was here that Gates Junior met up with co-Microsoft founder Paul Allen. Gates dropped out of Harvard to start a programming business with Allen and the rest is history. Gates, who married his wife Melinda, a former Microsoft employee, in 1993, is thought to own around 16 per cent of Microsoft stock, which makes his holding worth around $74 billion. On top of this, Gates has a large number of investments in other interests such as property and biotechnology, which according to some makes him worth more than $100bn. He has pledged to leave 95 per cent of his wealth to charity.
Joel Klein
Assistant attorney-general Joel Klein is the most successful entrepreneur in the US federal bureaucracy, turning the Justice Department’s Anti-Trust unit into an astonishing profit center for the Treasury.
In his two years at the Department, he has collected more than $750 million in fines, mostly from European monopolists. Klein, who was President Clinton’s deputy counsel until 1995, broke new ground in anti-trust law by winning serious jail time for corporate price-fixers (a felony in the US) who happen to be key funders of the Republican Party. Unlike his attack dog, litigator Boies, Klein made his name fighting for the impoverished, mentally ill and retarded, joining the Mental Health Law Project after graduating from Harvard Law School, with high honors, in 1971.
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Gregory Palast’s column “Inside Corporate America” appears fortnightly in the Observer’s Business section. Nominated Business Writer of the Year (UK Press Association – 2000), Investigative Story of the Year (Industrial. Society – 1999), Financial Times David Thomas Prize (1998).

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