Monopoly Power and Microsoft

next link NOTE: provided instructions for public comment on remedies. Many commenters were not made aware that there has been more than one antitrust suit settled involving Microsoft. The consent decree invoked in 1995 did little to dissuade the company from viewing future violations of federal law as good for business. Don't forget, with the 1995 decree, that Judge Sporkin refused to sign the decree, and it was signed by Judge Jackson instead. Judge Jackson's obvious frustration at Microsoft during the current case probably stems at least in part from the realisation of how easily Microsoft skated round and bypassed the 1995 decree (see MTC-00010202)

Since the comment period ended:

Computer savy individuals will be able to learn through the comments how corporations behave when they look at laws from a cost of penulty and risk of getting caught vs benefit-to-the-business perspective. (see Those who are not computer savey will just have to wait for the film. This case has all the attributes necessary for blockbuster status.

Today, most stakeholders are unaware of the relationship between Microsoft and ENRON, the former providing accounting software to ENRON and the later bandwidth for Microsoft or that Microsoft is a partner in Asia Global Crossings. Nor do they question how Microsoft's current belief that the DOJ is the final authority on settlement, rather than a judge, came about. This was certainly not Microsoft's position prior to Ascroft's appointment to head the DOJ. But it does portray a strategy of using Appeal and Supreme courts against judges trying to represent the public interest. Rather than winding down; the scrutiny on the US court system and the importance of applying penalties that discourage law breaking by corporations could be ramping up.

"If competition is valuable, which I think it is, then antitrust laws have a place in embodying the values of our country," said Vice President Al Gore when pressed by Microsoft management to comment on Microsoft's alleged violations. Two months later Microsoft's CEO resigned. Four months later in June of 2000 the breakup of Microsoft Corp was ordered. The appeal started in late February 2001 and concluded on 28 June 2001, with really nothing resolved.

The case is very much now about appearances. The weak US Federal criminal justice system is as much on trial now as Microsoft. Jackson has openly criticized the Appeals Court for "making up laws" to support Microsoft. And the integrity of the system has long been a question. Many Americans now simply count the number of Republican vs Democratic party judges and predict Appeal and Supreme court rulings.

By that rule of thumb, the Appeals Court created a HUGE appearance of impropriety by the highly unusual restructuring of the court in a manner that would ensure a Republican majority of judges. "Every comment that Judge Jackson made derived from the evidence that was gleaned in the trial," said former D.C. appellate Judge Kenneth Starr. Judges are suppose to become bias as a result of court proceedings. Saying Jackson is bias against Microsoft after the conclusion of his proceedings is the same as saying he is doing his job. Several other judges became bias the same way. Jackson is a Republican.

On August 6 2001, Microsoft conceded that it had lost at the Appeal Court level, this contrary to press releases and share holder communications. "The Supreme Court's review of the {Appeal Courts} disqualification {of Judge Jackson from further involvement in the case} issue is important to restoring public confidence in the integrity of the judicial system" Microsoft argued. However this request for Supreme Court review had taken on special significance owing to the year earlier "Expediting Act" decision from the Supreme Court and no review was made. The district court under Jackson entered conclusions of law holding that Microsoft violated Section 2 of the Sherman Act by engaging in anticompetitive acts to maintain its operating system monopoly and that it had committed other violations of antitrust law. This finding was upheld by the Appeals Court. Jackson wrote:

Microsoft’s anticompetitive campaign has retarded, and perhaps altogether extinguished, the process by which two middleware technologies (Java and the Netscape API) could have facilitated the introduction of competition into an important market. Furthermore, 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. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft’s self-interest. The court concluded that Microsoft violated Section 2 of the Sherman Act by attempting to monopolize the market for Web browsers.

The DOJ is currently compelled by appearances to limit its involvement to just the issue not in dispute, Microsoft's guilt under Section 2, rather than risk more Supreme Court involvement, because that court appears improper regardless of the course of action. If there is a delay in a decision the court shows bias for the criminal organization; if it takes futher action there is delay and a possible admission that its prior decision not to invoke the Expediting Act was in error. There is delay regardless. There was perhaps only one way to appear proper for the Supreme court and that was to invalidate what was done in the Appeals court and let Jackson's rulings - all of them - stand. This would have been similar to how the Supreme Court handled the recent presidential election.

George Bush, putting the election issue aside, advocates the creation of a new court system that is beyond the influence of criminal organizations - specifically the Taliban. While one can argue about the ligitimacy of his election, President Bush is a good decision maker. The US Supreme Court and its extention, the Appeals Courts, are probably tools of the organizations they are suppose to judge.

Findings regarding the Microsoft Case follow below. An analysis follows the court findings.


Microsoft first tried to reach a “market allocation” agreement with Netscape. The proposed agreement would have required Netscape to stop its efforts to develop Navigator into “platform-level” browsing software for the upcoming Windows 95 operating system in return for Microsoft’s refraining from developing browser products for other operating systems. Microsoft “warned” that information about Windows APIs — information that Netscape needed to make its browser run well on Windows 95 - depended on Netscape’s acquiescence. Had Netscape gone along with Microsoft’s scheme, it would have become “all but impossible” for Navigator or any other browser rival to pose a platform threat to Windows. Microsoft then withheld important technical information needed by Netscape. Microsoft understood that large numbers of developers would write to the APIs exposed by Navigator only if they believed Navigator would become “the standard” Web browser, and that, if developers expected Microsoft’s own browser, Internet Explorer (IE), to attract a large share of usage, they would continue to focus their efforts on the Windows platform. Microsoft therefore decided to engage in a multifaceted campaign to maximize IE’s share of usage and minimize Navigator’s.

Between 1995 and 1999 Microsoft spent more than $100 million each year and increased to more than a thousand the number of developers working on IE, even though Microsoft has given IE away free since its release in July 1995. In addition, Microsoft decided “to constrict Netscape’s access to the distribution channels that led most efficiently to browser usage” —installation by OEMs on new PCs and distribution by Internet access providers (IAPs) such as America Online.

Because “no other distribution channel for browsing software even approaches the efficiency” of those two channels, Microsoft sought to “ensure that OEMs and IAPs bundled and promoted Internet Explorer to the exclusion of Navigator,”.

Microsoft’s campaign to foreclose Netscape from the OEM channel involved a “massive and multifarious investment” in a “complementary set of tactics”: (1) contractual restrictions forcing OEMs to take IE with Windows 95 and 98 and for-bidding them from removing or obscuring it; (2) “additional technical restrictions to increase the cost of promoting Navigator”; (3) exchanging valuable incentives for OEMs’ commitments to promote IE exclusively; and (4) threats to “penalize individual OEMs that insisted on pre-installing and promoting Navigator.”


Microsoft’s contractual bundling of IE and Windows conflicted with the interests of its OEM customers and browser users, for “Web browsers and operating systems are separate products, and “[m]any consumers desire to separate their choice of a Web browser from their choice of an operating system,”. Nevertheless, by July 1995, Microsoft had concluded that bundling Windows 95 and IE, contrary to its initial plan, was the “most effective way” to diminish Navigator’s threat to the operating system monopoly. Its OEM licenses required that OEMs not delete or modify any part of what Microsoft defined to be “Windows,” including IE, even by using the “Add/Remove” capability Microsoft included in Windows 95 and promoted to users. OEMs acquiesced, even though that prevented them from meeting consumer demand for PCs without IE, because “they had no commercially viable alternative to pre-installing Windows 95 on their PCs. Microsoft’s licensing requirement had no technical justification, and guaranteed the presence of [IE] on every new Windows PC system,” Microsoft knew that the inability to remove [IE] made OEMs less disposed to pre-install Navigator onto Windows 95.”

Despite those contractual restraints, Microsoft officials believed they were not going to win” the browser war simply by “[p]itting browser against browser,” so they decided to make technical changes in Windows 98 to ensure that removing IE from Windows is difficult and “running any other browser is a jolting experience.” Unlike Windows 95, Windows 98 thus did not allow even users to “uninstall” IE with the Add/Remove feature, although Gateway, a major OEM, had expressly requested such a feature, and although users were permitted to uninstall numerous other features.

Microsoft Senior Vice President James Allchin complained to Group Vice President Paul Maritz that [w]e are not leveraging Windows from a marketing perspective. [W]e are not investing sufficiently in finding ways to tie IE and Windows together.” In Allchin’s view, “[t]reating IE as just an add-on to Windows which is cross-platform [means] losing our biggest advantage—Windows marketshare.” Maritz agreed and, to “combat” Netscape, decided to delay the release of Windows 98 until IE 4.0 could be bound with it, “even if OEMs suffer[ed]” by missing important seasonal sales opportunities. That decision “delayed the debut of numerous features that Microsoft believed consumers would find beneficial, simply in order to protect the applications barrier to entry.”

Binding IE to Windows 98 also produces “unpleasant consequences for users” of Navigator, because it can “override the user’s choice” of browsers and require even Navigator users “to employ [IE] in numerous situations that, from the user’s perspective, are entirely unexpected.” There is no technical justification for that binding. Despite those technical obstacles, Microsoft still feared that OEMs might install Navigator in addition to IE and might even configure the icons on the initial computer screen, and arrange the boot (start-up) sequence, to promote the use of Navigator rather than IE.

Microsoft thus “threatened to terminate the Windows license of any OEM” that did so or added “programs that promoted third-party software to the Windows ‘boot’ sequence.” Microsoft’s tactics “soured” its relations with OEMs generally and also “stymied innovation that might have made Windows PC systems more satisfying to users. Microsoft would not have paid this price had it not been convinced that its actions were necessary to ostracize Navigator from the vital OEM distribution channel.” Microsoft “could offer consumers all the benefits of the current Windows 98 package by distributing the products separately and allowing OEMs or consumers themselves to combine the products if they wished.”

Microsoft’s technical binding of IE made OEMs even less likely to install Navigator on their PCs. Furthermore, although IE was a “no revenue” product, Microsoft nevertheless offered OEMs valuable incentives and discounts to promote [IE] and, in some cases, to abstain from promoting Navigator, Together with the other components of its campaign to foreclose the OEM channel to Netscape, these measures required Microsoft to pay out “huge sums of money, and Microsoft “largely succeeded in exiling Navigator from the crucial OEM distribution channel.”

By January 1998, Microsoft executive Joachim Kempin was able to report to CEO Gates and others that Navigator was being shipped through only four of the 60 OEM distribution sub-channels. Even then, Navigator was most often in a position “much less likely to lead to usage” than IE’s position. Within a year, “Navigator was present on the desktop of only a tiny percentage of the PCs that OEMs were shipping.”


Microsoft’s strategy for foreclosing Netscape from the other crucial channel of distribution, Internet access providers that provide browser software to their customers, similarly involved both huge expenditures and substantial sacrifices of revenue that made no business sense except as a way of protecting the applications barrier to entry. Microsoft believed that, if IAPs gave new subscribers a choice between [IE] and Navigator, most of them would pick Navigator.

Accordingly, Microsoft gave IAPs valuable incentives to promote and distribute IE and to inhibit promotion and distribution of Navigator. Its actions, which “sealed off a major portion of the IAP channel from the prospect of recapture by Navigator,” “had, and continue to have, a substantial exclusionary impact,” sacrifice[] many millions more in lost revenue every year.” The campaign was “only profitable to the extent that it protected the applications barrier to entry” and so preserved the operating system monopoly. For example, Microsoft exchanged valuable promotional placement on the Windows desktop for the leading IAPs’ agreement to distribute Navigator to no more than 15%-25% of their subscribers even when more of them wanted Navigator, to refrain from promoting Navigator, and even to refrain from mentioning to subscribers that they could use a browser other than IE. Microsoft’s resulting control of the two distribution channels through which “a very large majority of those who browse the Web obtain their browsing software,” together with its other efforts to protect the applications barrier, caused browser usage shares to “change[] dramatically in favor of [IE].” This prevented Navigator from becoming an attractive enough platform to weaken the applications barrier to entry.” Microsoft’s numerous and varied actions against Navigator “ ‘would not be considered profit maximizing except for the expectation that . . . the entry of potential rivals’ into the market for Intel-compatible PC operating systems will be ‘blocked or delayed.’


Microsoft also feared another middleware technology— Sun Microsystems’ Java a programming language with related middleware that enables applications “written in Java” to run on different operating systems. Java technology threatened to erode the applications barrier to entry, and Microsoft sought to extinguish the Java threat by “maximizing the difficulty with which applications written in Java could be ported [i.e., adapted] from Windows to other platforms, and vice versa.”

Microsoft induced the development of Java programs that performed well on Windows but would not run on other operating systems without significant modifications. Microsoft “invested [these] great sums, and sacrificed potential sources of revenue, with the sole purpose of protecting the applications barrier to entry.”

Microsoft improved IE over time, but it still recognized in May 1998 that IE4 is fundamentally not compelling” and “[n]ot differentiated from Netscape v[ersion]4—seen as a commodity.” Thus, “superior quality was not responsible for the dramatic rise [in IE’s] usage share.” Microsoft, like others, developed a “Java Virtual Machine” (JVM) for the Windows operating system. A JVM is a computer program that translates Java-based programs into instructions that the operating system can understand and execute. Microsoft’s JVM and developer tools incorporated Windows-specific features in a way that makes a Java program designed to rely on those features more difficult to port to another operating system. Microsoft took steps to ensure that developers would write Java programs that used those features; it conditioned early access to Windows technical information on using Microsoft’s JVM as the default, and it failed to warn applications developers about the porting consequences of reliance on Windows-specific features of its development tools. Microsoft undertook other actions to discourage developers from creating Java applications compatible with non-Microsoft JVMs, and those actions made no business sense except as a means of protecting the applications barrier to entry.

Microsoft’s avowed aim was not to innovate, or to give consumers a better product. Microsoft’s determination to cripple Sun’s cross-platform Java was related to its actions against Netscape’s Navigator. In May 1995, Netscape announced that it would include a Sun-compliant Windows JVM with every copy of Navigator, creating the possibility that Sun’s Java implementation “would achieve the necessary ubiquity on Windows” to pose a threat to the applications barrier to entry. Microsoft responded not only by restricting distribution of Navigator and bundling its own JVM with IE, but also by pressuring Intel, which was developing a high-performance Windows-compatible JVM, not to “share its work with either Sun or Netscape, much less allow Netscape to bundle the Intel JVM with Navigator.” Microsoft ultimately succeeded in impeding Java’s ability to weaken the appli-cations barrier to entry with a series of actions “whose sole purpose and effect were to do precisely that.”

Microsoft pursued its “dedication to the goal of pro-tecting the applications barrier to entry” despite “the fact that its efforts to create incompatibility between its JVM and others resulted in fewer applications being able to run on Windows than otherwise would have.” Based on the conduct described above, along with nu-merous other instances of predatory and exclusionary conduct detailed in other findings, the district court found that, “[t]o the detriment of consumers,” Microsoft had undertaken a coordinated series of actions “designed to protect the applications barrier to entry, and hence its monopoly power, from a variety of middleware threats.”


To define Microsoft as a monopoly, you must first put the company in a pond where it will be the biggest fish. This is easy to do. Just define the pond as Intel based PCs. Here operating system preloads give Microsoft a clear advantage and huge power (monopoly power) over original equipment manufacturers (OEMs). But define Microsoft in a larger context and it is a company with less power.

Bob Herbold, retired Microsoft Executive Vice President and Chief Operating Officer, stated in his letter to Nader that Microsoft accounts for only 1 percent of total information technology industry revenues of $1.1 trillion; Microsoft accounts for less than 4 percent of total software industry revenues of $250 billion and; Microsoft is not even the largest software company - $13 billion of IBM's $75 billion in revenues is in software; that is more than Microsoft's $ 11 billion.

In typical bully fashion, however, this is not the message that the Microsoft marketing machine puts out. Most think Microsoft dominates the industry. Most think Microsoft can win the war on Java. Most includes most Microsoft executives. Most are wrong. Mr. Herbold, and logical decision makers, know that Microsoft lost the war on Java in July of 1997. Microsoft is simply to small to fight an entire industry and win.

But consumers do not make decisions regarding browsers or operating systems when they purchase an Intel PC because for the most part the OS and browser are preloaded. Microsoft has monopoly power in that pond and, according to the Department of Justice (DOJ) formerly headed by Janet Reno, Microsoft uses that power in violation of a consent decree. A European Commision found that Microsoft acted illegally. Compuserve subscribers complain of lost capabilities. The consumer ends up paying for an OS and browser that the consumer may not need or ever use. The consumer is also harmed by virus attacks made possible by Microsoft's refusal to move with the industry to Java based models and by suppression of non-Microsoft controled technology such as speech, palm and smart card technology that threaten the graphical user interface and mouse related businesses that generate revenue for company. Consumers are also forced to repurchase Microsoft software when retiring old computers, even though standard licensing agreements most often allow moving the software to new computers as long as it is removed from the retired one. Almost all consumers have experienced the economic equivalant of the $4,000 to $7,000 yearly cost of maintaining each Microsoft Window's PC. Many consumers have dust gathering on PC investments that will never provide value. Microsoft's marketing methods and file format incompatabilities fooled countless consumers into replacing functional DOS and CPM based machines with Windows based ones. The most recent estimate of dammage to consumers, based on court documents, is 5.15 billion.

To protect the consumer, the courts might have eliminated all Microsoft preloads. This would have greatly reduced Microsoft's power over OEM's who sell to consumers and, because the end consumer usually reloads Windows and office suite software anyway (owing to a crash or upgrade), it really would not inconvenience the consumer. In the near future NT-hydra or Windows 2000(WTS) and WorkSpace on Demand (OS/2) server products will load the OS anyway.

Eliminating all Microsoft preloads is an enforceable remedy to the DOJ contempt charges filed against Microsoft that makes the end consumer the decision maker. However, it would be necessary to require that Microsoft remove restrictions that add nothing to its Windows 2000 products except to limit client and maintenance devices to those also running Windows 2000. Breaking up Microsoft, while a traditional remedy, may only further an organizational strategy (Keiretsu) long used by Microsoft. Microsoft, or its officers, hold influencing stock positions in many if not most of the companies that could possibly be viewed as competitive. It also has special relationships with consulting firms that are mistakenly viewed by their clients as objective and independent, such as the big 5 accounting firms. Scott McNealy, the CEO of a competing firm, believes that Microsoft should be prohibited from using its operating systems revenue to fund investments and acquisitions in other markets such as broadcast, telecom, media content, and wireless. "Let's not confuse R & D with M & A," he says. Microsoft might be forced to practice nondiscriminatory pricing and be forbidden from "exclusionary agreements" that threaten customers who use competitors' products. The States want Microsoft to auction off Windows. The New York Times provides a court history of the situation. For more information see:

Interview: Gary Reback PBS Online Presents: I, Cringely
Options: Microsoft Stronger In 2001 Consumers, competitors and competition
Sun, Microsoft get court date Microsoft witness undercut
Judge Jackson's court order Has Microsoft hit its high-water mark?
Justice wins first round against Microsoft Judge to Microsoft: cease and desist
Microsoft contends fact-finder is biased The Truth by John Heilemann
Netscape Loss May Undercut Microsoft Court Case
Gates: IBM is Out to Get Us Microsoft, Justice Department face off in court
Trial and Error Microsoft fighting many battles

Europe Trial

Microsoft, AT&T held Internet talks Microsoft vs DOJ: Partial settlement reached
Microsoft details game plan for appeal Windows 95 price raised after Windows 98 released
Microsoft's tactics hurt consumers, judge rules Microsoft stops HP from supporting Java
Direct Testimony against Microsoft Caldera's lawsuit against Microsoft heats up Caldera alleges Microsoft "obtained" a monopoly
Current Temp Agency workers included in lawsuit Supreme Court Agrees Judge orders Microsoft to stop using Java logo
Target -- Microsoft Microsoft Off-Course Microsoft believes it owns infrastructure
Microsoft shamed in courtroom Is Microsoft so big that it's spreading itself too thin? Missteps are becoming more apparent
Microsoft Plans Stealth Media Blitz Impements Plan in June 2000 27 States oppose Microsoft

The DoJ/Microsoft battle provides an excellent study in leadership and decision making. Compare the case with the approach taken by Intel's executives. Where is Microsoft's chairperson, Bill Gates, on the decision tree? Did he deligate decisions regarding the case? What happened to Brad Silverberg, the veteran Microsoft executive behind the development of Windows 95 and Dave Cultler the developer of NT? Is Bob Herbold a decision maker in these matters? What about Steve Ballmer? Should the Microsoft so called brain trust avoid email or any writing that could be used in a court? Will the Appeals Court affirmation of Judge Jackson's Findings and Conclusions require Microsoft to pay each purchaser of Windows 98 $120.00 per copy? Should Microsoft assets be frozen to protect funds necessary to pay tripple damages as required for the crime of which Microsoft has been found guilty? Assuming Netscape is worth nothing today AOL would be owed 4 times 3 or 12 billion if so. Netscape was purchased by AOL for over 4 billion. Will the major reorganization of Microsoft be good for consumers? How about Microsoft partners? How about share holders? Did Microsoft's Board of Directors and the DoJ view Bill Gates as an autocrat who's risky decisions and poor ethical track record make him unsuitable as CEO? Should Microsoft have been allowed to invest 1 billion in 1997 in Comcast and then another 5 billion in AT&T in 1999 and then encourage them to merge in 2001? Should the company be given more time to compromise the objectivity of judges who may decide on remedies? Is divestiture (perhaps involving court ordered/ negotiated shareholder dividends) still a likely remedy? Will Microsoft be required to sell its interests in companies that appear to be competitors (like SCO, Apple, and Corel/Borland)? How should decision makers who selected more costly Microsoft products over similar products be regarded given the above? Should Microsoft employees, contractors, providers and partners be required to study the case? Is Neukom's departure from Microsoft part of a settlement? Should Ashcroft be removed from office for failures to continue with the work of Reno? Since the financial software integrators of Microsoft (Great Plains) were installing their products at ENRON pror to the crash will Microsoft Executives be devoting time and energy to that matter? US Tax law provides that when a corporation accumulates earnings "beyond the reasonable needs of the business," it is subject to an accumulated earnings tax of 39.6%. According to the IRS, "the fact that a corporation has an unreasonable accumulation of earnings is sufficient to establish liability for the accumulated earnings tax unless the corporation can show the earnings were not accumulated to allow its individual shareholders to avoid income tax." Can Microsoft, with 50 billion in cash show that? (see Nadar letter)






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