Microsoft Corp. has used its unparalleled dominance in the computer industry to bully rivals and squelch competition, a federal judge ruled yesterday in a stinging decision that lays the foundation for a final judgment that could fundamentally realign the multibillion-dollar technology industry.
Addressing for the first time the key factual issues in the government's long-running antitrust battle with the software giant, U.S. District Judge Thomas Penfield Jackson cast Microsoft as a voracious monopolist that has hindered innovation, harmed consumers and run roughshod over its rivals.
"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," Jackson wrote in a 207-page ruling. "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."
Jackson's "findings of fact" stopped short of concluding whether Microsoft's aggressive business behavior violates the Sherman Antitrust Act. The judge will address that issue in another ruling that likely will be released early next year, assuming the government and the company do not reach an out-of-court settlement.
But legal specialists said yesterday's ruling, which almost exclusively sided with the government's courtroom depiction of Microsoft as an unrestrained behemoth, sets the stage for the judge to rule that the company has broken the law and to slap it with stiff sanctions. The remedies could range from requiring an end to certain practices to possibly forcing Microsoft to split itself into separate companies.
The Justice Department's antitrust chief, Joel I. Klein, hailed the ruling as an "important victory" that shows that "in America, no person and no company is above the law."
Microsoft executives maintained that their actions have not broken the law and said they plan to continue their legal fight. "We respectfully disagree with a number of the court's findings, and believe the American legal system ultimately will affirm that Microsoft's actions and innovations were fair and legal, and have brought tremendous benefits to millions of consumers," Microsoft Chairman Bill Gates said in a statement.
Microsoft almost certainly will appeal Jackson's final judgment, should he rule against the company, but some legal experts predicted that the way the judge crafted the factual findings--with a methodical and thorough assessment of the evidence--could reduce the odds of the decision being overturned. Moreover, appeals courts almost always give great weight to the factual record assembled by a trial judge.
In their lawsuit, the Justice Department and 19 states alleged that Microsoft used a variety of illegal business tactics to monopolize the market for PC operating systems with its Windows software and to extend its dominance into the burgeoning market for Internet browsing software. The case, which seeks to apply antitrust laws drafted in the age of railroad and oil monopolies to the fast-changing world of technology, ultimately could create a legal precedent in the same league as the government's breakups of Standard Oil Co. in 1911 and AT&T Corp. in 1984.
Although both sides have had some preliminary settlement discussions over the past year, Microsoft negotiators thus far have been unwilling to concede much, believing their position would prevail in court, according to sources familiar with the talks. But legal experts said last night that the aggressiveness of Jackson's factual findings could alter the company's strategy. "This could shock Microsoft into reality and make them more serious about a settlement," said Robert H. Lande, a law professor at the University of Baltimore.
Gates yesterday suggested that the company would be willing to make a settlement overture, saying that "Microsoft is committed to resolving this case in a fair and responsible manner."
In his ruling, Jackson accepted almost all of the government's evidence, while ignoring or rejecting outright the explanations of Microsoft witnesses. He ruled that the government clearly crossed a plaintiff's first hurdle in an antitrust case: Proving that the defendant has "monopoly power."
"Microsoft possesses a dominant, persistent and increasing share of the worldwide market for Intel-compatible PC operating systems" with its Windows software, Jackson wrote, noting that every year for the past decade, Microsoft's market share has been more than 90 percent, and for the past couple of years it has been at least 95 percent.
In 76 days of courtroom testimony that began in October 1998, Jackson heard executives at many of the country's largest technology companies--among them International Business Machines Corp., America Online Inc., Intel Corp. and Apple Computer Inc.--describe how Microsoft threatened to raise prices and withhold crucial technical support from them if they did not bow to the firm's demands. The government contended that Microsoft sought to crush any product that either competed directly with Windows or that helped to make rival operating systems more attractive to consumers.
To buttress their allegations, government lawyers displayed hundreds of internal Microsoft e-mail messages, many of which outlined the company's take-no-prisoners approach in dealing with competitors. They also played several unflattering clips from Gates's pretrial deposition, in which he said he could not remember important meetings and e-mail.
Microsoft tried to persuade the judge that its hard-nosed tactics helped to spur innovation, not hinder it. And it made no apologies for its tough-talking e-mails, telling the judge that "the antitrust laws are not a code of civility in American business."
But Jackson was unmoved.
Microsoft's interactions with rivals "demonstrate that it is Microsoft's corporate practice to pressure other firms to halt software development that . . . competes directly with Microsoft's most cherished software products," the judge wrote.
The judge wholeheartedly sided with the government's description of meetings and other interactions with rivals in which Microsoft allegedly delivered the threats. Most notably, he accepted the government's version of a June 1995 meeting between Microsoft executives and officials at Netscape Communications Corp. in which Microsoft was alleged to have urged Netscape not to make Internet browsers that would run on Windows because Microsoft wanted to control that market.
"Had it convinced Netscape to accept its offer of a 'special relationship,' Microsoft quickly would have gained such control over the extensions and standards . . . to make it all but impossible for any future browser rival to lure appreciable developer interest away from Microsoft's platform," Jackson wrote.
In one of the most important factual findings for the government, Jackson rejected Microsoft's argument that its Internet Explorer browser is a fully integrated feature of Windows that benefits consumers. Instead, he said the two are separate products whose combination has actually inflicted "collateral harm on consumers." In a ruling last year, a federal appeals court said that Microsoft could combine its browser and operating system so long as it helped consumers.
The government argued that Microsoft added Internet Explorer to Windows--and gave the browser away for free over the Internet--largely to undercut Netscape because Microsoft feared that Netscape's browser posed a threat to Windows. To further attack Netscape, the government contended--and the judge agreed--that Microsoft forced personal computer makers and Internet service providers to sign contracts that limited their ability to promote the Netscape browser.
In finding that Microsoft possesses monopoly power, Jackson rejected Microsoft's arguments that it faces immediate competitive threats from a rival operating system called Linux, Sun Microsystems Inc.'s Java technology, slimmed-down "network computers," hand-held organizers and other electronic devices. "For while consumers might one day turn to network computers, or Linux, or a combination of middleware and some other operating system, as an alternative to Windows, the fact remains that they are not doing so today," Jackson wrote.
The judge also said that Microsoft's "substantial discretion" in setting the price of Windows reflects its monopoly power. He cited a previously confidential Microsoft study from November 1997 that determined the company could have charged $49 for an upgrade to Windows 98, but identified $89 as the "revenue-maximizing" price.
"There is no reason to believe that the $49 price would have been unprofitable," Jackson wrote, noting that Microsoft "opted for the higher price."
Legal experts who have been following the case widely expected Jackson to rule against Microsoft. At various points in the trial, the judge, a Washington native who was appointed to the federal bench by President Ronald Reagan in 1981, suggested through his questions and comments to lawyers that he found some of Microsoft's explanations of its conduct to be hard to believe. And in 1997 he ruled against Microsoft in a dispute with the Justice Department over whether the inclusion of Internet Explorer in Windows 95 violated an agreement with the government.
Microsoft's rivals hailed the findings yesterday as a powerful victory in their long battle to hold the company accountable for its behavior, which they contend has crushed competition and restricted innovation.
"This isn't a big surprise," said Mitchell S. Pettit, the president of ProComp, an industry group in Washington that represents several Microsoft competitors. "Microsoft gambled the law wouldn't catch up to them. Today it did."
If Jackson eventually rules that Microsoft has violated the Sherman Antitrust Act, he likely will hear additional evidence from both sides before deciding on sanctions. Government lawyers have not yet decided what sort of remedy they would ask for, but they are actively considering seeking stiff penalties, including a corporate breakup and forced sharing of the secret computer code that makes up Windows, sources said.
A breakup, the ultimate sanction in American antitrust law, could happen in two ways, according to economists who have been studying the issue. Microsoft could be carved into one company that would sell only the Windows operating system and one that would sell other Microsoft software products, such as word processors. The other approach would be to split the firm vertically into two or three nearly identical units.
Under the code-sharing approach, viewed as a way to avoid the political fallout of a breakup, Microsoft would be forced to sell its equivalent of the Coca-Cola soft-drink formula to two or three other technology firms. With this "source code" for Windows, the other firms could develop their own versions of the operating system, injecting new competition into the PC operating system market.
Connecticut Attorney General Richard Blumenthal, who helped to coordinate the states' involvement in the lawsuit, suggested yesterday that the government would push for aggressive sanctions. "These are serious and far-reaching violations that should lead to serious and far-reaching remedies," he said.
Microsoft almost certainly would oppose any sanctions. The company has argued that it is already facing stiff competition from a new generation of Internet-connected computing devices that do not rely on Windows.
Jackson's ruling was not released until 6:30 p.m. yesterday, after U.S. financial markets had closed for the week. In trading after the regular stock market session closed, Microsoft's stock fell nearly 5 percent, to $87.06 on the New York Stock Exchange.
In one final jab at Microsoft, the electronic version of his ruling, provided to lawyers on both sides as well as journalists, was formatted not for Microsoft's industry-standard Word software program for word processing, but rival Corel Corp.'s struggling WordPerfect software.
Staff writers Ariana Eunjung Cha, Shannon Henry, John Schwartz and David Streitfeld contributed to this report.
The Long Battle
Key dates in Microsoft Corp.'s long antitrust fight:
The Federal Trade Commission begins to investigate claims that Microsoft monopolizes the market for PC operating systems.
The FTC closes its investigation, but Justice Department and European Commission antitrust investigators begin independent probes.
July: Microsoft, in a consent decree, agrees to change some business practices, notably the terms for licensing its operating system to PC makers.
Aug. 21: U.S. District Judge Thomas Penfield Jackson approves the consent decree reached between Microsoft and the government the previous year.
Aug. 25: Microsoft launches
November: Microsoft releases Internet Explorer 2.0 for Windows 95, a challenge to Netscape's Navigator, which dominates the browser market.
September: Microsoft says the Justice Department is probing the bundling of its Internet browser and PC operating system.
September: Microsoft launches Internet Explorer 4.0 in a stepped-up challenge to Netscape, whose share of the browser market slips to less than two-thirds of Internet users.
October: The Justice Department sues Microsoft, alleging Microsoft violated the 1995 consent decree by forcing computer makers to feature its Internet browser, which the company says is an integral part of its operating system.
December: A preliminary injunction forces Microsoft to stop requiring manufacturers to install its Internet Explorer on PCs. Microsoft appeals but agrees to sell a modified version of Windows.
May 18: The Justice Department and 20 states sue Microsoft, alleging anti-competitive practices.
May 22: Judge Jackson sets a September trial date for Microsoft.
June 23: An appeals court rules that Microsoft did not violate its 1995 consent decree with the federal government when it integrated its Internet Explorer browser with its operating system.
June 25: Microsoft releases
Oct. 19: The Microsoft trial begins. Each side is limited to 12 witnesses.
Nov. 24: America Online announces a plan to acquire Netscape Communications for $10 billion.
Dec. 7: South Carolina pulls out of the lawsuit.
Jan. 13: The government rests its case.
Feb. 27: Microsoft rests its case. Both sides begin preparing rebuttal arguments.
March 31: Microsoft and the government hold brief settlement talks but cannot reach an agreement.
June 1: After a 13-week recess, rebuttal arguments begin. Each side is limited to three witnesses.
June 25: Rebuttal arguments conclude.
Sept. 21: Both sides deliver closing arguments.
Yesterday: Jackson issues "preliminary findings of fact."
Next month: Each side will present legal briefs detailing how the nation's antitrust laws apply to the facts. Legal specialists also expect both sides to explore ways to settle the case.
2000 and beyond
Winter: If a settlement is not reached, Judge Jackson will issue a final ruling.
Spring: If Microsoft loses, Jackson has indicated he will hold another set of hearings on "remedies." Those proceedings could involve additional witnesses and last several weeks.
Summer: A final decision on remedies is expected. The losing side almost certainly will appeal. An appeal to the U.S. Court of Appeals could take six to 12 months. A Supreme Court decision could take another six to 12 months.
SOURCES: Associated Press, Washington Post news reports, Bloomberg News
Microsoft In Profile
Business: Microsoft is the world's No. 1 software company; it develops, makes, licenses, sells and supports software products. With NBC, Microsoft operates cable news channel MSNBC.
Products: Windows operating system, MS Office business productivity suite (Excel, Word, PowerPoint), Internet Explorer Web browser
Based: Redmond, Wash.
Origins: Microsoft was born in an Albuquerque hotel room in 1975 when Bill Gates teamed with Paul Allen to sell a version of the programming language BASIC.
Chairman and chief executive: Bill Gates
Yesterday's closing stock price: $91.561/4 (MSFT on the Nasdaq)
Web address: www.microsoft.com
How Big Is Microsoft?
Among U.S. corporations, this is how Microsoft ranks on various indicators:
1st Stock market value: $471 billion
2nd Profit as percent of revenue: 31 percent
4th Annual profit growth, 1988-99: 39 percent
109th Revenue: $14.5 billion
How Fast Has Microsoft Grown?
Over the past decade, the number of Microsoft employees has grown nearly sixfold, and its profits have soared:
NOTES: Market value as of market close yesterday.
Ranking in profit as percentage of revenue, annual profit growth and revenue is from the 1999 Fortune 500, based on 1998 information in Fortune magazine.
Revenue for fiscal year ended June 30, 1999, was $19.8 billion. Employees and net profits are for fiscal years ended June 30, according to Microsoft.
1990: $279 million
1999: $7.8 billion
Profit per employee
Terms to Know
Here are definitions of some of the important terms in the Microsoft case:
Antitrust: "Trusts" were coalitions formed by large companies in the late 1800s to dominate markets and maximize profit. The Sherman Antitrust Act, voted into law by Congress in 1890, outlawed these anti-competitive agreements and other abuses of a company's monopoly power, such as using a monopoly in one market to secure a similar dominance in another.
Findings of fact: Judge Thomas Penfield Jackson's accounting of what Microsoft Corp. has done, but not whether those actions broke any laws. Available at www.washingtonpost.com
Operating system: The program (OS for short) that oversees every other program on a computer, communicates with any hardware installed on that machine and lets a user manipulate files and issue other commands to the computer. Microsoft's Windows 95, Windows 98 and Windows NT are operating systems; so is Apple's Mac OS.
Browser: A program to view pages on the World Wide Web, such as Netscape Navigator and Microsoft's Internet Explorer.
Java: A programming language developed by Sun Microsystems Inc. that allows one program to run on multiple operating systems, possibly eroding Microsoft Windows's market dominance: normally, programs must be rewritten in different versions to run on different "platforms."
Linux: An operating system that competes with Windows. It was originally developed by a Finnish programmer, Linus Torvalds, then given away for free. Anyone who installs a copy of Linux can modify it as long as the changes, and the programming code behind them, are also given away for free. Because of the rapid improvement this "open-source" method allows, and because the software is free, Linux has rapidly gained market share in recent years.
SOURCES: Staff reports, Hoover's, Bloomberg News, Fortune
Major Players in U.S. v. Microsoft
JOEL I. KLEIN heads the Justice Department's antitrust division. He brought the case against Microsoft and has staked much of the reputation of government trustbusters on its outcome.
DAVID BOIES is the government's lead attorney. Recruited out of private practice for this case, Boies took aim at the credibility of Microsoft executives throughout the trial and scored a series of tactical courtroom victories.
THOMAS PENFIELD JACKSON, U.S. District Court Judge, is presiding over the trial. Aside from some questions skeptical of Microsoft's rendering of events, Jackson has said little to signal his personal leanings in the case.
BILL GATES is Microsoft's chief executive. Though he never personally appeared at the trial, his videotaped deposition was shown repeatedly in court.
WILLIAM NEUKOM is the head of Microsoft's legal department. A familiar bow-tied presence at the trial, Neukom is considered every bit as hard-nosed about fending off Microsoft's adversaries in court as Gates.