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Why You Should Not Feel Sorry for Bill Gates

On April 23, Bill Gates took the witness stand for the first time in the antitrust case against Microsoft. At one point he said that Microsoft is facing disintegration. If the remedies proposed in the antitrust action were accepted, he argued, Microsoft’s business and technology model would be in peril, innovation would be discouraged and the consumers would be damaged.

Before we start to feel sorry for the sad fate possibly looming over one of the most successful businessmen in the history, let us take a step back and try to understand why Microsoft is in this situation and where does this antitrust case come from.

The skirmishes between Microsoft and the Department of Justice (DOJ) date as far back as 1994. At the time Microsoft came under attack because of alleged “bad behaviors” to preserve its dominant share in the Operating Systems (OS) market.

One bad behavior was the “per processor licensing”, every computer manufacturer, or OEM (Original Equipment Manufacturer) had to buy one copy of the MS DOS (yes, we’re talking prehistory!) per every processor if it wanted to do business with Microsoft. For OEMs this meant that, if they were Microsoft’s customers they were virtually forced to use DOS for every computer they shipped.

The other “bad behavior” was the “tying” of Windows 3.1 (the ancestor of Win 95) to DOS, DOS and Win 3.1 were always sold as a “package”.
Using these two behaviors, which constitute a violation of the Sherman Antitrust Act, Microsoft was able to kill competition from other systems, such as Digital Research Dos and other “click-and-point” systems, such as Apple OS.

Microsoft and the DOJ ended up settling the case in 1995, when Judge Jackson signed a consent decree in which Microsoft basically vowed not to engage in these behaviors anymore.

However, Microsoft played the same trick when it tied Internet Explorer
to Win95, thus killing Netscape in the browsers market. This “tying” was a violation of the consent decree but Microsoft argued that the two applications were so integrated that they had to be bundled.

When Judge Jackson signed a preliminary injunction to Microsoft to un-bundle the two applications and make it possible, for example, for a Win95 user to delete Internet Explorer icon from the desktop, Microsoft responded with a letter to the OEMs explaining that it was now possible to get rid of Internet Explorer icon by deleting some files, but this operation could end up making Win95 virtually unusable.

As expected, when Judge Jackson knew about it, he called for a new violation of the consent decree but in Appeal in 1998, his injunction was declared not valid and Microsoft was legally allowed to force OEMs to install Win95 and Internet Explorer as a package. This was a big surprise given that, during the trial, internal Microsoft documents had been shown where some of Microsoft’s top executives explicitly stated that they had to steal market share from Netscape in other ways than just through a superior product.

Right after this verdict, on May 1998, the DOJ and 19 American states (plus the District of Columbia) filed a new, regular antitrust suit against Microsoft. After two years, in June 2000, Judge Jackson decided that Microsoft must be split into two different firms, one producing operating systems, the other producing software applications, such as Office programs and browsers.

Again, Microsoft appealed and won. On June 2001, in Appeal Judge Jackson’s decision was overturned, the case was sent back to a lower level court and Jackson was removed from the case because he was considered “too biased.” Microsoft settled with the federal government and it seemed that it could go away with it again.

However, nine American states refused the settlement and pushed for a new antitrust action, proposing a number of remedies to block Microsoft from preventing competition and expanding its monopoly in adjacent sectors. The hearings that are now going on are about these possible remedies and the new Judge Colleen Kollar-Kotelly will have to decide.
This is definitely a complex and controversial case, probably testing the limits of an Antitrust Law, which worked well with oil and steel companies but has problems in dealing with hi-tech.

Whatever your opinion about it and whatever the final decision will be, it just seems to me very funny that Bill Gates plays the role of the victim and argues that Microsoft must be left free to innovate and serve customers. It would be interesting to know what would have happened if Microsoft had not used its power to kill competition in the OS and browsers markets. My guess is that there would have been more innovation and better products and a better service for the consumers.

May 6, 2002
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