Fallout From the Microsoft Trial

Fallout From the Microsoft Trial

Fallout From the Microsoft Trial

Moneybox
Commentary about business and finance.
Nov. 5 1999 8:52 PM

Fallout From the Microsoft Trial

Some quickly jotted-down thoughts on Judge Thomas Penfield Jackson's findings of fact in the Microsoft antitrust trial, a ruling handed down about an hour ago.

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1. The press is treating Jackson's chief conclusions--that Microsoft has monopoly power in the PC-operating-systems market; that Microsoft has used that power to harm competitors in other markets; and that using its power in that way has harmed consumers--as surprising. But the real surprise may be that anyone's surprised, given Jackson's attitude and behavior throughout the case. While the trial was going on, in fact, you would have been hard-pressed to find a single reporter covering it who thought that Microsoft was going to win. But since the trial has ended, the media was apparently seized by the conviction that Jackson would be temperate in his decision. He wasn't.

2. The stock market, on the other hand, seems to have been taking the implications of this decision into account for some time. Even as the Nasdaq has rallied strongly in the last couple of weeks, Microsoft's stock has been treading water. In fact, it's trading about where it was back in April. Now, in the wake of the ruling, the stock did sell off a bit in after-hours trading, but markets are all about anticipation, and the stock market appears to have already anticipated something like the ruling Jackson produced.

3. That's not to downplay the one-sidedness of the findings of fact. Although Jackson did credit Microsoft with helping accelerate the expansion of the Internet and with benefiting consumers via innovation in other cases, the weight of his ruling is on the side of the government. In particular, his ruling treats Microsoft as a textbook example of the idea that a monopolist can use its control of one market to give itself control over another, and that it can use the profits--"immense profits," Jackson calls them--reaped as a result of its monopoly to fund the domination of another.

These happen to be ideas that many academic economists are deeply skeptical of, since if it makes long-term economic sense for Microsoft to expand into, say, browsers, it should also make long-term economic sense for someone else to fund Microsoft's competitors. But Jackson is essentially saying that Microsoft is too powerful--because of its control of the operating-system market--and too profitable for anyone else to enter the fray against it. In fact, near the end of his ruling, he explicitly says that Microsoft's power has limited technological investment that would otherwise have taken place.

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4. Without sounding like a Microsoft shill here (and yes, Slate is published by Microsoft), the findings of fact do seem as if they're describing a world that doesn't quite exist anymore. The advent of Linux; the continued penetration of Java; the merger between AOL and Netscape; and the rapid growth in PDAs and non-desktop applications: All of these are phenomena that don't fit into the picture of a computing world in which domination of the PC operating system translates into domination elsewhere. Jackson's ruling was, of necessity, backward-looking, since he had to decide what had happened. But insofar as he remains guided by a PC-centric definition of computing, it's not clear whatever remedies he suggests will really conform to the way things are, rather than the way things were.

One of the odd things about the centrality of the browser war to the antitrust trial, in fact, is that the browser itself now seems about as important and distinctive as something like Wordpad (which is to say, not very important at all). Once, it seemed like he who controlled the browser would control the Internet. Now, if anyone controls the Internet, it's the portals. The unanswerable question, of course, is whether this would have happened had there been no antitrust trial.

6. As everyone is pointing out, the findings of fact do not tell us how Jackson will read the relevant laws in the case (that's Phase 2) or what remedies he may prescribe (Phase 3). And it certainly seems possible that Microsoft and the Justice Department will reach a settlement. Some have even suggested that Jackson's strong language was intended to spur just an agreement, although one might have thought a more balanced opinion would have had a better effect in that direction.

Nonetheless, there is at least one thing worth thinking about going forward. You could read Jackson's ruling as essentially implying that Microsoft's monopoly over the PC operating system means that any expansion into other contiguous markets--and most computing markets can still be construed as in some way contiguous to the PC--is an unacceptable exercise of monopoly power, then what kind of business can Microsoft legally pursue? Does Jackson secretly think that Microsoft shouldn't ever have been able to branch out into desktop applications like Word and Excel? In other words, does control of the operating-system market really preclude a company from seeking to compete in others? If Jackson's answer to that last question is really yes (which would be, I think, a startling answer), then we may in fact be talking about the AT&T decision all over again. And that really would be a surprise. But then, AT&T settled. And after this ruling, Microsoft may decide it's better off in the appellate courts after all.