In early November, Judge Thomas Penfield Jackson released his findings of fact in the Microsoft antitrust trail. Did he get the facts right? How did he apply the classic tests and definitions of antitrust doctrine to the case? This week, Jonathan Zittrain and George Priest discuss these questions, as well as recent twists in the case.
Judge Jackson’s findings are written with great style and force. They present an epic tale of the entrant Microsoft, an unimportant newcomer until IBM adopted its DOS; gaining dominance of the operating system and application markets to become a giant; on the basis of this dominance, through a variety of ingenious means, enslaving all that would do business with it; finally, battling off potential competitors to maintain its dominant position indefinitely into the future.
Though the details are different, it is an epic written in the style and worthy of comparison to Cortez defeating the Aztecs or Pizarro and the Spaniards conquering Inca Peru. And the comparison is not so far-fetched: The final indignity is that, just as the Spaniards successfully suppressed the variety of native languages so that the entire continent would speak their own, Microsoft has succeeded in converting almost all of us to the language of Windows. Most consumers have as much interest in converting to a competing operating system as they do converting to speaking Quechua.
Though compelling, however, there are some problems with the narrative. First, Microsoft gained its dominant position not through killing and maiming less competitively sophisticated rivals, but most generally through merit. Consumers adopted Windows and, given again a choice, adopted Windows’ subsequent improvements. Second, Microsoft “enslaved” equipment manufacturers and applications writers, most commonly, not by demanding riches in ransom, but by paying them handsome promotional fees or by providing licenses to Windows at attractive prices. Finally, consumers have adopted the Windows language, not at the expense and demise of their traditional ways of communicating, but as an addition to–indeed, a powerful addition to–their traditional means of connecting to the world. As a consequence, Judge Jackson’s epic rests on very fragile foundations.
Judge Jackson finds Microsoft to have abused its monopoly, essentially, on the basis of two different sets of practices. The first consists of a variety of limitations and constraints that Microsoft imposes in its Windows licensing agreements. The second consists of its efforts to gain dominance in the browser market in order to snuff off a potential platform for a competing operating system. The fragility of Judge Jackson’s opinion is evident in both. Perhaps not all, but most of the various Windows licensing restrictions can be as easily interpreted as promoting competition as Judge Jackson’s opposite characterization. More damaging to the opinion is Judge Jackson’s factual account of the competition over browsers. Judge Jackson soft-plays the fact that Microsoft’s success with Explorer is partial, not complete. Moreover, even by his own account, Explorer’s success must be attributed to merit, which has never been held to constitute an antitrust violation.
What are the nefarious licensing restrictions? Microsoft in many instances offered substantial promotional payments or favorable terms if equipment manufacturers installed Windows and Windows’ applications. It offered payments and assistance to various applications writers if they designed their products to work especially well with Windows. These practices are not likely to be found to be illegal; they are emulated too often in our modern markets as firms strive to improve their competitive position.
There are some licensing practices of somewhat more questionable character under the antitrust laws. Judge Jackson describes some examples in which Microsoft appears to be dividing the market of one application or another with a competitor. If true–the facts are not clearly persuasive from Judge Jackson’s opinion–the practices clearly violate the law. In other instances, Microsoft enters agreements limiting its licensees from promoting Navigator at all, or limiting the extent of promotion. This, too, might be found anti-competitive. Oddly, because there are not so many examples of these practices, Judge Jackson floats over them. Their legality is not entirely clear: They may simply be other promotional efforts. It cannot be a violation of the antitrust laws to ask a joint-venturer to promote your product rather than that of a competitor. But the impact is not evident, and a future prohibition of these practices might form the grounds for a settlement of the case.
Microsoft’s efforts in the browser wars are harder to find illegal, though not so hard for Judge Jackson. The key to Judge Jackson’s approach is his acceptance of the Justice Department’s claim that the browser software application is a legitimate competitor to Microsoft’s operating system. This conclusion is not quite a “fact”; it is better characterized as a theory. Navigator does not run alone–it needs Windows or some other operating system. Judge Jackson ignores this point.
Microsoft’s development of Explorer, otherwise, is unexceptionable–indeed, the essence of competition on the merits. According to Judge Jackson’s account, Explorer initially is an inferior product. Microsoft wants to improve it–Judge Jackson finds this desire predatory. Microsoft invests, according to the judge, “hundreds of millions” to improve it–Judge Jackson finds these investments to be dangerously predatory. Explorer is improved and gains market acceptance against Navigator–to Judge Jackson, proof of the predation’s success. AOL adopts Explorer as its default browser, substantially boosting its market share–further proof of the predation, though Judge Jackson quotes AOL memos showing that Explorer worked better for them than Navigator.
Finally, the smoking gun: AOL acquires Netscape. At the time, Judge Jackson mentioned from the bench that this acquisition might change the competitive landscape for operating systems. AOL’s licensing agreement with Microsoft was set to expire on Dec. 31, 1998. But what does the new parent of Navigator do? It renews its agreement with Microsoft for Explorer because it finds the relationship beneficial.
Judge Jackson is scathing in his description of AOL’s choice to renew its agreement with Microsoft. His opinion does not even consider the possibility that AOL, in pursuing its own self-interest, is providing benefit to its consumers. (Nor does he consider the very difficult question of whether licensing agreements entered during the pendency of this case might be designed to influence its outcome.) Instead, to the judge, AOL’s decision is merely one more example of Microsoft’s enormous power and its willingness to stop at nothing to maintain its monopoly.
Though crucial to Judge Jackson’s findings, the AOL episode is the weakest element of all and exposes the ultimate fragility of the narrative. Is this the story of the Aztecs and Incas, in which a vicious invader dominates and enslaves a powerless citizenry? Or is this the story of America, where citizens abandon their native homes to gain new opportunities and learn a new language from which–together–all will benefit? Judge Jackson has one narrative in mind, but the facts he presents do not clearly rule out the alternative.
