Armageddon

The trial began in October 1998, promising to answer many lingering questions about the software industry, the Internet, and their conver­gence into the information sector. By the end of November, AOL had announced its intention to acquire Netscape—answering at least one burning question in the negative.

The trial ranged far and wide. The government outlined how Microsoft had destroyed Netscape, but it didn’t stop there. It showed how Microsoft had crippled Sun’s Java—a language that allowed pro­grammers to write a single program that would communicate with any platform—by “extending” it into a Windows-only version. It showed how Microsoft had forced IBM to terminate the last vestiges of OS/2. It showed how Microsoft had forced Intel to squelch a nascent software­development effort; how Microsoft had threatened Apple with extinc­tion in order to eliminate it first as a credible platform challenger and then as a potential Netscape ally; how Microsoft had coerced computer manufacturers and ISPs to choke off Navigator’s best distribution chan­nels; how Microsoft had bribed Web developers to tweak their Web pages to appear best (or only) when accessed through Internet Explorer. Overall, the government showed how Microsoft had engaged in tactic after tactic that reduced consumer choice throughout the worlds of soft­ware, computing, and the Internet.

The government claimed that Microsoft had engaged in all of these actions both to maintain its platform monopoly and to leverage that monopoly into additional software markets. Microsoft, the government claimed, was intent on retaining its sole proprietorship of the translation frontier, so that all communications between humans and machines would have to pass through a Microsoft translator.

The government’s case seemed devastating. And for the most part, Microsoft didn’t deny the actions that the government described; it simply disagreed about their propriety, their underlying motives, and their effect on consumers. Where the government saw cheating, anti­competitive behavior, and consumer harm, Microsoft asserted laissez- faire capitalism, superior product development, brilliant marketing, and shrewd negotiating.

The trial ended in mid-July 1999. In November, Judge Jackson issued his “findings of fact.” He agreed with the government on almost every­thing. But in an unusual move, he didn’t say anything at all about the law.

Microsoft took actions that could only have been advantageous if they operated to reinforce monopoly power. These actions are described below....³⁰ Microsoft focused its antipathy on two incarnations of middleware that, working together, had the potential to weaken the applications barrier severely without the assistance of any other middleware. These were Netscape’s Web browser and Sun’s implementation of the Java technologies....³¹

The combined efforts of Netscape and Sun threatened to hasten the demise of the applications barrier to entry, opening the way for non-Microsoft operating systems to emerge as acceptable substitutes for Windows. By stimulating the development of network-centric Java applications accessible to users through browser products, the collaboration of Netscape and Sun also heralded the day when vendors of information appliances and network computers could present users with viable alternatives to PCs themselves. Nevertheless, these middleware technologies have a long way to go before they might imperil the applications barrier to entry. Windows 98 exposes nearly ten thousand APIs, whereas the combined APIs of Navigator and the Java class libraries, together representing the greatest hope for proponents of middleware, total less than a thousand. Deci­sion-makers at Microsoft are apprehensive of potential as well as present threats, though, and in 1995 the implications of the symbiosis between Navigator and Sun’s Java implementation were not lost on executives at Microsoft, who viewed Netscape’s cooperation with Sun as a further reason to dread the increasing use of Navigator....³²

Once it became clear to senior executives at Microsoft that Netscape would not abandon its efforts to develop Navigator into a platform, Microsoft focused its efforts on ensuring that few developers would write their applications to rely on the APIs that Navigator exposed.

Not much subtlety in there. Despite the absence of a ruling on the law, Jackson couldn’t possibly have left Microsoft with any doubt as to which way the wind was blowing.

Jackson even took the opportunity to address the most controversial question of all—and the one on which Microsoft had likely been pinning its greatest hopes: Did Microsoft really do anything that harmed con­sumers? After all, it’s one thing to say that Microsoft harmed Netscape or Sun or IBM. And that’s bad, particularly if you held shares in Netscape or Sun or IBM, but what’s it to us consumers? What has Microsoft ever done to hurt us? Microsoft claimed that all of its actions had both the intent and the effect of helping consumers—and many of its supporters agreed. Jackson, however, did not.

Now, Microsoft’s effect on consumers is likely to remain one of the trial’s great open questions, to be debated for decades to come.³⁴ What’s more, even if Microsoft did harm consumers, it still might not deserve to lose the case; courts are only empowered to redress certain types of harm. But the question of consumer harm remains central to under­standing the trial, the debate around it, and the information sector itself. Finding an answer requires a trick that also reveals why that answer is so elusive: We must imagine what the software market would look like today had Microsoft not violated the antitrust laws.

In my picture, Microsoft did maintain prices above their competitive levels—but that was only a small part of the harm. The bigger problem was that Microsoft forced a standard on the public. In so doing, it impeded innovative product development and retarded the information sector’s natural growth. To be fair, even an enforced standard has its advantages, though they’re small compensation for reducing what should have been an exciting, competitive, innovative software market into one controlled by the Microsoft commissariat. I don’t like centrally planned software features because I believe in the power of markets. Let devel­opers compete and let the market decide.

Of course, not everyone agrees with me. Many callers to radio shows, debunkers of network myths, Microsoft’s economists, and the editors of the Wall Street Journal all take a different view. Perhaps they find huge comfort in knowing that never again will they have trouble translating programs between formats—at least as long as Windows reigns supreme. More likely, they also believe that many of Microsoft’s flagship products were technically superior to those of their competitors, that Microsoft won its many dominant positions by being responsive to consumer needs and desires—not through monopoly leveraging, and that Microsoft has pushed software prices down, rather than up. And I can’t prove that they’re wrong any more than they can prove that I’m wrong. So we’re still stuck in a sort of stalemate.

But in the final analysis, the only imagined present that really mattered was Jackson’s—and he pictured a market that Microsoft had distorted badly. In his view, Microsoft’s positive contributions paled in compari­son to its intentional violations of the antitrust laws. And so, with the release of Jackson’s findings of fact, Microsoft knew that it was on the verge of being ruled a monopolist and ordered to do something that it would consider odious.

But Posner, despite being a judge, a professor, and a respected scholar, had somehow retained at least a modicum of common sense and innate wisdom. After four months of trying to reconcile the irresistible force from Washington with the immovable object of Redmond (or was it the other way around?), he withdrew. He realized, correctly, that no settle­ment was possible. In April 2000 Jackson issued his findings of law. He elevated Microsoft from the status of mere monopolist to the rather rarified infamy of adjudicated monopolist.

That legal ruling set the stage for the next question: What sort of remedy could Jackson impose that would fix things? A good remedy should do a number of different things. It should punish Microsoft for behaving in an anticompetitive manner. It should preclude Microsoft from repeating that behavior. It should deter anyone else from follow­ing Microsoft’s lead. It should restore competitive balance to the markets. And it should be fair and proportional to the nature of Microsoft’s trans­gressions. What remedy could achieve all of that?

Antitrust remedies typically fall into one of two broad camps: struc­tural and behavioral.³⁵ Remedies in most cases are behavioral. The court tells the defendant to stop doing whatever it has been doing, orders it to pay some money, and everyone calls it a day. But here, the challenge lay in figuring out what set of instructions could possibly preclude Microsoft from repeating its behavior. After all, from DR-DOS through the appli­cations markets and on into Navigator, Microsoft was a proven recidi­vist. How do you fine a company that’s essentially minting money? How do you stop a company from what is essentially rational (if illegal) behav­ior designed to maximize profits using the tools at its disposal? Is it pos­sible to do more than to nudge such a firm so that rather than crossing the line of antitrust legality, it merely skirts that line from the inside— until, that is, it finds another direction in which to push outward? And above all, how do you fix a market that has been so badly broken that the only remaining player is your adjudicated monopolist?

These questions convinced many observers that no behavioral remedy could possibly work. As long as Microsoft retained sole proprietary own­ership of the Windows APIs, it would be able to leverage its way into virtually any software market that it chose to conquer—and it was a pretty safe bet that Microsoft would choose to conquer any middleware threat that might force it to share the next generation of the translation frontier with a competitor, or even worse, with the world at large in the form of (shudder) an open standard. These observers argued that Jackson had to do something unusual to inject competition back into the plat­form market. They argued for a radical restructuring of the software industry; surgery that would change Microsoft’s corporate structure. Such structural remedies would break Microsoft into a number of com­peting companies.

Any such structural approach would certainly prevent Microsoft from repeating its behavior, and seems sufficiently draconian to have a serious deterrent effect on other monopolists (including the companies to emerge from the breakup). The remaining questions were thus whether this remedy was fair and whether or not it would fix the market effectively. Effectiveness, of course, would depend on the specific breakup ordered. Many of the outside scholars and observers who had proposed intricate breakups, for example, questioned the plan ultimately submitted by the DoJ, which split the operating system company from the applications company—but left the Windows monopoly intact. Many of them had favored creating multiple (typically 3) Windows companies, nicknamed the “Baby Bills,” who would then compete directly with each other.

The DoJ, however, felt that no such division of the Windows monop­oly was necessary. And so, in the spirit of Aristophanes’ toast at Plato’s Symposium, the jealous gods of the DoJ moved to sever the happy Microsoft into two natural halves—a platform company (“Winco”) and an applications company (“Appco”)—reasoning that they would each wander the software world seeking to recreate their missing halves. When Appco recreated a Windows competitor and Winco recreated an Office competitor, competition would reign throughout the land, and consumers would benefit.

Jackson agreed. On June 7, 2000, he ordered Microsoft broken into Winco and Appco. He also subjected Microsoft to a number of conduct restrictions. Finally, he put all of these remedies on hold until an appel­late court had had a chance to review them—on the off chance that Microsoft might want to appeal.