An Analysis and Opinion of the Microsoft Antitrust Settlement

As I reported last week, Microsoft announced Friday that it had reached a settlement with the US government in its 3-year antitrust case. If the judge overseeing the case approves it, the settlement will have sweeping ramifications in the computer industry and beyond. But the big question is whether the settlement effectively punishes Microsoft for its illegal activities and prevents it from continuing such activities in the future. I think the settlement fails miserably on the first of these two qualifications, although it appears to satisfy the second. But, as with Microsoft's 1995 consent decree, the text of this settlement--the so-called Final Judgment--contains language that gives the company some wiggle room in the future. The settlement is a travesty of justice that leaves an illegal monopoly in a position of power, enabling Microsoft to continue harming competitors, partners, and even customers.
 
Before I review the settlement, however, I'd like to present some background information. As a technical reporter who has covered Microsoft professionally for more than half a decade, I've had a difficult time understanding the company. Microsoft is full of intelligent, enthusiastic, and driven people, many of whom literally believe that they can change the world through the company's products. It's a paradox to me that the people who make up Microsoft are responsible for one of the most predatory entities that has ever entered the world economy. Furthermore, Microsoft is responsible for some of the most unreliable and buggy technology ever foisted on consumers, and Microsoft has prevented other companies with more elegant technology from being successful again and again over the course of its 25-year history.

Some of its products--Windows 2000 and Windows XP, for example--are world-class, however. It's difficult to reconcile the actions of the predatory corporate giant with the people I know at Microsoft and the occasionally excellent products the company makes.

In the end, of course, it doesn't matter how any of us feel about the company. The historical record will show that the courts found Microsoft guilty of illegally gaining and maintaining a monopoly for PC OSs. The government presented a lot of evidence in court to bolster this argument, and I'd add that far more evidence is available to back it up even further. A fact's a fact: Microsoft dominates the industry.

After an initial round of appeals, Judge Colleen Kollar-Kotelly directed Microsoft and its foes in the Department of Justice (DOJ) to fashion a settlement. If a settlement wasn't reached by last Friday, she said, Microsoft would face the music in court next spring. And Kollar-Kotelly warned Microsoft that her own judgment wouldn't be particularly kind to the company. Other than a Microsoft breakup, which the government had previously ruled out, Kollar-Kotelly told the company to expect the strictest possible remedy.

Microsoft and the government met and held meetings around the clock but were unable to reach an agreement. So the court appointed a mediator, who worked with the two sides to establish an acceptable settlement. Last Friday, the two groups presented this settlement to Kollar-Kotelly, who will wait to accept the deal until she receives input from the US states that are also allied against Microsoft. In the meantime, Microsoft and its competitors weighed in on the terms of the deal.

"While the settlement goes further than we might have wanted, we believe that settling this case now is the right thing to do to help the industry, and the economy, to move forward," said Microsoft Chairman and Chief Software Architect Bill Gates. "We recognize that the success of our products has created concerns. This settlement addresses those concerns in a fair and reasonable manner, while still enabling Microsoft to continue innovating and pushing technology forward."

Others weren't so sure. "This [settlement] is a reward, not a remedy," said RealNetworks General Counsel Kelly Jo MacArthur in a statement. "This agreement allows a declared illegal monopolist to determine, at its sole discretion, what goes into the monopoly [OS] in the future."

So where's the truth in all this? You have to look closely at the settlement to find out. Like most legal documents, the proposed final settlement is chock-full of obtuse language, extended background information, and even a glossary that defines relevant technical terms. The important parts, however, concern how the settlement will curtail Microsoft's predatory conduct.

First, Microsoft can't retaliate against its own partners--PC makers, in this case--if any of these companies decides to promote, use, or sell non-Microsoft software or sell PCs that dual-boot Windows and a competing OS. This agreement comes too late to save tiny Be Inc., which had sought to install its Be OS in dual-boot scenarios with PC makers; because of their restrictive Windows contracts, the major PC makers didn't sign on, and Palm, which recently bought Be Inc., has no plans to continue development of the Be OS. It's also too late to save Netscape, which AOL swallowed up after Netscape was unable to compete with Microsoft's bundled Internet Explorer (IE) product.

Microsoft must offer all PC makers a uniform price for Windows and not reward noncompetitive partners (e.g., Dell) with better deals while punishing other companies (e.g., IBM) with higher prices, as the company has in the past. However, Microsoft is free to offer volume discounts based solely on sales. This part of the agreement is fair but does nothing to compensate the companies that Microsoft's favoritism damaged in the past. During the original trial, for example, IBM stated on record that it lost millions of dollars because of Microsoft's refusal to supply a Windows 95 license in a timely manner because IBM sold Lotus products that competed with Microsoft Office.

The settlement agreement lets PC makers modify Windows display icons, Start Menu entries, and other onscreen elements for products that compete with the bundled products Microsoft supplies in Windows. For example, PC makers can now replace Windows Media Player (WMP) icons with RealNetworks RealPlayer or Apple QuickTime icons. The caveat is that such replacements must not harm the UI's operation, which leads me to believe that in the future Microsoft will integrate product bundlings even more tightly into Windows than they are today. In the meantime, Netscape, RealNetworks, Apple, and many other companies have felt the sting of Microsoft's product-bundling strategy as their products have fallen in use: It's easier to use a program that's built in than it is to download an alternative from the Internet. For many competitors, this change comes too late.

Sometime during the next year, Microsoft will release new documentation to PC makers and other partners that clearly explains how to better integrate third-party products with Windows. In the past, Microsoft withheld this crucial information from companies that threatened its core platforms. In addition, Microsoft will release the information programmers need to access all client and server protocols and interfaces in Windows so that third-party applications and services can better integrate with Windows. A major facet of Sun Microsystems' complaint against Microsoft--a complaint that touched off Microsoft's European antitrust investigation, incidentally--regarded the withholding of such information. Again, this action comes too late to help the companies that struggled against the many bundled products and services in Windows.

I'll present the next condition in the exact wording of the Final Judgment; pay attention to the word "except," because the repeated use of this word in this document buys Microsoft room to bargain in the future: "Microsoft shall not enter into any agreement relating to a Windows Operating System Product that conditions the grant of any Consideration on an ISV's refraining from developing, using, distributing, or promoting any software that competes with Microsoft Platform Software or any software that runs on any software that competes with Microsoft Platform Software, except that Microsoft may enter into agreements that place limitations on an ISV's development, use, distribution or promotion of any such software if those limitations are reasonably necessary to and of reasonable scope and duration in relation to a bona fide contractual obligation of the ISV to use, distribute or promote any Microsoft software, or to develop software for, or in conjunction with, Microsoft." Yikes. You can imagine the contractual language wrangling that will accompany any future deals of this nature. The wiggle room is obvious.

Some interesting changes are also ahead for end users. Sometime during the next year, Microsoft will ship a downloadable update for XP (but not, notably, for any Windows 9x product) that will let both users and PC makers enable or remove access to IE, MSN Explorer, Outlook Express, Windows Messenger, WMP, and other related technologies by using a desktop icon, a Start Menu entry, or the Add or Remove Programs applet. In addition, end users and PC makers can designate competing products as replacements for Microsoft's bundled products. So, for example, you might designate Netscape or AOL as the default Web browser and RealPlayer as the media player. This language does nothing to reverse the years of Windows product bundling and the irreversible damage that bundling caused to competition.

Because of Microsoft's less-than-honorable approach to complying with its 1995 consent decree, the Final Judgment also includes a section about compliance, which specifies how Microsoft will be forced to stay in line going forward. For the next 5 years, a three-person Technical Committee (TC) will monitor Microsoft to ensure that the company complies with the terms of the settlement. Again, this action is acceptable for future behavior, but it does nothing to address the previous behavior that resulted in Microsoft's market dominance.

And if it's not obvious by now, the major failing of this settlement is that it doesn't punish Microsoft for breaking the law but instead prevents the company from continuing the behavior that got it into trouble. The list of prohibited conduct spells out, in very general terms, exactly what the company did wrong in the past. But preventing similar crimes in the future isn't "justice." Imagine a court letting a convicted thief keep the items he stole if only he promises never to steal again. That's the "justice" this settlement foists on the people of America and the world. True justice addresses the people the crime hurts--in this case, Microsoft's competitors, partners, and users--and punishes those who commit the crime. This settlement lets Microsoft retain its illegally gained market power, along with most of the advantages that come along with that dominance.

RealNetworks' MacArthur is right. This agreement isn't a remedy--it's a reward.