Micro + Soft – The Split Of An Empire Micro + Soft – The Split of an Empire Kendra Phelps BUS 415.3 / Business Law Rob Goodwin July 5, 2000 Table of Contents I. Introduction: The Allegations and the Laws 3 II.
Introduction: The Proof 4 III. Trial 5 Table 1 6 IV. The Proposal 8 V. Microsoft’s Response 9 VI. The Foes and Their Thoughts 11 VII.
Current Status and Discussion 12 VIII. Recommendations 15 References 18 Micro + Soft – The Split of an Empire Could the megalosaurus business that was conceived in 1975 really be split in two – or three? This is what U.S. District Court Judge Thomas Penfield Jackson has decreed in order to put a stop to the monopolistic shenanigans that Microsoft calls business as usual. The Department of Justice (DOJ) and 20 states are suing Microsoft Corporation in one of the largest antitrust lawsuits brought about since the investigation and ensuing breakup of AT in 1984. If Judge Jackson gets his way, Microsoft (MS) could very well be two different companies sparring with each other. I.
Introduction: The Allegations and the Laws Essentially, the plaintiffs are charging Microsoft with the following three violations: 1) Microsoft has waged an criminal campaign in defense of its monopoly position in the market for operating systems designed to run on Intel-compatible personal computers (PCs). More specifically, the plaintiffs contend that Microsoft violated Section 2 of the Sherman Act by engaging in a series of exclusionary, anticompetitive, and pillaging acts to maintain its monopoly power. They also assert that Microsoft attempted, although unsuccessfully to date, to monopolize the Web browser market, which is also in violation of Section 2 of the Sherman Act. Finally, they claim that some specific measures taken by Microsoft as part of its campaign to protect its monopoly power, specifically, tying its browser to its operating system and entering into exclusive dealing arrangements, are also a violation of the Sherman Act, Section 1 . II. Introduction: The Proof The plaintiffs have already shown at trial that MS possesses an extremely dominant, persistent, and increasing share of the relevant market.
Microsoft’s share of the worldwide market for Intel-compatible PC operating systems currently exceeds 95 percent, and the company’s share would rest well above 80 percent even if the Mac OS were included in the figures. The plaintiffs also proved that the applications barrier to entry protects Microsoft’s dominant market share. This barrier ensures that no Intel-compatible PC operating system other than Windows can attract significant consumer demand, and the barrier would operate to the same effect even if Microsoft held its prices substantially above the competitive level for a protracted period of time. Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power.
Microsoft did not create the barrier to entry all by itself, the consumers’ preferences helped this along, however, Microsoft took specific predatory measures to make sure that its product attracted the market and ultimately trapped the market. Section 2 of the Sherman Act prohibits the act of monopolization. This means that the act itself is unlawful, not monopolies. It states that Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or person, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.
Here is the law – the plaintiffs found the proof. They found it in many of MS’s actions and in their contracts with distributors and they have written testimony, records, and even admissions by MS of their many actions. Yet, MS still maintains that it is not a monopoly. Unfortunately for MS, there are only two defenses to the allegation of monopolizing that have been acknowledged.
One is the defense of innocent acquisition, meaning that they somehow gained acquisition (or purchased) because of superior skills or foresight and that it wasn’t calculated or targeted. The second defense for monopolizing that is recognized is a natural monopoly. This means that there would be a very modest market that could only support one competitor, such as a small town coffee shop, newspaper, or video store. Obviously, Microsoft doesn’t fit into either category, and if it did fit into one of the categories and still abused its power in any plundering or restrictive way, it would lose the defense. III. Trial In order to fully present the history and the situation as it stands, I have included a table that shows a subset of the major events leading up to the present status of the case against Microsoft.
It demonstrates just how long this type of case can persevere and how much time, money, and effort are involved. (See Table 1). Table 1 Trial Timeline Date of Event: Important Details: Oct. 20, 1997 The Justice Department sues Microsoft, asserting that the company violated a 1995 court order and consent decree resolving an earlier government lawsuit against Microsoft. The government asks for a record $1 million per day in fines.
Dec. 11, 1997 U.S. District Judge Thomas Penfield Jackson orders Microsoft to stop requiring computer makers to distribute Internet Explorer with its 95 operating software. The ruling also applies to the upcoming Windows 98 program, in which IE is even more integrated with the operating software.
Dec. 15, 1997 Microsoft files an appeal with the U.S. Court of Appeals. The company argues that it was an error for the court to forbid Microsoft from bundling IE 4.0 with Win95 after denying the Justice Department’s claim that Microsoft violated the 1995 consent decree.
Microsoft says it will comply with the injunction while it is on appeal. Jan. 8, 1998 Microsoft executives express regret for the company’s harsh rhetoric against the Justice Department and say the software giant should have been more respectful of the court and prosecutors. (In an ABCNEWS.com poll on Jan.
9, 72% of the 2,500 respondents believed that Microsoft had been disrespectful to the Justice Department and the court.) Jan. 22, 1998 Microsoft and the Justice Department settle their dispute. Microsoft agrees to offer an IE-free Windows. May 5, 1998 Microsoft asks a federal appeals court to rule that Judge Jackson’s Dec.
11 preliminary injunction imposing restrictions on Windows 95 or any successor do not apply to Windows 98. May 18, 1998 The Justice Department and 20 state attorneys general sue Microsoft for antitrust violations, including tying the browser to the operating system and using anti-competitive contracts with computer makers and Internet service providers (ISPs). June 23, 1998 The U.S. Court of Appeals reverses the lower court’s decision in the Windows 95 consent decree case, allowing Microsoft to ship Windows 95 with browsers.
Aug. 31, 1998 In response to a routine filing by Microsoft, the DOJ makes its first references to Microsoft’s business dealings with other companies, including Apple, Intel, Sun Microsystems and Caldera. Oct. 19, 1998 After a number of delays, the case of U.S. vs. Microsoft begins in U.S.
District Court in Washington, D.C. Then-Netscape CEO Jim Barksdale is the government’s first witness. Nov. 17, 1998 In a separate court case, Sun Microsystems wins a preliminary injunction against Microsoft, forcing Microsoft to stop producing and distributing Java technologies that don’t comply with Sun’s standards. Decisions in this and other antitrust cases involving Microsoft could affect the federal case.
June 1, 1999 With no word of any possible settlement forthcoming, both sides are expected back in court on this date to present rebuttal witnesses and closing arguments. June 2, 1999 Microsoft began defending itself in a federal court in Connecticut against Bristol Technologies, which claims antitrust violations after Microsoft refused to license Windows source code to Bristol. An antitrust suit by Caldera, filed in 1996, also began this month. Sept. 22, 1999 One day of closing arguments. Nov.
5, 1999 Judge Jackson rules that the software company does indeed hold a monopoly thanks to its pervasive Windows operating systems, that it abused its monopoly power and that this abuse has harmed potential competitors and consumers. The judge’s finding of fact is the first of three rulings that will determine Microsoft’s fate. April 3, 2000 Judge Thomas Penfield Jackson rules that Microsoft violated the Sherman Antitrust Act, and is also liable in 19 state suits. Microsoft said it will appeal. May 24, 2000 Judge Jackson confirms MS’s violations of the Sherman Antitrust Act, and rules to split up the company.
June 20, 2000 Judge Jackson granted a request to stay the conduct remedies until a higher court acts and sent the case to the Supreme Court for consideration. IV. The Proposal The Government proposed the following to control Microsoft and bring them down a notch or two: Microsoft shall be split into two companies, one for its Windows operating system and one for software applications, such as Microsoft Office and Internet Explorer. The government is requesting that Microsoft would have to submit a breakup plan four months after the final ruling of U.S. District Court Judge Jackson. The two separate companies brought into existence would be prohibited from merging or forming any joint ventures with each other.
Separate boards of directors for the two companies would be established and kept apart. The government requested that the terms of the breakup plan would last ten years. Other controlling, yet temporary restrictions would also be imposed on Microsoft until the appeals process was completed. In addition to breaking Microsoft in two, the Justice Department would demand the following restrictions: 1) Temporary uniform standards would have to be adopted for licensing the Windows operating system to other makers of personal computers.
2) Personal computer makers would be allowed to modify the appearance of the Windows operating system. 3) No actions of retaliation could be taken by the two companies against those who gave evidence to the federal government against Microsoft or submitted testimony. 4) A temporary ban would be placed on Microsoft to prevent any threats or acts against personal computer makers. Here is an illustration of what the make up of a Microsoft Applications Company might look like: Microsoft Office, BackOffice, Internet Explorer, Mobile Explorer, Outlook Express, Frontpage Express, Net Meeting, and other browsers, e-mail clients and related tools.
Slate online magazine, Expedia travel network, the Microsoft network, MSNBC. Streaming audio and video client and service software, media player, voice recognition software, Java virtual machine software. Developer tools, consumer hardware, transaction server software, XML servers and parsers, Microsoft Management Server SNA server software, indexing server software, Internet Information Server. This would also extend to investments owned by Microsoft in connection with partners, joint venturers, original equipment makers, independent hardware vendors, independent software vendors, distributors, developers, and promoters of Microsoft products or in other information technology businesses. And, the other new company – here is what the make up of a Microsoft Operating Systems Company might look like: Windows 95, Windows 98, Windows 2000 Professional, and their successors, including Windows operating systems for personal computers code-named Millennium, Whistler, Blackcomb, and their successors.
Development, licensing, promotion and support for computing devices, including personal computers, other computers based on the Intel x-86 or competitive microprocessors such as servers, handheld devices and television set-top boxes. This would of course also include the personnel, facilities and other assets associated with those businesses. It would be able to hold a license to continue distribution of the existing Internet Explorer code, but it will have to develop its own browser in the future under new strategies. V.
Microsoft’s Response Obviously, Microsoft was less than happy with the proposal put forth by the government and did not intend to back down. They saw the DOJ’s proposal as too harsh and overly extreme under the circumstances. Microsoft spokesman, Jim Cullinan likened the proposal of giving up their intellectual property to competitors like Sun and Oracle, to forcing Coke to share its secret formula with Pepsi and every other major soft drink vendor in the country. And CEO Steve Ballmer called the government’s plan to split the company like splitting up a rock band because of its popularity. At the Judge’s request, Microsoft tendered their own proposal to the courts on May 10, asking that the Judge punish them in the area of their business conduct, but not break the company in two.
Critics viewed Microsoft’s counter proposal of their own judgment as not much more than a slap on the wrist and do not expect that the courts will accept it. Ironically, if Microsoft had intended to actually do some of the nice play techniques that they are now proposing, maybe they wouldn’t be on trial. So far, the government’s opinion is that Microsoft has merely come up with a transparent cosmetic remedy that will not have much impact on the competitive issues. What remedy does Microsoft propose to undo the damage to competition caused by its past illegal conduct? the government wrote, Nothing. Alternatively, Microsoft’s counter proposal was viewed by many as being very soft.
Listed here below are the fundamental pieces: 1) They [Microsoft] will ensure that Microsoft will not cancel or refuse to grant a Windows license agreement to a PC maker because the PC maker ships or promotes other non-Microsoft software. 2) They will allow PC makers to include as many icons for non-Microsoft software as they choose on the Windows desktop. 3) They will allow computer users to choose which Web browser they want to use during Windows’ initial boot sequence. 4) They will allow PC makers to remove the Internet Explorer web browser icon from the Windows desktop and start menu. 5) They will refrain from promoting another company’s product on the Windows desktop in exchange for that company’s agreement to limit its distribution of non-Microsoft software. 6) They will ensure that independent software vendors have timely access to technical information called application programming interfaces needed to write Windows applications.
7) They will continue to license a predecessor operating system after the release of a new version of Windows so that computer makers could use the old one if they didn’t like the features in the old one. 8) Mic …
