For Microsoft, Ruling Will Sting but Not Really Hurt
By STEVE LOHR
When the federal government and 20 states filed their sweeping antitrust suit against
Microsoft in May 1998, the company dominated the personal computer business and was
aggressively moving into the markets for software for hand-held computers, cellphones,
television set-top boxes and data-serving computers.
More than four years later, little has changed. And there is little in yesterday's ruling on
sanctions in the case by Judge Colleen Kollar-Kotelly of Federal District Court in
Washington that will slow down the big software maker.
By endorsing most of the Bush administration's settlement with Microsoft, reached last
year, the judge adopted a fairly narrow view of the case and showed a reluctance to
meddle in Microsoft's business practices and product designs. She rejected calls by nine
dissenting states seeking tougher measures, like requiring Microsoft to offer a stripped-
down version of its Windows operating system or to publish freely the programming
code for its Internet browser.
In doing so, Judge Kollar-Kotelly chided the plaintiff states, writing that some of the
proposed remedies appeared to be intended "simply for the sake of changing the status
quo." In a passage that echoed Microsoft's complaint that its legal problems were the
work of its rivals, she wrote: "Certain of Microsoft's competitors appear to be those who
most desire these provisions."
Yet the ruling does not mean Microsoft is untouched. A federal appeals court last year
found that Microsoft was a monopolist in the personal computer operating system
market, and that it had repeatedly abused its monopoly power to thwart competition and
stymie innovation. That means Microsoft is a court-decreed monopoly that is in the
process of becoming regulated.
But based on Judge Kollar-Kotelly's ruling, that regulation will be done with a light
touch. "It shows a great reluctance to go down the regulatory path," said Robert E. Hall,
an economist at Stanford, who has done consulting work for Microsoft.
Her reluctance, Judge Kollar-Kotelly noted, was grounded in the appeals court's ruling of
June 2001. It upheld the monopoly ruling of the district court and several of its findings
against Microsoft, but it also narrowed the scope of Microsoft's liability and brushed
aside the lower court's order to break the company in two.
Judge Kollar-Kotelly did try to strengthen the controls in the Justice Department's
settlement, which was joined by nine other states, in a couple of areas. In what she
termed the "most forward-looking" portion of her ruling, she required Microsoft to share
more technical information with rivals like I.B.M., Sun Microsystems and others who
make server computers, which act as the data-serving hubs of computer networks.
In taking up server software, she rejected Microsoft's objections, a rare setback in the
ruling for the company. By singling out server software, she implicitly recognized the
emerging threat to Microsoft from Linux, an increasingly popular operating system that is
distributed free and updated by a community of volunteer programmers.
The judge's order requires Microsoft to disclose the communications protocols in its
Windows desktop PC software, so that competitors' server software can work as
smoothly with Windows as the server operating systems sold by Microsoft do.
"That is a real effort to do something procompetitive," said Timothy Bresnahan, a
Stanford professor who served as chief economist in the Justice Department during the
Clinton administration.
But Mr. Bresnahan worried that Microsoft might well find ways around the requirement,
since it only applied to Microsoft operating systems and not to all Microsoft programs.
More broadly, Mr. Bresnahan says that the conservative regulatory approach — instead
of the break-up proposal championed by the Clinton administration — leaves Microsoft
too many ways around the ruling. So, he contends, the policy goals of antitrust
enforcement — curbing a monopolist so competitive alternatives and new ideas can
flourish — have been badly undermined.
"There was a fabulous opportunity to free up innovation and choice in the PC and online
world," Mr. Bresnahan said. "We got about 1 percent or so of that value."
In the markets it has earmarked for aggressive expansion — from servers to cellphones to
online services — there is no assurance that Microsoft will succeed. It continues to
struggle to gain ground in some areas, like cellphone and TV set-top box software.
But Microsoft has seemingly limitless financial resources and enormous influence on the
computer industry thanks to its lucrative hold on the PC software market. Windows has
roughly 95 percent of the desktop operating systems market and Microsoft's word-
processing and other office programs have a similar market share.
So Microsoft can trail in a market for years and still spend heavily to catch up, giving it
time to steadily improve its products and fine-tune its marketing.
The company's MSN online service has long lagged well behind America Online, but
MSN is starting to close the gap since AOL became embroiled by distractions arising
from its merger with Time Warner. To exploit the opportunity, Microsoft recently began
a new $300 million marketing campaign.
Last month, in the middle of a severe slump in the technology industry, Microsoft
reported that its quarterly profit rose 40 percent and its sales increased 26 percent. Part of
the surge was attributable to a new pricing plan that raised charges for many purchasers
and brought a chorus of protests from corporate customers. But nearly all of them paid up
and went along.
"Microsoft may be a little bit more restrained and a little bit less aggressive because of
the antitrust case," said David B. Yoffie, a professor at the Harvard Business School.
"But not much. Microsoft's market power has been unimpeded by the case."
Still, as some analysts note, the company's corporate culture does seem to have been
altered by the long litigation.
It seems to have been, they say, a hard-learned lesson in humility. "Internally, within
Microsoft, I think the company is very different," said Michael Cusumano, a professor
the Massachusetts Institute of Technology's Sloan School of Business. "I think they are
less aggressive with customers and partners than they were, and more respectful of the
law."
But, Mr. Cusumano said, "Not much has changed in the marketplace."